Five Moves To Make By Year-End
Writing off state sales taxes and buying cold tablets to use up your FSA are among the new ways to cut what you owe to Uncle Sam
(MONEY Magazine) – Ring out the old, ring in the new. The first step toward getting your finances in great shape for the new year is to make sure you've successfully wrapped up money matters for the old one. The following mix of new and traditional year-end strategies will help you trim your taxes for 2004 and get a jump on key issues for the 2005 filing season.
1 TALLY UP YOUR PURCHASES New legislation, in effect for 2004 and 2005, lets you choose between deducting your state income tax or state sales tax—a big boon if you live in a low- or no-income-tax state, anda potential tax savings if you've recently purchased a car or other big-ticket items. To figure out the sales-tax deduction, you can use tables that the IRS provides or the actual receipts, if you've kept them. Residents of states with an income tax won't need to decide between the two options until they actually file their 2004 return next year, but it's smart to run a comparison now. That way, you can accelerate or defer expensive purchases if doing so will result in a bigger write-off, this year or next.
2 SPEND DOWN YOUR FSA Flexible spending accounts, which let you set aside pretax money to pay for out-of-pocket medical costs like health insurance premiums, deductibles and co-payments, are a use-it-or-lose-it proposition. So if it looks like you'll still have money left in your account at the end of the year, pick up a spare pair of glasses or contact lenses, get your teeth cleaned or stock up on prescription and over-the-counter drugs (allowable expenses in many plans for the first time this year) by Dec. 31.
3 DO AN AMT CHECK Use an online calculator (hrblock.com/taxes/tools/amt) to see if you're likely to owe the alternative minimum tax. If you think you will be AMT-free this year but may not be next—a probable scenario for many as the number of taxpayers subject to the AMT swells—push deductions that cannot be claimed under the AMT (such as your January property tax payment) into 2004.
SOURCE: Urban-Brookings Tax Policy Center.
4 BE CHARITABLE Every $1,000 you donate in cash, securities or tangible items by Dec. 31 will cut your 2004 tax bill by $280 if you're in the 28% bracket. So start writing those checks and cleaning out your closets. If you're considering donating an old car, be forewarned that the IRS is scrutinizing these gifts closely. You can only write off the amount the car would likely sell for; starting next year, your deduction on a car worth more than $500 will be limited to the charity's actual proceeds from the sale of the car. Says Ernst & Young's Martin Nissenbaum: "If you have a car you want to donate, do it this year."
5 DUMP YOUR LOSERS If you've lost money in stocks or mutual funds this year, consider unloading some clunkers if their prospects for recovery seem slim. As long as you sell by year-end, you can use those capital losses to offset gains on other securities you've sold this year, potentially wiping out any taxes you owe. You can use any remaining net capital loss to offset taxes on up to $3,000 of ordinary income. If you wind up with a larger net loss than you can use this year, you can roll over the remainder to reduce taxes in future years.
SOURCE: MONEY calculation.