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Year-end tax tips
5 Tips: Here are five ways to minimize your payment to Uncle Sam.
November 7, 2005: 3:38 PM EST
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NEW YORK (CNN/Money) - Tax season is still several months away, but actions you take in the next six weeks can have a lot of impact on your bill come April.

1. Don't fall into the AMT trap

The Alternate Minimum Tax is a separate tax system. It has its own set of rates and its own rules for deductions, which usually are less generous than the regular ones. And more and more people are falling prey to this tax.

AMT exemptions and tax brackets are not adjusted for inflation, so if your income has increased within the past year you may fall into the AMT zone. There isn't much that you can do, unfortunately, if you do qualify, but you can be aware of this vulnerability and plan how you can pay for it.

To find out if you're going to qualify, get form number 6251 and make sure that you're in the clear, advises Donna LeValley of J.K. Lasser Your Income Tax. While there is no specific trigger for this tax, if you pay high state and local taxes or you have a lot of personal exemptions or a high mortgage interest, you'll want to tread more carefully.

It is estimated that by the end of 2010, 30 million people will be stuck paying the AMT.

2. Count your Katrina deductions

If you housed an evacuee after Katrina, you are eligible to get a $500 per person exemption up to $2,000 as long as you were a host for at least 60 days.

If you used a car or a boat to help out in distributing supplies or disaster relief, you'll be able to get increased mileage deduction. Right now you can deduct $.34 a mile instead of the usual $.15.

If you were affected by Katrina, casualty losses that were not reimbursed by insurance or the Federal Emergency Management Association are fully deductible on either your 2004 returns or your 2005 returns. In addition, you'll be able to use your 2004 income levels to qualify for child tax credit and earned income tax credit.

3. Take advantage of tax-exempt accounts

Pay attention to your employers' open-enrollment periods. Take advantage of flexible spending accounts which will let you put pre-tax money for medical expenses including dental bills, over the counter medicine expenses or any other medical expense.

Using these accounts you will save $.30 on the dollar and there is no set federal limit. If you have children or older parents that you need to take care of, think about investing in a dependant care account. The maximum you can contribute is $5,000.

You can use this pre-tax money for summer programs, babysitting services or caretaker help. You won't pay federal or social security taxes on this money, which is a better deal than a deduction.

4. Deduct your home-office

Nearly a third of the U.S. workforce regularly worked at home in 2004, according estimates from In-Stat/MDR. Yet, come tax time, less than a quarter of these workers are likely to claim home office deductions.

Suffice it to say, the IRS's criteria for this deduction is quite strict. This is because it was the most abused areas of the tax code before 1970 says CPA Ron Hegt. But that doesn't mean you shouldn't try to get this deduction. You will qualify if you work for yourself and use your home office exclusively for business purposes.

If you work for a company, you can claim the deduction if it's in the convenience of your employer. So, if you've been encouraged to work from home in order to save the company some money, you have a case, but if working from home was your idea, then forget it.

And just because you don't qualify for the home-office deduction, doesn't mean you can't claim any expenses associated with a home-based business. Office supplies, the cost of bringing a second telephone line, putting in a fax line, home mortgage interest and real estate taxes is allowed as an itemized deduction on your tax return even if you can't take a home office deduction according to CCH Tax and Accounting.

You can get a sense of what the deduction may be worth to you by using a home deduction calculator.

5. Chill out on tax reform proposal

You've probably heard already about proposals by the President's tax-reform panel will make owning a home may less tax-friendly.

The plan, which was introduced last week, would substantially reduce mortgage-interest and property-tax exemptions. The reform would specify a tax credit.

State and local property taxes would no longer be deductible. Neither would interest on second homes or home-equity loans.

The mortgage-interest exemption is among the tax code's most unfair features, but you don't have to worry just yet. You will still be able to deduct your mortgage interest this year. In fact, the proposals have been met with largely negative reviews there has been no endorsement from the administration.

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For all the latest Five Tips columns, click here.

Tax reform: Find out how you would fare under the proposed changes.  Top of page


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