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| Check in each weekday from December 5 through December 16 for ten ways to trim your 2005 taxes. |
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Taxpayers traditionally make year-end donations to their favorite charities as a way of sharing the spirit of the holiday season while trimming their tax bills. This year the donations arrived a few months early, as charitable contributions surged in response to Hurricane Katrina. Now Uncle Sam offers his own dash of pre-holiday cheer, in the form of extra tax breaks for both donors and victims of the storm.
Laurel and Steve Burrows of Atlanta had been empty nesters for less than two weeks when Katrina left hundreds of thousands of people homeless. With plenty of room in their home after their third child had left for college, Laurel and Steve signed up with an online service that connects hurricane evacuees with host families.
Soon afterward, Deborah Grimes moved in with her two children, Gary, 18, and Octavious, 8. Steve Burrows, who is a design-and-build contractor, borrowed a set of bunk beds and turned his home office into a bedroom for the boys. Laurel, who runs a home-based catering business, expanded her grocery-shopping list to accommodate their temporary family of five.
Families who have opened their homes to storm victims rent-free for 60 days or more can claim an additional personal exemption of $500 for each evacuee, up to a maximum of $2,000. In the 25% bracket, that would save $500 in taxes.
Storm victims such as Deborah Grimes also get a gift from Uncle SamÑthey can deduct the full amount of their uninsured casualty losses. Normally, you must reduce your actual loss by $100 and then by 10% of your adjusted gross income. So if your AGI for the year was $100,000, the first $10,100 of your loss would not result in any tax savings. But in response to Katrina, Congress decreed that residents of the affected areas aren't bound by those restrictions.
Also, residents of any presidentially declared disaster area have the option of claiming their casualty loss on an amended 2004 return (Form 1040X) to speed the refund process. Or you can wait to claim the deduction when you file your 2005 return next spring.
Consolidate deductions. For taxpayers unaffected by hurricanes, the best year-end tax strategy is to reduce your taxable income as much as you can. If, for example, your itemized deductions are close to the amount of the standard deduction, you may be able to boost your tax savings by loading deductions into one year and claiming the standard deduction in alternate years. For 2005, the standard deduction is $5,000 for individuals and married couples filing separately, $7,300 for heads of household and $10,000 for married couples filing jointly.
To maximize your deductions for 2005, make all your charitable contributions and pay your medical bills before December 31. If you're short on cash, you can use a credit card. "The deduction is available in the year you charge the expense, even if you don't pay the bill until the following year," says Bob Scharin, editor of RIA's Practical Tax Strategies. (Note that charitable contributions are fully deductible if you itemize, but only those medical expenses that exceed 7.5% of your AGI are deductible.)
Speed up payments. For some taxpayers, accelerating tax-deductible payments that are due in January -- such as mortgage interest, property taxes or quarterly estimated payments for state and local taxes -- into the current tax year is another way to ease the tax bite. But this sooner-is-better strategy does not work if you're subject to the alternative minimum tax, a parallel tax system with its own set of rules. The AMT does not allow deductions for state and local taxes, home-equity loan interest (unless the borrowed money was used for home improvements), or items such as investment expenses, nor does it allow personal exemptions for yourself, your spouse or your children.
Essentially, you have to figure your taxes under two sets of rules -- the regular tax code and the AMT -- and pay whichever is higher. As regular tax rates have declined, your chances of being snared by the AMT have increased, particularly if you live in a state with high income taxes or high property taxes, or if you have a large family. Before prepaying any of your January bills, check to see if you're vulnerable to the AMT.
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