2005 YEAR END TAX PLANNING IDEAS

As the end of the year approaches, it is a good time for you to engage in tax planning. You know your tax picture from earlier in the year and you have a pretty good idea of what it will be for the rest of the year. With that knowledge in hand, you are now in a position to take various actions that may save taxes for this year, next year, or both years.

A recent flurry of tax legislation may have an impact on your year-end tax planning for 2005. For example, the Energy Tax Incentives Act of 2005 provides a new tax credit for making certain energy-saving improvements around the house. But the new credit is not available until 2006, so you may want to hold off on the improvements if possible. On the other hand, the Katrina Emergency Tax Relief Act of 2005 allows some taxpayers to claim bigger charitable deductions than in the past because the Act lifts restrictions that limited the deductions. But it's only a temporary reprieve; the restrictions return after December 31, 2005. So, if the restrictions apply to you, you may want to consider accelerating your charitable donations from 2006 to 2005.

There are other tax law changes taking effect at the beginning of 2006 that you should take into account in your end-of-2005 planning. For example, a deduction for college tuition is scheduled to go off the books unless Congress extends it. You may want to prepay in 2005 tuition not due until early 2006 if that lets you increase your tax savings from the expiring deduction.

Also, on January 1, 2006, the deduction for buying a hybrid automobile converts to a tax credit that's probably more valuable to auto buyers than the deduction. So if you are thinking about buying a hybrid, you may want to delay your purchase until 2006. Also, whether you are buying a hybrid or a regular car, you should think about the sales tax deduction. For 2005, you can deduct state and local sales taxes in lieu of state and local income taxes. Unless the law is changed, for 2006, you won't have the choice; you'll only be able to deduct income taxes. So if you are deducting sales taxes this year and are planning to buy a car soon, you may want to push the purchase into 2005 to increase your sales tax deduction. This works because the deductible sales tax amount from the IRS's optional sales tax table is increased (but only up to the amount paid at the general sales tax rate) by the sales tax paid on a purchased or leased motor vehicle (which not only includes cars, but also motorcycles, motor homes, recreational vehicles, SUVs, trucks, vans, and off-road vehicles). Also, you may add to the table amount, sales tax paid on an aircraft, boat, home (including mobile or prefabricated), or home building materials, if the tax rate is the same as the general sales tax rate. So these items also may be suitable for purchase this year.

The IRS previously announced that the optional mileage allowance for owned or leased autos (as well as vans and pickups or panel trucks) is 48.5¢ per mile for the balance of 2005. The rate reduces to 44.5¢ per mile beginning in 2006.

We have compiled a checklist of actions that may help you to save taxes if you act before year-end. Not all actions will apply in your particular situation, but you will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make:

Increase the amount you set aside for next year in your employer's health flexible spending account if you set aside too little for this year. Don't forget you can set aside amounts to get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids. Also, new rules allow your plan to permit a grace period after year-end for using remaining amounts.

If you have any capital gains or losses from sales of stock or other capital assets or you have stock or other capital assets that are ripe for sale, it may be advisable for us to meet to discuss how you can best coordinate timing your gains and losses to minimize tax on your gains and maximize the tax benefit from your losses.

It may be advantageous to try to arrange with your employer to defer your bonus until 2006.

If you own an interest in a partnership or S corporation you may need to increase your basis in the entity so you can deduct a loss from it for this year.

Consider using a credit card to prepay expenses that can generate deductions for this year.

You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.

Business clients also should consider making expenditures that qualify for the $105,000 business property expensing option.

You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.

You may be able to save taxes this year and next year by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses and other itemized deductions.

Those facing a penalty for underpayment of estimated tax may be able to eliminate or reduce it by increasing their withholding.

Self-employed individuals should consider setting up a self-employed retirement plan.

You can save gift and estate taxes by making gifts sheltered by the annual gift tax exclusion before the end of the year. You can give $11,000 in 2005 to an unlimited number of individuals but you can't carry over unused exclusions from one year to the next. Note that the annual exclusion amount increases to $12,000 for 2006.

If you're thinking of donating a used auto to charity, you may want to inquire whether the charity plans to sell the car or use it in its charitable activities; the latter may yield a bigger deduction for you.

If you are contemplating marriage or divorce consider how marriage penalties could affect you. Marriage penalty relief has been extended for the 15% tax bracket and the standard deduction but other marriage penalties remain.

If you are receiving Social Security benefits, there are a number of steps you can take to reduce or eliminate tax on your benefits. Consider asking your employer to increase withholding of state and local taxes to pull the deduction of those taxes into this year (but only if doing so won't cause an AMT problem).

Consider extending your subscriptions to professional journals, paying union or professional dues, enrolling in (and paying tuition for) job-related courses, etc., to bunch into 2005 miscellaneous itemized deductions subject to the 2%-of-AGI floor.

Depending on your particular situation, you may also want to consider deferring a debt-cancellation event until 2006, electing to deduct investment interest against capital gains, and disposing of a passive activity to allow you to deduct suspended losses.

These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you.