Before you can stuff that last turkey leg in your mouth, it will again be tax time. Yes, I know. As much as you would like to put this thought on the back burner for a few months, take a moment to consider what you can do before year’s end to help you out when tax time rolls around. Besides, author Jim Lange says two new tax laws could mean big savings for you.
“I know that deciphering the relevance and nuances of new tax laws is, for most people, about as much fun as drinking castor oil,” says Lange, author of Retire Secure!: Pay Taxes Later The Key to Making Your Money Last as Long as You Do. “However, taking the time to understand what they mean for you can save you a lot of money. That knowledge should make the process much less painful.
“Everyone should know there have been two major tax bills passed this year that have important implications for taxpayers,” he continues. “The bills, the Tax Increase Prevention and Reconciliation Act, also called TIPRA, and the Pension Protection Act, or PPA for short, offer enormous tax savings-if you respond appropriately right now.”
Here is a summary of the best strategies for making these new tax laws work for you-strategies that could help you save thousands of dollars and potentially much more in the long run.
Create nondeductible IRAs now to convert to Roth IRAs in 2010. TIPRA permits all taxpayers to make Roth conversions beginning in the year 2010, regardless of their income level. For the family, the long-term benefit of a Roth IRA conversion is simply phenomenal. The new provision will particularly benefit high-income taxpayers who have not had the opportunity to make significant contributions to a tax-free Roth account.
Maximize retirement plan contributions through your plan at work. The PPA has also made permanent the laws allowing higher contributions to your retirement plans and the catch-up contributions for individuals over age fifty. In 2006, individuals can contribute $15,000 per year ($20,000 per year if age fifty and older) to their retirement plans. If you haven’t already, now is the time to review your 2006 year-to-date retirement plan contribution opportunities.
Save money through tax-loss harvesting. Using capital loss carry-forwards to reduce taxable gains by offsetting the losses against the gains is referred to as “tax-loss harvesting or tax-loss selling.” Now is the time to review your investment portfolio and make some decisions that will generate tax savings.
Go ahead and make non-cash charitable contributions-but keep good records. The PPA also made a significant number of rule changes on the requirements of charities and individuals claiming non-cash contributions. Among other things, the IRS now will allow donations of clothing and household items only in “good used condition or better.”
Think before transferring investment assets to your kid: the new “kiddie” tax rules. TIPRA rules now will classify children as those through age seventeen-not just youngsters through age thirteen, as before. This means that if your child under age eighteen has investment income over $1,700 in 2006, the child will pay tax at the parent’s tax rate and must file Form 8615.
Buy a hybrid car. Beginning in 2006, there are tax credits available for purchasing Alternative Technology Vehicles, the most common of which are the hybrid vehicles that use both gas and electricity to propel the vehicle. This credit reduces federal tax bills on a dollar-for-dollar basis and replaces the clean-fuel vehicle deduction allowed in prior years. Unlike many tax credits in the Internal Revenue Code, these energy tax credits are not phased out for higher-income individuals.
“If you don’t take the time right now to review your financials to see which of these new provisions will benefit you, you are missing out on potentially saving thousands of dollars,” says Lange. “I know a lot of this material can be very heavy. If you’re just not sure what all of this means for you, sit down with your financial advisor and let him or her explain it. I know it doesn’t fit with your festive mood, but make an appointment and grab some holiday cookies to take with you to lighten the mood. Come April 15, you’ll be very glad you did.”
Take a look at that new book of his — Retire Secure!: Pay Taxes Later The Key to Making Your Money Last as Long as You Do