Off-season is time to think taxes
Work now makes April less painful
By HANK EZELL
Cox News Service
June 26, 2005
ATLANTA — At midyear, more than a few smart people dig out their tax returns and comb through them yet one more time.
They are looking for adjustments that will make next year's tax ordeal a little easier, and preferably a little cheaper.
Do it now and you have six months to put your new strategies to work. Indeed, you have time to put the process off for a while and still have time to get it done.
Here are some items to look at:
Withholding. About three of every four individual taxpayers got refunds on last year's taxes, averaging $2,110 apiece.
Truth is, people love to get money back from the federal government. It feels like a win, or even free money.
Wrong. It was your money to start with. You just let Uncle Sam use it for a while. Did he say thank you?
You could think about your refund as a loan you gave to the feds, without even charging interest. Or you could think about it as a pay raise you turned down. That average of $2,110 comes to about $176 a month. You could have left that money in your paycheck. Not a bad pay raise.
To adjust your tax withholding, go to your company's payroll department and fill out another W-4 form. The form includes a worksheet to help figure out how much to decrease your withholding.
It might help to read Publication 919, "How Do I Adjust My Tax Withholding?" It has more worksheets and helpful tips. You can download a copy from www.irs.gov. (Use the search function on the left side of the page, putting the form number in the first box and switching to "Forms & Publications" in the second box.)
Retirement plans. Make sure you're putting the maximum amount you can afford into any available 401(k)s, individual retirement accounts or similar plans.
Note that the maximums have changed. This year you can put as much as $4,000 into IRAs, or $4,500 if you're age 50 or over.
"You can make an IRA contribution as late as April 15 of the following year, but you can be aware right now and be sure you have the money available," said Mark Luscombe, principal federal tax analyst with CCH, a leading provider of tax information. "Also, sooner is better. Put the money in now, and it gives you almost another whole year of additional tax-deferred interest."
For 401(k)s, the maximum contribution increased from $13,000 last year to $14,000 this year. Don't count on your employer to make that adjustment. "Maybe some do," said Luscombe. "But it's usually sort of up to you."
Record keeping. Don't wait until the last minute to assemble records on such things as capital gains, medical expenses, property taxes and charitable contributions. "If you box up old clothes for Goodwill or a church bazaar, you might not keep a list of what's in the box and what it's worth," Luscombe noted. "We accountants don't have a lot of time around April 14 to help run down that kind of stuff."
For more on record keeping, check out www.ajc.com
/money/.
Hybrid automobiles. As was widely reported, the deduction for buying a gas-saving vehicle was scheduled to start phasing out this year. But Luscombe noted that the phase-out has been delayed. For 2005, you can still claim the deduction, up to a maximum of $2,000.
Bunching deductions or income into a chosen year. People who usually take the standard deduction, for example, might find it profitable to itemize their deductions — if they jam enough deductions into one year. Perhaps the most common maneuver is to schedule major gifts to charities into a single year.
The time-honored rule of thumb is to take deductions as soon as you can and push income into the future as far as you can. But the encroachments of the alternative minimum tax may complicate or even reverse that practice.
"If you had to pay the AMT or know you're close, you should be aware that some tax strategies may be sandbagged by the AMT," said Luscombe. "It gets pretty complicated, and you may want talk to a CPA."
Giving cars to charity. Too many people have cheated the government by giving an old clunker to a charity, then claiming an inflated value as a deduction.
That's why the rule was changed: Now your deduction is limited to the gross sales price that the charity got when it actually sold the car — not what you say it was worth when you gave the car away.
But there are exceptions, Luscombe pointed out. If your charitable organization uses the car for its own purposes or substantially modifies it, you can still claim an estimated fair market value rather than actual sale price.
The same holds if the charity sells donated vehicles to people in need, Luscombe said.
Read more "Bank on Hank" columns
|
