Tax Tip for December 2005
Year-End Tax Planning
Strategies
The 4th
quarter is the ideal time to discuss year-end tax planning strategies and
consider recent tax law changes.
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Depreciation: Consider purchasing before year-end furniture and equipment
which will be used for business purposes. Internal Revenue Code (IRC) section
179 allows businesses to elect to expense (rather than depreciate over several
years) in the year of purchase up to $105,000 of the cost of qualifying fixed
assets. Note that this section 179 allowance was scheduled to expire at end of
2005, but has recently been extended through 2007.
For SUVs weighing more than 6,000 lbs and less than
14,000 lbs, IRC 179 depreciation is limited to $25,000. As always, please
contact us prior to making major purchases so we can ensure that you receive the
maximum tax benefit.
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The state and local sales tax deduction will be expiring
at the end of 2005. Beginning in 2004, taxpayers could elect to take state and
local general sales taxes as an itemized deduction, instead of deducting state
income taxes. Taxpayers who make this election may either (a) deduct their
actual sales taxes paid or (b) use IRS-published tables and then add to the
amount from those tables the actual amount of their sales tax for certain
"big-ticket" items, such as motor vehicles, boats, big screen TV’s, etc. Since
this will be expiring after 2005, if you expect you may benefit from this
deduction and are considering the purchase of a big ticket item in the near
future, you may want to accelerate the purchase into 2005 to achieve a higher
itemized deduction for sales taxes.
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The above-the-line deduction for certain higher education
expenses will be expiring at the end of 2005. An
above-the-line deduction is allowed for an individual taxpayer's qualified
tuition and related expenses. For 2005, the maximum deduction is $4,000. It is
generally available to taxpayers with adjusted gross incomes below $65,000
($130,000 for joint filers). You may want to prepay in 2005 tuition not due
until early 2006 if that would increase the tax savings from the expiring
deduction.
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Postpone income until 2006 and accelerate
deductions into 2005 to lower your 2005 tax bill. Postponing tax generally is a
primary goal of year-end tax planning. It's particularly effective if it helps
you to claim larger deductions, credits, and other tax breaks that are phased
out over varying levels of adjusted gross income. These include Roth IRA
contributions, conversions of regular IRAs to Roth IRAs, child credits, higher
education tax credits, and deductions for student loan interest.
One
opportunity for accelerating deductions that is often overlooked is to pay your
anticipated Arizona tax liability before year-end. By paying your state tax
liability prior to year-end, you accelerate into 2005 the itemized deduction for
state taxes paid, rather than having to wait to claim the deduction on your 2006
tax return.
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Bunch deductible expenses such as medical expenses, charitable
contributions, mortgage interest and investment expenses into one year to
maximize your itemized deductions.
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Harvest capital losses. If you are holding onto stocks or mutual funds in
nonqualified accounts (i.e. not a retirement account, annuity, or other tax
deferred account), and have lost value since original purchase, consider selling
before year-end to capture the capital losses for tax purposes.
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Take advantage of the Arizona School Tax Credits. Qualifying
contributions made before December 31, 2005 will generate a dollar-for-dollar
state tax credit as well as a federal charitable contribution itemized
deduction. The total available credits have increased for 2005, and are a
combined $700, or $1,125 if married filing jointly (“MFJ”), and break down as
follows: $500, or $825 if MFJ, to a qualifying private school, and $200,
or $300 if MFJ, to a qualifying public school, both K through 12th
grades.
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Take advantage of the Arizona Charitable Tax Credit. Similar to the
School Tax Credits, qualifying contributions made before year-end can generate a
state tax credit as well as a federal charitable contribution itemized
deduction. The total available credit is $200, or $300 if MFJ. Contributions
made to charities that assist the Working Poor qualify. A list of these
charities appears on the Arizona Department of Revenue website at
http://www.revenue.state.az.us/certifiedcharities.pdf. The one twist to this
credit is that in order to qualify, your total 2005 charitable contributions
must exceed your baseline year (typically 1996) charitable contributions.
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A note for the 2006 tax year. Recently Congress passed the Energy Tax
Incentives Act of 2005, which takes effect January 1, 2006. Although this new
law carries many new incentives for energy companies to boost energy production
and efficiency, it also includes new and substantial tax incentives for
individuals to make energy saving (and some energy creating) improvements to
their homes. The incentives come in the form of tax credits which reduce your
federal tax bill on a dollar-for-dollar basis. What's more, the credits are not
phased out at higher-income levels. Please refer to the Tax Tip (October 2005)
page of our website,
www.patinella.com for details.
Other planning areas that we
can assist with throughout the year include:
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Stock Option Planning
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Retirement Planning
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Mortgage Planning
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College Planning
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Estate Planning
The tax planning strategies
mentioned in this letter are general suggestions that may not apply to every
taxpayer.
By doing year-end tax
planning now, we can take a proactive approach to reducing your taxes, rather
than just being reactive. Please call us if you have any questions or if we can
be of further assistance.
