Year-end Tax Breaks
Extra tax breaks go to the victims of this autumn's Gulf Coast storms, as well as to hurricane-relief donors. Plus, what you need to do now to lower your 2005 taxes -- and why some home improvements ought to be postponed until 2006.
By Mary Beth Franklin, Senior Editor
From Kiplinger's Personal Finance magazine, December 2005
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Keep receipts. Unless Congress acts to extend the temporary break, this is the last year that taxpayers who itemize have the option of choosing between deducting state and local sales taxes or state and local income taxes. For those who live in states with no income tax, it's a no-brainer. You can use an IRS table to determine the sales-tax deduction for your income bracket and family size, and then add sales taxes paid on big-ticket items, such as cars, boats, RVs and mobile homes.
If you're considering a big purchase, make your move before year-end to be able to deduct the sales tax. One exception: If you're thinking about buying a hybrid car, you're better off waiting until 2006 (see the box below).
Teachers get one last chance to deduct up to $250 in classroom costs.
Take your losses. Look on the bright side: Selling a losing asset can be a great way to rebalance your portfolio and save on taxes. Debra Watts, a financial planner for Harbor Lights Financial Group, in Manasquan, N.J., tells of a retired couple who had 20% of their portfolio tied up in the stock of a regional bank. They also owned 1,000 shares of Lucent Technologies, the former high-flier whose price has tumbled. Watts urged them to sell their Lucent shares and enough of the profitable bank stock to result in a net loss of $3,000. That way, they could reallocate their investments more appropriately and use the $3,000 loss -- the maximum allowed each year -- to offset ordinary income.
Donating appreciated stocks or other assets to a charity before year-end is another tax-saving move. You won't owe capital-gains taxes, and you can deduct the full market value of the shares.
Boost savings. One of the best ways to reduce current taxable income and increase future savings is to contribute to a tax-deferred retirement account. The maximum 401(k) contribution for 2005 is $14,000, plus an additional $4,000 if you'll be 50 or older by the end of the year. The maximum IRA contribution is $4,000, plus an extra $500 for those 50 or older. IRA contributions made as late as April 17, 2006, qualify as a deduction on your 2005 tax return. You're permitted to deduct your IRA contribution if you don't participate in a retirement plan at work, or if you do participate in an employer-sponsored plan but your income is $60,000 or less for individuals or $80,000 or less for married couples.
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