'Tis the season to save on your taxes

“If taxpayers have available cash and are not taking full advantage of their employer’s 401(k) plan, they should see if they can still make an additional contribution before year end,” says LeValley.

Contributions to 401(k) plans create above-the-line deductions, directly reducing adjusted gross income. The contribution limit this year is $15,000, but those who turned 50 in 2006 may contribute $20,000.

Review investment portfolios
“It’s an oldie but goodie,” says Lange, referring to selling investments held at a loss. Realized capital losses may be used to offset capital gains realized during the year. Amounts in excess of those gains, up to $3,000 a year, may also be used to offset ordinary income. Any remaining amounts can be carried forward for use in future tax years. The trick is to avoid the Wash Rule by buying the same security back within 30 days of selling the security.

College savings plan tax benefits
This year “529” plans, which shelter earnings from federal taxation as long as withdrawals are used for qualified education expenses, were made permanent fixtures of the tax code. While contributions are not deductible at the federal level, a number of states, including Illinois, New York and Ohio offer deductions on their state returns.  Information on each state’s plan and any available deductions may be found in the free portion of SavingforCollege.com.

The kiddie tax bites back
“For savings occurring outside of (tax-advantaged) Coverdell and 529 college savings plans, parents could be picking up additional investment income this year,” says Justin Ransome a partner with the accounting firm of Grant Thornton in Washington, D.C.  Previously, income exceeding the first $1,700 earned on assets held in a minor child’s name was taxed at the child’s tax rate once they turned 14, not at the parents’. That age for dependent minors has been lifted to 18, which could pack an unwelcome surprise for parents in the form of higher tax bills on existing savings accounts.

The child-care credit gets friendlier
The expenses now qualifying for the Child and Dependent Care Credit now include agency fees incurred in locating and hiring a care provider; room and board for a provider; and the transportation costs involved in getting that provider to and from a care center, after-school program or day camp. Tuition for specialty day camps also now qualifies under the credit.

Buy a green machine
For those thinking about buying a new hybrid car, doing so sooner rather than later offers a tax advantage. A tax credit has replaced the prior deduction for hybrid vehicle purchases.  But the credit phases out based on the number of cars sold by each manufacturer — the more cars each sells, the lower the credit that may be taken for its hybrid models.  The credit disappears altogether when each manufacturer sells its 60,000th vehicle. This is why earlier is better with these purchases for tax purposes.

Make an energy-efficient home improvement
Improvements to a principal residency’s energy efficiency may qualify for a limited tax credit.  That limit is $500 and applies to both 2006 and 2007.  No more than $200 of the credit may be for exterior windows, however.  Qualified central air conditioners, heat pumps or water heaters are limited to $300 credits and qualified hot-water boilers and furnaces to $150. Additional credits are also available for residential solar and fuel cell equipment.

Expect a telephone-tax refund
A bit of an unexpected gift will be included in every tax return. This year there will be a rebate accessible through taxpayer returns for improperly collected telephone taxes. The minimum tax credit will be $30, according to LeValley. 

Keep a paper trail
Most of what is needed to file returns will arrive by mail during January in the form of W-2s, 1099s and brokerage, bank and mortgage statements. 

“Even if year-end tax planning only involves setting up a folder so that when documents start coming in there is a place to put them, it can save time and aggravation later,” says Meighan.

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