10 tax time bombs to defuse now
By Kay
Bell • Bankrate.com
There's always too much to do and not enough time to do it during
the hectic holiday season. But you need to add one more item to
your must-do list: a quick tax checkup.
Spending a few minutes on your taxes now can pay off
at filing time.
Defuse these 10 tax time bombs by Dec. 31, and you
won't have to call in an accounting SWAT team on April 15.
1. Get in the giving mood
Since the holidays are the time for giving, add your name to your
tax gift list by donating
to your favorite charity. As long as you itemize, you can deduct
gifts of cash or goods to help reduce your tax liability.
Another nice thing about giving to charities, aside
from the satisfaction you get from helping others, is that unlike
medical and miscellaneous deductions, your contributions don't have
to meet a percentage threshold. Your entire goodwill helps your
tax situation as well as the recipients.
If one of the items you plan to donate is an auto,
then you definitely want to do it by the end of 2004. This is the
last year that you can (easily) get the Kelley Blue Book value for
a donated
vehicle. Because some taxpayers cheated when valuing their automotive
gifts, federal lawmakers approved stricter donation rules that take
effect on Jan. 1, 2005. But if you donate a car (or boat or other
vehicle) now, you still can use the existing, more lenient guidelines
to determine your 2004 return's deduction.
Don't have a car to give away? Many charities are
just as happy to accept run-of-the-mill items, such as clothing
and household goods. To keep the Internal Revenue Service happy,
make sure you claim the fair market value for your gifts. Bankrate
has some worksheets
to help you figure the appropriate amount.
You also might be able to reap additional, and potentially
sizeable, tax savings if your giving
is less traditional.
Did you do volunteer work for your favorite nonprofit
this year? While you can't deduct the value of your donated time,
you can write off your mileage if you used your car to help out
the cause -- for example, delivering meals to shut-ins. Deduct your
volunteer travel at 14 cents per mile.
Or consider donating stock that's appreciated in value
but no longer fits your investing plan. Instead of selling it, give
it to your favorite charity, which can then sell the stock without
any tax consequences and use the money for its projects. As for
you, you'll sidestep capital
gains taxes plus be able to deduct the asset's market value
at the time you made the gift. Just make sure the donated stock
is one you've owned for more than a year and that it has gained
value while you owned it. It doesn't do you any good to give away
a stock that's lost value since you can't deduct that loss.
2. Evaluate your portfolio
A stock loss under different circumstances, however, could be beneficial
at tax-filing time.
Many investors use the last month of the year to rebalance
their portfolios or simply to sell stocks or funds that have turned
a nice profit. Remember, though, that your investment savvy will
cost you in capital gains taxes. You do get some tax consolation
if you sell assets you owned for at least 366 days. These are long-term
capital gains, taxed at 15 percent or 5 percent vs. ordinary
income tax rates that go as high as 35 percent.
Even without selling anything, you could face a tax
bill if you own mutual funds. With an individual stock, you decide
when you buy and sell, giving you some tax control. But with mutual
funds, assets are sold throughout the year and a portion of any
gain is passed along to you, the shareholder, as capital
gains distributions. The good news: Capital gain distributions
are treated for tax purposes as lower-taxed, long-term gains.
You can lessen a looming investment tax bill by clearing
the financial dogs from your portfolio by Dec. 31. Rather than hold
onto a perennially poor-performing stock in the hopes it will recover,
sell it at a loss. Sure, it's never easy to take a loss on an investment,
but it could actually pay off from a tax standpoint: Uncle Sam lets
you net
losses against gains. Plus, you can use up to an additional
$3,000 in capital losses to reduce taxable ordinary income. If your
bad stocks cost you more, you can carry the excess into future tax
years.
3. Home sweet tax breaks
A little year-end tweaking when it comes to tax-deductible
home costs also can cut your impending IRS bill.
Your Jan. 1 mortgage payment really represents interest
for the month of December, so make the payment before the 31st.
By accelerating the payment you get an additional deduction this
tax year for the interest paid.
Some tax professionals say you can simply mail your
extra
mortgage payment by Dec. 31 and have it count. However, if you
actually get your payment to the bank by the last business day of
the year (or a day or two early), the extra interest will show up
on the lender's official paperwork. And that means no curious tax
examiner will question any difference between the amount you claim
on your Schedule A and what your lender reports on the Form 1098
that you (and the IRS) will get in late January with details of
your deductible mortgage activity.
If your year-end mortgage statement doesn't reflect
the extra payment's interest, go ahead and deduct the correct amount
on your tax return and attach a statement explaining why your number,
not the lender's, is accurate.
Remember, though, that while an early payment will
give you 13 mortgage interest amounts to deduct this year, it means
that on your 2005 taxes you'll only have 11 (or 12 if you pay a
little early next December, too). So before you send off that check,
make sure you really need the added deduction amount on this coming
return.
The same early-bird approach also applies to deductible
property taxes. If your county or municipal tax collector will take
your tax payment (or part of it) now, pay it to accelerate the tax
benefits. Of course, this only works if you pay real estate taxes
yourself, rather than having your lender pay them from an escrow
account.
While you're making early property tax payments, don't
overlook any other state or local taxes you can pay now and deduct
against your upcoming federal tax bill. This works especially well
if you pay estimated income taxes to your state treasury. By making
the final quarterly payment in December instead of the January due
date, you shift the tax benefit into this year.
A word -- actually, three words -- of warning about
shifting state tax payments: alternative
minimum tax. This parallel tax system was devised more than
30 years ago to guarantee that wealthy filers paid their fair share
to the IRS. But nowadays, more middle-class filers are finding the
AMT applies to them, in large part because the alternate system
isn't designed to keep up with some inflation. Under the AMT, some
usually acceptable tax breaks, such as state and local income taxes
as well as real estate and personal property taxes, aren't allowed.
Before you shift payment of extra taxes into this year, make sure
you won't face an AMT bill where they wouldn't be deductible.
4. Maximize medical deductions
You've got another Dec. 31 deadline to meet if you want to get the
most out of itemized medical deductions.
Medical
and dental expenses can help take a chunk out of your tax bill,
but only if you have enough of them. IRS rules say you can't count
these deductions unless they exceed 7.5 percent of your adjusted
gross income. If you make $50,000 that means you get no tax benefit
until your medical costs exceed more than $3,750.
You still have time to reach the earnings cutoff.
If you've been putting off that elective surgery and can afford
it, schedule the procedure before the year's end to bump your medical
bills up to the deductibility threshold.
The eligible expenses must be those not covered by
any insurance or other reimbursement plan, such as a flexible spending
account (more on this in Tip
7). And make sure there's a solid medical reason for the procedure.
Cosmetic nips and tucks don't count here!
But you can include any dependent's medical treatments,
as well as the installation costs of special, doctor-prescribed
therapeutic equipment or medically necessary improvements to your
home. And if you must travel for medical treatments, you can deduct
the drive at 14 cents per mile, along with any parking and tolls
you paid along the way.
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