Recs

0

Start Planning for Next Year's Taxes

Many think that taxes are simply a chore, something to attend to once a year. Anyone with that attitude is likely leaving money on the table. Those who view the tax process as an opportunity to save money will be the real winners. With the recent tax law changes, planning for the reduction of your 2005 taxes is more important than ever before. Here are a few suggestions that you should consider in order to jump-start your tax planning and get you on the road to paying less in taxes in 2005.

Income planning
Invest in dividend-paying stocks. Because of the favorable 15% tax rates on dividend income, holding stocks that pay dividends can reduce your taxes immediately. This might make such investments more attractive than other cash-generating securities, such as bonds.

Hold stocks long-term. Dividends aren't the only type of income recently given favorable tax treatment. Long-term capital gains (gains on assets held for more than one year) are also taxed at a maximum 15% tax rate. So when you decide to sell a stock, consider your holding period and remember the tax savings allowed for long-term gains will allow you to reap significant tax benefits.

Reduce your income. Make sure to take advantage of the more liberal contribution limits to tax-deferred retirement accounts. By contributing to your employer-sponsored retirement plan -- such as a 401(k), 403(b), or 457 plan -- you'll reduce your taxable income, and you won't pay taxes on your savings and earnings in the account until you take distributions. What with the 2005 contribution limits raised to $14,000 for most plans, you could slash your tax bill just by saving for the future. And don't forget: If you're age 50 or older in 2005, you can make an additional $4,000 "catch-up" retirement contribution.

Make gifts to children. Consider shifting your income to your younger children. That means making a gift to them, generally of appreciated stock. You might want to wait until the child turns age 14 (in order to avoid the kiddie tax rules). But if you gift the stock to a child, and the child then sells the stock, the long-term gain will be taxed at the child's tax rate, which is likely much lower than your 15% rate. Depending on the child's other income and the amount of the gain, the tax on the gain could fall all the way to zero!

Deduction planning
Deductions and credits for non-itemizers. Just because you don't itemize your deductions doesn't mean that there aren't other deductions and credits available to you that you can use to reduce your taxes. Alimony paid, student loan interest paid, job-related moving expenses, medical insurance for the self-employed, penalty for early savings withdrawal, expenses for educators, the new college tuition deduction, and deductions for self-employment taxes are all available to you -- regardless of whether you itemize your deductions or not. And there are also many tax credits available, such as the Hope and Lifetime Learning credit, the retirement contribution credit, the foreign tax credit, the adoption credit, and the dependent care credit. And, if you qualify, all of these credits (and more) can be used to reduce your taxes without itemizing your deductions, so make sure to check your eligibility for any or all of them.

Deduct charitable and medical travel. Do you use your auto for charitable purposes? If so, you can deduct 14 cents per mile for all qualified charitable travel. Not only that, you can deduct your out-of-pocket expenses when you are serving a qualified organization. It's likely that you also use your auto for medical travel, such as to and from your doctor and dentist visits. For 2005, medical travel is deductible at 15 cents per mile. And if you have to travel a great distance for medical treatment, the actual cost of the travel (such as airfare) and lodging can also be deductible.

Charitable contributions. Thinking about donating that old car of yours? It'll get you a great deduction and will also provide funds for a charitable organization to do good works. But make sure you follow the new rules regarding the deductions dealing with autos and other property. They are much more stringent in 2005.

Refinance points. Have you recently refinanced your home? Did you pay any points? Or did the new loan wipe out a prior loan on which points were charged and you were expensing over the life of that old loan? Make sure that you don't overlook the deduction for points and how it impacts you and your taxes.

Overlooked deductions. Make sure that you don't overlook many of the deductions available to you and your family. The more you become familiar with the law, the more you can tug on those tax loopholes and pull them wide enough for you to jump through.

Hire family members. If you're an unincorporated business owner, consider putting your kids or other lower income family members on the payroll. This allows you a double-dip tax savings of both income and self employment taxes. Your kids won't have to pay any Social Security/Medicare (FICA) taxes on their wages if they're under age 18, and they won't be subject to Federal Unemployment (FUTA) taxes if they're under age 21. With the 2005 standard deduction at $5,000, you can pay that amount to your child with no income tax consequences.

Help yourself
While you may have a million other things to do this summer, don't let your tax planning slip through the cracks. Starting your 2005 tax planning now not only helps reduce your taxes but also puts you in control of your entire financial situation. Start now. Be diligent.

Roy Lewis lives in a trailer down by the river and is a motivational speaker when not dealing with tax issues, and he understands that The Motley Fool is all about investors writing for investors. You can take a look at the stocks he owns as long as you promise not to ask him which stock to buy. He'll be glad to help you compute your gain or loss when you finally sell a stock, though.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 469318, ~/Articles/ArticleHandler.aspx, 4/21/2014 3:04:30 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 3 days ago Sponsored by:
DOW 16,408.54 -16.31 -0.10%
S&P 500 1,864.85 2.54 0.14%
NASD 4,095.52 0.00 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes


Special Offer for Savvy Investors Like You!

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut semper dui vitae molestie venenatis. Suspendisse.

Enter Email Address:



Privacy / Legal Information
Advertisement