10 Year-End Income Tax Tips

I have not used Turbo Tax in 5 years but for some reason I am still on their spam email distribution list. That’s fine, their tips are generally decent and it helps me to have an educated discussion with my accountant.

Today’s email lists 10 tips that you should at least review at some point over the next couple of weeks.

• Defer Income – Income you don’t receive until after midnight on New Year’s Eve isn’t taxed until the following year. Even if you’ll be in the same tax bracket, you win by putting off the tax bill.

• Exploit Last-Minute Deductions – Contributing to charity is a noble way to get a deduction. And you control the timing.

• Beware of the Alternative Minimum Tax – Sometimes accelerating deductions can cost you money… if you’re already the alternative minimum tax (AMT) or you inadvertently trigger it. Originally designed to make sure wealthy people could not use legal deductions and congressionally created loopholes to drive their tax bill to zero, or close to it, the AMT is now increasingly affecting the middle class.

• Sell Loser Stocks to Offset Gains – Since it’s up to you when to sell securities – and convert paper gains and losses to real ones – you can mix and match your trades to deliver the tax outcome you desire.

• Do a Bond Swap – The point of this year-end maneuver is to lock in a tax loss by selling bonds that have fallen in value (usually because market interest rates have risen) and reinvesting the proceeds in other bonds. Done right, you can maintain the income stream from your bonds.

• Don’t Buy a Tax Bill – Mutual funds often pay out most of their capital gains and dividends in December. Don’t think you’re getting a windfall if you buy just before then. It’s a tax mistake.

• Contribute the Maximum to Retirement Accounts – Bump up your 401(k) contribution so that you are putting in the maximum amount of money allowed ($15,000 for 2006 and $15,500 for 2007, so start early). If you think you can’t afford it, run the numbers.

• Give Money Away – You can give away as much as $12,000 a year to any number of people without triggering the federal gift tax. The tax-free amount doubles to $24,000 if your spouse joins you in making the gift.

• Check IRA Distributions – If you have reached age 70-1/2 (or if your parents have), remember that the law demands that payouts must be made from traditional IRAs after the owner reaches that age.

• Check up on Your Flexible Spending Accounts – The catch is the notorious “use it or lose it” rule. You have to decide at the beginning of the year how much to contribute to the plan and if you don’t use it all by the end of the year, you forfeit the excess.

Their site goes into much greater detail on each of these points, so please do not make any choices simply based on these excerpts.

Read Top 10 Year-End Tax Tips at TurboTax