Published: January 03, 2007 04:42 pm            

Wealth Choices: Year-end planning now can reap big tax rewards later

With the current year winding down, a little planning now could make a big difference when your personal taxes are calculated in 2007. There are some simple steps that can be taken that could make a big difference when it comes time to pay your taxes.

Project your taxes

This time of year is great for projecting your tax situation. It will allow you to be on top of your finances so that you have some control over what happens come April 2007. I can’t speak for you, but I hate those little surprises that come up, especially with personal taxes.

To help you complete a thorough review of your finances, you begin to gather information. Such things as pay stubs, realized capital gains or losses with investments and charitable giving are good places to start.

In addition, review your 2005 1040 tax return to see if you might have any losses you can carry forward. Take a look to see if you have to pay the Alternative Minimum Tax and the new rules of higher exemptions for 2006.

You will also want to factor in your income from multiple businesses or sources. If you are a business owner, you will want to look at the Section 179 deduction that might allow you some advantages.

Gathering this information and having the help of your accountant will put you more in control of your tax situation and give you a good projection as to where you stand for this year.

Retirement planning

Take a look at your retirement savings and the contributions you have made for this year.

If you have a retirement plan such as a 401k at work, you can contribute $15,000 in 2006 plus a $5,000 catch-up contribution as long as you are age 50 or over. Other plans, such as the Simple IRA, will allow a contribution of $10,000 plus a $2,500 catch-up for individuals over the age of 50.

A maximum contribution to your IRA and Roth IRA for 2006 is $4,000 plus $1,000 catch-up contribution. Again, this is for those of you 50 and above.

In 2005, the Tax Increase Prevention and Reconciliation Act allowed anyone to convert a traditional IRA to a Roth IRA in 2010 and beyond. At present, eligibility is limited by your income. The biggest advantage with a Roth IRA is that you do not have to pay tax on the distributions you take once you have held the account for five years or are over the age of 59 1/2. As another bonus, you do not have to take Required Minimum Distributions as is required with a traditional IRA.

College/education planning

Parents and grandparents enjoy setting money aside for their children’s education and for their well-being. A 529 plan, uniform gift/transfer to minors account, or a Coverdell savings account, will carve out some money to your children’s future.

Year-end charitable/gift planning

Now is a great time to make some decisions about your giving. The most common approach people have used is to make a tax-deduction contribution to charities. With the new passing of the Pension Protection Act, individuals who are age 70 or older may temporarily (2006 and 2007) claim tax-free treatment on otherwise taxable distributions from traditional IRAs.

In order to do this the money must be paid out directly to the tax-exempt charity. This new distribution can be made up to $100,000 annually.

Keep in mind you can give $12,000 each to as many people as you want without triggering the gift tax. The gift does not need to be cash. You may give appreciated stocks you hold instead. When doing so the cost basis of the asset will transfer over to the person receiving the asset. Should that person happen to be in a lower tax bracket than you, they may pay less in the capital gains tax upon selling of the asset.

These are just a few of the things that can be done at year’s end to save or defer taxes. So be sure to take a few moments to look at your 2006 tax situation. A little advanced planning on your part now can reap big rewards later.

        

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