Cut Your 2006 Taxes

With the clock quickly winding down to Dec. 31, you'll want to act quickly to reduce your tax bite. Here are some suggestions.

New tax laws
Take advantage of the tax laws that were recently passed by Congress, but which have not received widespread publicity. They include deductions for sales taxes paid on large purchases, higher education payments, and classroom supplies purchased by educators.

Go green
There are many new credits and deductions available for the purchase of energy-efficient vehicles, and for the purchase and installation of other energy-efficient devices, such as solar water heating, more efficient air conditioning units, or better-insulated windows or doors.

Kiddie taxes
Don't overlook the new kiddie tax rules. New legislation raised the age of a "kiddie" from 14 to 18, and those rules went into effect in the middle of 2006. It might be too late to change your investment strategy for 2006, but it's not too early to make changes to reduce any potential kiddie taxes that might be imposed for 2007.

Direct IRA charitable contribution
If you're considering making a charitable contribution before the end of the year, consider making it directly from your IRA. This is especially helpful for seniors who no longer itemize their deductions but still make charitable contributions. Under the old rules, the taxpayer had to take the IRA amount into income (which would generally increase other taxes, such as the tax computation on their Social Security income), but would receive no tax benefit for the deduction, since they don't itemize. But under the new rules, the charitable contribution can be made directly from the IRA account. The taxpayer still doesn't get a charity deduction, but the income isn't taxed, and it won't affect other tax issues. You have to be age 70 1/2 or older to play this game, but it works really well if you're over the age limit and consider charitable contributions important.

Give, give, give
If you do itemize your deductions, consider a donation to a worthy charitable organization. You'll help your community and benefit from a tax deduction at the same time. You might also consider the contribution of qualified appreciated stock for the greatest charitable contribution leverage. But be careful of the new rules for the charitable contribution of cash, checks, and goods. And don't overlook that many charitable organizations will accept credit card contributions via their website for a quick deduction.

Charge away
Speaking of which, remember that if you charge any goods or services, the expense is deemed to be made when you charge your purchase ... not when you actually pay your bill. So if you're running short of cash, and want to generate additional deductions (not to mention getting a 30-day "float" on your money in some cases), consider using your credit card for last-minute deductible expenses. This strategy also works well for small business owners looking to purchase last-minute business assets.

Worthless stock
Don't overlook off-the-radar shares that you might have been holding for a number of years. You might be able to claim a deduction for worthless stock and reduce your other capital gains by that amount. If your stock losses exceed your gains, you can claim as much as $3,000 in capital loss deductions to offset other income. The balance of any other losses will be carried forward to offset capital gains or other income in future years.

Review medical expenses
Hopefully, most of you won't have to use this itemized deduction. But with the cost of medical care, don't overlook deductions for things that you might not even have thought of. Medical travel can be deductible. Part of the cost of an assisted living facility is also deductible. Deductions can be allowed for the modification of your home to support medical care for yourself, spouse, or dependent. Don't overlook any of them.

An important point
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 -- points that you were expensing over the life of that old loan? Make sure that you don't overlook the deduction for points and how it affects you and your taxes.

Make business purchases now
If you're a business owner, consider buying big-ticket items before the end of the year. That could include virtually any business asset, such as computers, furnishings, or a business vehicle. I certainly don't advise spending money just for the sake of spending it before the end of the year -- we'll leave that to the government. But if you need business assets to improve your efficiency, or you're thinking about making those purchases early next year anyway, make 'em now. You can take advantage of the liberal depreciation rules and Code Section 179 expense deduction (up to $108,000 in assets purchased in 2006), which will likely allow you to deduct those purchases immediately, without the actual hassle of depreciation.

Plan for retirement
Also, if you're a business owner, consider opening a qualified pension plan account before the end of the year. While the account is required to be opened before year's end, it is not required to be funded until 2007, even though the pension deduction is claimed in 2006. If you can't open a qualified account before the end of 2006, consider a Simplified Employee Pension (SEP) plan. An SEP plan isn't required to be opened or funded until 2007, but will still allow for a 2006 deduction.

Defer your compensation
Check with your employer about the possibility of maximizing your deferred compensation contributions before the end of the year (401(k), 403(b), etc.). With the new higher contribution limits, the more you can move into your tax-deferred account, the more taxes you can save immediately.

Clean up your portfolio
You might own stocks that are no longer appropriate for your portfolio, and those stocks might also be in a loss position. You can sell those shares, take the loss, and use that loss to offset the sale of gainers (and even long-term capital gains from mutual funds) in the current tax year. Once you've used your losses to offset your gains, you can use as much as $3,000 in losses to offset your other income. That'll save you tax dollars right now. But even if you do have long-term stock gains, don't fret too much, since the maximum tax rate on these gains is only 15% -- or less, depending on your marginal tax bracket. Remember that for any stock or mutual fund sale, the trade date, not the settlement date, is the controlling factor for tax purposes. There are very few trading dates left in the year, so if you want to clean out your portfolio and realize some losses, you must do so soon.

Hopefully, you'll find one or more of these immediate tax reduction tricks to your liking. It's not too late to ring in 2007 with a lower tax bill.

When he's not dealing with tax issues, Fool contributor Roy Lewis is a motivational speaker who lives in a trailer down by the river. 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.