Year-End Tax Planning

While the average taxpayer will avoid thinking aboutconcept applies for miscellaneous deductions.If you
income taxes until the approach of the April deadlineexpect to be able to itemize, and you are making
forces him to do so, once the ball drops on Onequarterly state estimated tax payments, make the
Times Square at midnight on December 31st and the4th quarter payment in December, instead of waiting
New Year is rung in there is very little that can beuntil the January 16, 2006 due date, so you will be
done to cut your tax bill.However, during the last twoable to deduct the payment on your 2005 Schedule
months of the year you can do a great deal toA.4) If you do not have the cash available to pay for
reduce your tax liability.Sit down with paper and pencilthe deductible items you have scheduled as part of
and list your anticipated income for 2005 and all youryour year-end plan, you can use a credit card to pay
allowable deductions to date. What you want to dofor the item and still get a 2005 deduction. Allowable
is, using your 2004 return as a guide, prepare aexpenses charged to a credit card (VISA, Master
projected 2005 return. Once this is done you canCard, American Express, Discover) are deductible in
decide what steps to take to make sure you paythe year charged, and not in the year that you
the absolute least amount of federal and stateactually pay for the charge.5) The option to deduct
income tax possible for 2005 and 2006. Taxstate and local sales tax paid instead of state and
information for 2005 (i.e. standard deduction andlocal income tax paid will expire on December 31,
personal exemption amounts, tax rates, etc.) is2005. This option will not be available for 2006. If you
available on the WHAT'S NEW FOR 2005 Page at areare planning to buy a new car (other than a qualifying
some year-end tips:1) Traditional year-end planningenergy-saving hybrid - see tip #6), SUV, motorcycle,
calls for postponing the receipt of taxable incomeor other "big ticket" item in the near future you may
until 2006 and accelerating allowable deductions to bewant to do so before the end of the year to be able
claimed in 2005, the idea being to reduce your 2005to deduct the sales tax.6) The Energy Tax
taxable income to a minimum. This strategy willIncentives Act of 2005 creates new tax credits for
generally apply if you expect to be in the same taxcertain energy-saving autos, consumer products and
bracket for both 2005 and 2006, or if you will be in ahome improvements beginning in 2006. You may
lower bracket in 2006.If, however, you anticipate awant to postpone any purchase of qualifying
substantial increase in taxable income in 2006, whichenergy-saving items until next year to be able to
will push you into a higher bracket, you should do theclaim the credit.7) While postponing income and
reverse and accelerate the receipt of taxable incomeaccelerating deductions may reduce your "regular"
to 2005 and postpone deductible expenses until 2006.income tax for 2005, these actions may backfire and
Income received in 2005 will be taxed at a lowerend up costing you if you fall victim to the dreaded
rate, and deductions claimed in 2006 will yield aAlternative Minimum Tax (AMT). Why? Because
greater tax savings.Not sure what your 2006 incometaxes and miscellaneous expenses are not deductible
will be. Follow the rule of "when in doubt - defer" - goin calculating AMT, and medical expenses are only
the traditional route and postpone income anddeductible to the extent they exceed 10% of AGI.
accelerate expenses.2) It does not pay to itemizeWhen preparing your projected 2005 return be sure
unless the total of your allowable deductions exceedsto determine if you will be subject to AMT and plan
the standard deduction that applies to your filingyour strategies accordingly.8) When preparing your
status, plus any additions for age or blindness. If youprojected return you should review the performance
decide to accelerate allowable deductions to claimof your investment portfolio for the year. Add up all
them in 2005, you can accelerate all you want, but ityour realized gains and losses from actual sales of
will be wasted unless your total "itemizable"stock, bonds and mutual fund shares for the first 10
deductions exceed your applicable standardmonths of the year, with separate net totals for
deduction.Let us say you usually do not have enoughshort-term (held one year of less) and long-term
deductions to itemize. However, after preparing your(held more than one year) activity. Gains and losses
projected 2005 return you discover that, because offrom inherited property are always considered
some special circumstance, you will be able to itemizelong-term. Include in the long-term calculation any
this year. During the last two months of the year"capital gain distributions" from mutual funds.Now do a
you should incur, and pay for, as many deductiblesimilar calculation for unrealized "paper" gains and
expenses as possible.If, on the other hand, yourlosses on the investments you still hold. You may
projected return indicates that you do not havewant to sell some of your investments before the
anywhere near enough deductions to be able toend of the year at a loss to wipe out year-to-date
itemize, postpone making any deductible paymentsgains, or at a profit to take advantage of
until 2006. Making these payments in 2005 would notyear-to-date losses in excess of $3,000.00.There are
produce any tax savings, while it is possible that byno written in stone year-end tax planning rules that
deferring them until next year you may be able toapply to all taxpayers in all cases. As with any other
itemize in 2006.3) The timing of deductions istransaction, year-end strategies must be evaluated in
especially important when it comes to medicalthe context of the special facts and circumstances
expenses and miscellaneous job-related andof your individual situation. You may want to review
investment expenses. You are allowed to deductyour year-end situation with your tax
medical expenses only to the extent that theyprofessional.And remember - your first criteria for
exceed 7 1/2% of your Adjusted Gross Incomeevaluating any financial transaction you are
(AGI), and most miscellaneous deductions are onlyconsidering should always be economic. Taxes are
deductible to the extent that the total exceeds 2%second.Robert D Flach is a tax professional with 34
of AGI.If you anticipate a 2005 AGI of $70,000.00tax seasons of experience preparing 1040s for
you must exclude the first $5,250.00 of medicalindividuals in all walks of life. He writes THE
expenses - the first $5,250.00 is not deductible. IfWANDERING TAX PRO weblog ( the NJ TAX
your medical expenses to date are close to or morePRACTICE BLOG ( and the website which has a
than %5,250.00, and you will be able to itemize, paywealth of tax planning and preparation advice and
any outstanding medical bills and schedule, and payinformation. He also writes and publishes THE FLACH
for, check-ups, doctor visits and needed dental workREPORT, a quarterly tax newsletter. For more info
in November and December. If medical payments toon THE FLACH REPORT go to The above article is
date are substantially less than $5,250.00, put offtaken from postings to THE WANDERING TAX PRO.
paying any more medical bills until 2006. The same