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December is Tax-Prep Time

Forget the Mistletoe for a Minute; Now's the Time to Save on Taxes

By Fred Yager
ConsumerAffairs.com

November 30, 2006

• IRS Considers License For Tax Preparers • Tax Refunds Likely to Boost Consumer Spending • Last-Minute Tax Tips • Tax Tips & News for Procrastinators • Need More Time to File Your Taxes? Just Ask • Don't Overlook These Itemized Deductions • 10 Ways Uncle Sam Helps You Save Money • 10 Common Tax-Filing Mistakes to Avoid • Penalties for Late Tax Returns • Tempting the Tax Auditor • 10 Often Overlooked Tax Breaks • Big Break for Lower-Income Taxpayers • Should You Always File a Joint Return? • Your Taxes From A to Z • Some Cars Save More than Gas • 5 Stupid Tax Mistakes • Taxpayer Rights Just One Click Away • Foreclosure Tax Double-Whammy Eased • Tax Consequences of Defaulting on Your Mortgage • Help for Low-Income Taxpayers • Video: Tax Tips – New Tax Breaks For Your 2008 Return • Tax Scam Deal Really Is Too Good To Be True • IRS Offers Help to Financially Stressed Taxpayers • Don't Let Just Anyone Do Your Taxes • Tax Preparers Tighten Up on 'Instant Refund' Loans • New Tax Rules Could Cost Second-Home Owners • New York Stops H&R Block's Deceptive Sweepstakes Ads • J. K. Harris Settles Deceptive Ad Charges --- • More about tax preparation ...

If you're like me, you put off doing things until the last minute, then rush to get it done before the dreaded deadline.

That's especially true when it comes to tax preparation when each year I overlook the fact that, even though the filing deadline isn't until next April, I have to account for most of my deductions before the year ends and that's only a few weeks away.

The big problem with this strategy is that if you've put it off until now, you've already lost out on some deductions you could have taken advantage of if you had only started earlier in the year.

For example, taking a tax deduction on piles of old clothes or toys your children have outgrown, was relatively easy before August 17, 2006. You took them down to Goodwill or the Salvation Army, told them what you thought they were worth and they gave you a signed receipt.

But now, you have to prove that anything you plan on donating has to be in what the IRS calls "good to better condition." That means no more torn jeans or holes in the toes sweat socks. No more scratchy vinyl records. And if you're claiming more than $500 for any item being donated, it has to be appraised by a qualified appraiser.

Another deduction that would be larger if you began contributions earlier in the year is your 401(k) retirement account.

The maximum contribution for 2006 was raised to $15,000 ($20,000 if you are over 50), but you would have had to start the deductions at the beginning of the year to take full advantage of this increase. You can still begin now and have a head start on next year. As for IRA's you can contribute up to $4,000 (or $5,000 if you're over 50) and you have until April 16 of 2007 to do that.

If you're environmentally conscious and plunked down money for a hybrid car, and you did it before September 30 of this year, you may be able to get an Alternate Motor Vehicle Credit that would be worth from $250 to $2,600 in tax savings, depending on the make and model. If you buy a hybrid car between now and the end of the year you could still get a credit but it would only be worth half of what an earlier buyer would have received.

Not all of this year's new deductions favored early action. Remember Hurricane Katrina? You can now deduct up to 100 percent of your cash donations to any hurricane relief effort as well as many other charities and you can deduct it from your adjusted gross income. This is a 50 percent increase over last year. But you have to make the donations before December 31st.

What Else?

Here are a few more things you can do between now and the end of the year to reduce your tax bite.

You can deduct school tuition, or any interest paid on student loans up to the end of 2006. And if you pay the spring 2007 tuition before the end of this year, you can claim it this year.

You also may still have time to get a $500 maximum one-time credit for qualifying energy-efficient home improvements, but you have to do it before December 31st. This includes installing certain kinds of insulation, better windows, metal roofs, solar water heaters, heat pumps, central air conditioners or more efficient furnaces. Just make sure it has a certification that says it is eligible for the energy-efficient credit.

If you have expenses tied to investments such as special publications and advisory services, you should pay for them before year-end. You could also increase your mortgage interest deduction by paying your January 2007 payment in 2006 before December 31st. Another way to reduce 2006 taxes is to pay any estimated state income tax and property tax that you would normally pay in early 2007.

The stock market has had a pretty good year, which means you could be facing some capital gains taxes. One way to offset capital gains is to sell any of your poorly-performing stocks and record the loss, up to $3,000 before the year ends.

Now here's a tricky one.

If you're older than 70 1/2, don't forget to take the required minimum distribution from your IRA by December 31 to avoid having to pay a ridiculously high 50 percent tax on any money you should have withdrawn but forgot to.

Or, if you're feeling really philanthropic, you can donate up to $100,000 from your IRA to charity directly which means you bypass any taxes you would have had to pay on withdrawals. This donation would count toward your required minimum distribution. But again, you have to do it before the end of the year.

One of your goals is to reduce your adjusted gross income and exposure to the alternative minimum tax or AMT, which could have a major impact on whether or not your can deduct medical expenses.

If you don't qualify for an AMT, your medical expenses are deductible if they total more than 7.5 percent of your adjusted gross income. If you have to pay the AMT, only medical costs above 10 percent of your adjustable gross income are deductible.

If you're self-employed, another way to reduce income and possible exposure to AMT is to send out invoices for work done at the end of 2006 in early 2007.

Okay, now go back to your shopping and holiday parties, but if you want to schedule some needed expensive periodontal work you may want to do it before the end of December because it could put your medical costs over the percentage needed to qualify as a deduction.

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