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IT'S DECEMBER - ONE MONTH TO CORRECT THEM ALL

December 01, 2006

We plan to issue regular tips on year-end planning throughout December. We'll get started by reproducing our article from the December issue of 50 Plus Lifestyles, the Des Moines Register's special publication for the Beatles Generation. It's in the extended ("read more") entry below. It lays out the basics of the individual year-end tax planning process.

UPDATE: Go here for 2006 AMT exemption figures and a mock-up of a 2006 AMT form.

It’s December. Do you know where your taxes are?

Now that more than 92 percent of 2006 is behind us, most folks can pretty well tell what kind of year they’ve had financially. The remaining 8 percent of 2006 is still enough time to affect whether you’ll look back fondly or sadly when you file your 1040 in April.

The best way to plan for your year-end is to look at where you stand through 11 months. For most folks, the easiest way to do this is to pull out your 2005 tax return and look for things that have changed since last year. While there have been some tax law changes, if your income and deduction items look a lot like they did in 2005, and your withholding is about the same, you can expect to come out the same next April as you did this past filing season.

The most important line on your 2005 1040 for tax planning is line 45 – the line that shows whether you paid Alternative minimum tax (AMT). The most important question to ask when you start your year-end planning is: will you have AMT in 2006?

The AMT was originally enacted to ensure that the wealthiest taxpayers would pay at least some tax, in spite of their deductions. Nowadays the wealthiest taxpayers tend to escape the AMT. It afflicts the merely comfortable while passing by the fabulously wealthy. In Iowa, married taxpayers with a combined income of $150,000 to around $500,000 typically incur alternative minimum tax. It kicks in at lower levels when there are children claimed as dependents, and it can apply at much higher levels if the return shows large long-term capital gains.

So tax planning moves come in two flavors: those that work only if AMT doesn’t apply, and those that work whether or not AMT applies.

Tax planning moves when you aren’t facing AMT

· Prepay your state and local taxes. If you expect to owe Iowa income tax in April, pay them before December 31 so you can deduct them on your 2006 return.

· Consider paying your March property tax bill early.

· If you pay an investment advisor or tax preparer, or if you have other “miscellaneous itemized deductions,” you might want to prepay some that would otherwise be due in 2007. If you combine them so they exceed two percent of your adjusted gross income (AGI), you can get a deduction. Your tax preparer will now doubt be pleased to send you a bill for 2% of your income to help you out.

· Buy that “hybrid” vehicle you’ve been eyeing. If you buy before year-end, you can qualify for the new hybrid vehicle tax credit. A warning: this credit will be restricted for Lexus and Toyota models; it is fully available for qualifying hybrids from other manufacturers.

These tax saving moves, remember, only work if you don’t face AMT for 2006. Keep in mind that if you have a lot of these on your return, they could push you into AMT by themselves.

Tax planning moves that work whether or not you have AMT.

If AMT is an issue for you, don’t despair. While the easy moves listed above won’t help you, hope remains.

· Home mortgage interest is deductible whether or not you are an AMT taxpayer. Make sure you get the last payment of the year in before December 31.

· Charitable contributions also work for AMT. The most tax-efficient way to make these gifts is with appreciated publicly-traded stock. You can get a full fair-market value deduction for the value of the shares gifted without ever paying tax on the gain.

· Home energy credits work whether or not you are in AMT. That means you can get tax credits up to $300 if you buy a high-efficiency furnace or new water heater, for example. But if AMT is a problem, buy now; unless Congress acts, these credits won’t help next year if you have AMT.

· Take your losses. If you have capital gains year-to-date, you should comb through your portfolio for losers. If you sell loss stocks before year-end, you can deduct the losses to the extent of your 2006 capital gains, plus $3,000. But be careful not to replace your losers within 30 days before or after the sale, or your losses won’t count.

Finally, keep in mind that unless Congress acts, the exemption that keeps most folks from having to pay AMT will decline drastically in 2007. While most observers expect Congress to pass legislation to keep the higher exemption in place, it’s not safe to bet real money on politicians acting sensibly. If you have deductions that will only work if you don’t have AMT, 2006 is a much safer year to plan to use them.

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