FSI Tax Corp is alerting taxpayers to end-of-the-year actions they can take to reduce their 2006 tax bills. After the New Year, it will be too late to take advantage of many tax-saving opportunities, such as reducing 2006 income, exploring available tax credits and pursuing all legitimate 2006 write-offs.
1. Minimize your income
Because you are taxed on your yearly income, the simplest way to decrease your tax bill is to decrease your income. It may not sound like that’s a strategy that could save you money, but postponing income until 2007 can reduce your taxable income for 2006.
If you have clients, you can delay your invoices or push back due dates until after January 1, 2007. Unless a financial hardship requires immediate funds, wait a couple of weeks. It won’t count as income if you don’t receive it during this year, but you will still receive what you are owed. You will give your clients a needed break over the holidays and your patience will pay off in April. If you are an employee, see if your employer can delay your holiday bonus until after the New Year.
2. Tax Credits
People tend to focus on deductions more than tax credits when it comes to planning for tax season. However, there are many tax credits available that, if you qualify, can save you a lot on your tax bill. Below is a list of tax credits; detailed explanations of each credit can be found on the IRS website.
• Retirement Savings Credit: Available to low to moderate income level taxpayers who contribute to a retirement savings account. This credit can save up to $1,000 or $2,000 if filing jointly.
• Credit for Elderly or Disabled: Taxpayers earning a limited income may qualify for this credit if over 65 years old or permanently disabled.
• Adoption Tax Credit: If you adopted a child this year, you may be eligible for this credit which repays adoption expenses up to $10,639 in 2006 or about $5,000 for each adopted child.
• Child Tax Credit: Low-income parents with children under 17 years old may qualify.
• Child and Dependent Care Credit: This is for parents who have children under 13 and place their children in daycare or with babysitters so the parents can work.
• HOPE Credit: Students may qualify for a tax credit of up to $1,500 for tuition and fees assistance.
• Lifetime Learning Credit: A credit of up to $1,000 for which students (including part-time students) and students not in school due to pursuing a post-secondary degree or for a business purpose may qualify.
The Energy Tax Incentives Act was signed into law in August, and while critics of the law argue it is aimed at providing benefits to big energy companies, it also includes tax credits for consumers. Under the new law, taxpayers can take a credit for:
• Energy efficient home improvements, like insulations of windows and doors.
• Solar energy equipment for residences.
• Hybrid, fuel cell and other energy-saving or alternative energy using vehicles.
• Other energy equipment purchases, such as electric heat pumps and water boilers.
In addition to delaying income and taking advantage of tax credits, loading up on deductible expenses in 2006 can also reduce your taxable income. Taxpayers need to be careful to only include legitimate deductions because every deduction will be scrutinized by the IRS. Here are a few ideas:
• Prepay your state and local taxes. If you withheld state and local taxes this year, and you plan to itemize, it would be advantageous to prepay the taxes now and the payment will count as a federal deduction.
• Increase your 401(k) contribution to cut your taxes and increase your retirement savings. Some 401(k) plans permit “catch-up” contributions in lieu of yearly contribution maximums. According to SmartMoney.com, a taxpayer in the 28% tax bracket can save $280 by contributing an extra $1,000. You are getting paid to save!
• Include additional deductible mortgage interest by paying January’s mortgage bill now.
• Don’t postpone paying tuition and university fees. Pay for next year’s education now and save. In some states, contributions to your 529 college savings plan can also be deducted.
4. Donate to Charities
The holiday season is a “season of giving” and a great time to donate to your favorite charity. Not only does it feel good to give to the less fortunate, but you can help yourself by donating before January 1st and including the contribution on your 2006 tax return. For more information on charitable donations visit [http://www.irs.gov/newsroom/article/0],,id=164997,00.html.
You can also donate stock to charity, avoid paying taxes on the appreciation and deduct the full value of the stock.
For taxpayers looking for maximum generosity and time to consider how to give back, a donor-advised fund may be the answer. For a contribution of at least $10,000, you can deduct the entire amount now and disperse the funds over time.
In a Nutshell
There are many ways to work the tax system in your favor, as long as you are willing to roll up your sleeves and dig into the details. These last-minute, year-end tax tips are a good starting point.
FSI Tax Corp.
9212 Berger Rd.
Columbia, MD 21046