Should You Worry About Year-End Tax Planning?

(2005-12-05) by David John Marotta

Even if you didn’t make a penny more next year, how can you have more dollars for next year’s holiday season? Reduce your taxes. Between now and the end of the year there are several last-minute tax moves that may save you significant amounts of money. After January 1st, there’s little to do but pay-up.

Tax planning for Americans usually begins sometime in February. Many delay worrying about it until March or April, or even October! Tax planning before New Year’s may not make a difference in every case, but for some it is critical.

If you think you may be hit with the Alternative Minimum Tax or if you have taxable investments, make an appointment with your tax professional immediately. If you are a small business owner, year-end tax planning should be a habit by now.

AMT

Keep your eye on the Alternative Minimum Tax, which is a parallel tax system with different tax rates, income inclusions, and allowed deductions. This year, taxpayers earning as little as $75,000 may find themselves saddled with this tax. Originally instituted in 1969 to force 155 wealthy individuals into paying taxes, this year 18 million will likely pay AMT.

Because ATM turns many of the traditional tax-saving strategies on their head, your current tax plan may backfire and leave you paying more. If you think you might be hit with ATM, year-end changes can pay off.

Even if you didn’t pay AMT last year, you may get hit with ATM if you earn between $100,000 and $400,000. Large home equity or cash out refinanced mortgages, large state income tax payments, and other items may trigger ATM. And of course, if you were hit with ATM last year, you will probably be hit harder this year.

Investments

If you have significant taxable investments, tax planning can help you offset capital gains and limit your exposure to AMT.

Now is the perfect time to review your capital gains and losses. A standard tax-saving move is to offset capital gains by realizing losses before year end. After offsetting your gains, you may deduct remaining losses up to $3,000. Losses exceeding $3,000 may be carried forward indefinitely.

If you plan on significant end-of-year charitable gifting, consult with your tax professional to maximize your tax savings. You should know what effect different amounts of charitable gifting will have on your taxes. Should you have big capital gains this year, avoid paying tax on some of your gains by gifting appreciated stock to your favorite charity.

Stock options may also leave you exposed to capital gains or AMT. Depending on the type of stock options you have and when you sell your options, your investment may be taxed at the ordinary income rate and may increase your AMT. Unfortunately, there is no quick rule of thumb when navigating options. Review your holdings with your tax professional.

Year end is also the time to take care of investments for your children. If you have children 14 and older who have been given highly appreciate stock, take advantage of their capital gains tax bracket which may be as low as 5%. They should realize capital gains before they start earning a significant income.

If you have considered opening 529 college savings plans for your children or grandchildren, contributions in some states (like Virginia) can qualify for a state tax deduction if done before the end of the year.

Consider making your fourth quarter state estimated tax payment prior to year end so that you may use it as an itemized deduction next year.

Gifts and Estate Planning

You may also give $11,000 in 2005 to an unlimited number of individuals, but you may not carry over the unused exclusion from one year to the next. If appropriate, make gifts prior to year end.

Small Business

If you own a small business, make tax planning an intentional part of your business strategy. Small business owners bear the lion's share of the tax burden, but they also have some control over the structure their taxes.

This is the time of year to take advantage of your Section 179 deduction. Small businesses may deduct up to $105,000 in 2005 for business equipment. To receive the deduction, equipment must be placed in service before the end of the year.

If you are considering offering a 401(k), profit-sharing or SIMPLE retirement plan, a nonrefundable credit is available to offset some of the set-up costs associated with your new employee benefit plan.

Other tax-saving strategies for your business could mean reviewing how your business is set up. A regular corporation or LLC may want to make a Subchapter-S election. This process can be time consuming, so act now.

We recommend that our clients do end-of-year tax-planning in November or December. If you think you might benefit from last-minute tax planning, ask your tax professional to help you take advantage tax-savings before year’s end.

For more information on tax planning, we invite you to attend a free end-of-year tax-planning seminar held at our offices on Wednesday, December 7th, 2005 at 12:00PM.

from http://www.emarotta.com/article.php?ID=156