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Tax Talk

Tax tips for the holidays
Scripps Howard News Service


November 28, 2005

WASHINGTON - With Thanksgiving and Friday's Christmas-shopping kickoff, the 2005 holidays have arrived and that makes it time for year-end tax planning.

Waiting to cut your 2005 tax bill until it's due Monday, April 17, 2006, can cost you dearly.

Those at risk from the Alternative Minimum Tax need to start figuring now if they can take steps to avoid being slapped by this parallel tax system, which denies favorite deductions like state and local tax write-offs for people with hefty incomes, big capital gains, stock options or large families.

If you know you won't be caught by the Alternative Minimum Tax in 2005 but might be in 2006, consider pre-paying state and local income and property taxes that aren't due until next year, financial planner Rande Spiegelman of Schwab Center for Investment Research suggests. Also, he advises postponing the Christmas bonus and other income into 2006 if that money would trigger Alternative Minimum Tax liability.

Reverse that strategy if you are hit by the Alternative Minimum Tax on your 2005 taxes but not 2006. In that case, hold off paying 2006 state and local taxes until next year.





Other tax-law changes make it worthwhile to review charitable contributions. Private donations to hurricane relief are on track to surpass the $2.8 billion record Americans set in response to 9/11, according to Indiana University's Center for Philanthropy and the American Red Cross, and Congress has responded by sweetening the donation incentive for itemizers.

The Katrina Emergency Tax Relief Act of 2005 lets itemizers deduct donations by cash, check or credit card to any public charity - not just hurricane relief - that is made by Dec. 31, 2005, regardless of the amount, notes attorney-accountant Mark Luscombe of tax publisher CCH.

Before the Katrina relief bill's enactment, the rule was that donors couldn't deduct more than 50 percent of their adjusted gross income in any tax year. But now itemizers can deduct up to 100 percent of cash contributions made after Aug. 27, 2005, and before Jan. 1, 2006.

However, the higher contribution limit doesn't apply to gifts of stock or other property and you cannot give the money through a donor-advised fund.

Wealth-planning strategist Susan Hirshman of JPMorgan Asset Management cautions people who need to sell stock to make the cash gift under the Katrina act: However attractive this one-time-only provision is, taxpayers may be better off under the regular tax rules "gifting" appreciated stock to charity and deducting the fair-market value rather than owing 15 percent capital gains tax on the stock sale.

Global accounting firm Ernst & Young has produced a handy "Hurricane Katrina Tax Relief" guide that details federal and state benefits. Download the 58-page booklet at


Here are more year-end strategies recommended by tax experts:

- Sales tax deduction: This may be the last year to deduct state and local sales taxes instead of state and local income taxes as itemized deductions. That could help taxpayers considering buying a new car or other big-ticket items to decide to buy them this year if they expect the sales tax bill to exceed state and local income-tax liability, says editor Bob Scharin of RIA's Practical Tax Strategies, a journal for tax professionals.

- New and used cars: Buy a hybrid car or SUV by New Year's and get a $2,000 tax break. Wait until 2006 and you qualify for a credit of up to $3,400, depending on the weight of the vehicle you choose, says CCH's Luscombe. The credit applies to fuel-cell and other alternate-fuel vehicles, too, and there's an extra "conservation credit" of up to $1,000 based on projected energy savings over the life of the car.

With used cars, Luscombe notes, Congress toughened the rules for charity donations. So instead of deducting the Blue Book value or appraisal price of cars valued at $5,000 or more, starting Jan. 1, 2005, you can only deduct what the charity actually gets for the car, which is likely to be less than trade-in value.

- Investment adjustments: Spiegelman says consider rebalancing your long-term investment plan by harvesting capital losses in taxable accounts. Losses can be used to offset capital gains first and then ordinary income for taxpayers with excess losses in 2005.

When rebalancing investments, be mindful about what you hold in tax-sheltered retirement accounts as well as taxable mutual funds to lessen your risk, he adds.

- Mutual funds: If you're looking to sell a profitable mutual fund before year-end, do it before the December dividend distribution to make sure your entire gain qualifies for the maximum 15 percent capital-gains tax rate. Wait to sell, and the ordinary income part of the distribution could be taxed at up to 35 percent.

Buying mutual funds before year-end? Wait until after the dividend distribution in late December, or you'll get a tax bill for part of the money you just invested.

- Retirement savings: This year's 401(k) contribution limit is $14,000, which must be made by Dec. 31, 2005. If you're turning 50 or older before the end of the year, you may be eligible to contribute an extra $4,000. It may be too late to adjust your withholding for 2005, but remember the limits go to $15,000 with $5,000 for the 50-plus catch-up in 2006. IRA contributions for 2005, due by April 17, 2006, are $4,000 with an extra $500 for savers 50 and up.

- Gift it: For 2005, you can give up to $11,000 apiece to any number of people - $22,000 for couples "splitting" gifts - without paying gift tax. You can also make payments directly to educational institutions or medical providers without incurring a taxable gift, says JPMorgan's Hirshman. She adds that the amount you can "gift" free of federal gift tax rises to $12,000 next year, $24,000 for couples.


Contact Mary Deibel at DeibelM(at)

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