'Tis the season to save on your taxes

Gayle B. Ronan

“Basically it is a case of plan now or pay later,” says Bob Meighan, a CPA and vice president with the TurboTax division of Inuit Inc., about making a holiday ritual of reviewing finances before year's end.

But if having a tax expert perform that review before year's end is not in the cards, here are some things to consider when going the doing-it-yourself route.

The most important thing is to figure out what the damage will be now, while time to make changes remains.

“After year-end the only move left for reducing taxes involves setting up or contributing to IRAs, if you qualify,” says Meighan.  That is because the deadline for making 2006 IRA contributions — deductible or not— is the filing date, April 16.

While estimating taxes can be done with information found on the Internal Revenue Service Web site, online estimators like those available on the Microsoft's MSN Money and H&R Block  sites make the exercise less painful.  Both lead users through a series of questions, ensuring pertinent information is gathered for the calculation. An added benefit of gathering that information is it jump-starts the organizing process ahead of doing the actual return next year. (MSNBC.com is a Microsoft-NBC Universal joint venture.)

Delaying deductions can pay
Taking the year’s finances for a test run determines if the Alternative Minimum Tax (AMT) will be a factor.

“Despite the adjustment Congress made (raising) the AMT limits for 2006, it remains a serious threat not just to the wealthy, but to middle class taxpayers living in high-income states like California and New York,” says Meighan.  “Their deductions are much higher than average — primarily due to state and local taxes — and that is what throws them into AMT.”

Those forewarned of an AMT liability can run through what-if scenarios to see if there is anything they can do before year-end to reduce its bite, such as postponing payments for deductible expenses until after year's end.

Adjusting for tax-bracket changes
Similarly, taxpayers who are not subject to AMT but who anticipate being in a higher tax bracket in 2007 than in 2006, may also want to postpone incurring deductible expenses until the new tax year. Delaying gives them larger deductible amounts to take against 2007 income.

However, taxpayers who expect to be in a lower tax bracket in 2007, may be able to help their cause by boosting deductions — as can anyone interested in reducing this year’s tax bill — by prepaying 2007 mortgage interest and estimated taxes in 2006, assuming AMT is not a factor, or combining 2007 and 2006 charitable contributions and making them before year's end. 

However, the new watchword in charitable giving is “documentation.” 

Taking effect this past Aug. 17, only donations of clothing and household goods in “good used” condition are deductible. The Salvation Army offers online guidance as to the deductible value such property.

“Given this increased standard for what is deductible,” advises Donna LeValley, contributing editor of J.K. Lasser's Your Income Tax 2007, “keep a picture as proof that the items were in good and usable condition.”

Beginning in 2007 regardless of the amount of charitable donations, documentation — canceled checks and receipts — will be required.  The days of being “on your honor” regarding cash donations, has passed.

LeValley also suggests using credit cards when making cash donations close to year-end. ”If the check does not clear until 2007, it is not considered a deduction for 2006.”

Retirees have additional options when it comes charitable deductions. “Taxpayers over 70½ can reduce their taxable income by directing their minimum distributions to charity,” says James Lange, CPA/Attorney and author of “Retire Secure! Pay Taxes Later.” Such transfers can now occur free of taxation, unlike typical withdrawals from these plans. Up to a $100,000 may be contributed this way for the 2006 and 2007 tax years.

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