No humbug about it ? one?s hard-earned dollars are there for the keeping for those who know how to reduce their income tax exposure with savvy, year-end moves.
“Certainly you want to look over your portfolio at the end of the year to see if there are any losers that you can get rid of to create losses to offset any big gains that you?ve had,” advised Jeff Lawson, a tax accountant at Stoy, Malone & Co. in Towson.
“But you also want to start thinking about what?s coming up in 2007,” Lawson said. “If you?re anticipating higher income in 2007, maybe you don?t want to accelerate deductions in 2006.”
Reviewing some favorite year-end tax avoidance measures often pitted against gains, Lawson noted possibly increasing one?s charitable donations, if deduction itemization is used, or stocking up on next-year office supplies in December for those filing business income taxes.
He also stressed contributing the maximum ? $4,000 per year, as late as April 15, 2007 ? toward any regular or Roth IRAs that an individual participates in, and doing likewise (up to $15,000 per year) with employer-sponsored 401(k) retirement plans.
“Contributing to the employer 401(k) program, which typically has a matching portion to it, is the best investment that anyone can make,” said Charles Posey, a tax accountant at Kowek, Posey & Associates in Odenton. “But you may want to inquire whether the employer has adopted a Roth provision to the 401(k).”
Posey said that Roth plans are especially good for younger workers because all income earned over a Roth plan?s lifetime is tax-exempt ? instead of just tax-deferred until retirement ? which can result in a serious nest egg at career-end. Yearly contributions to this plan, however, are not tax deductible, Posey said.
“Another good one is looking at whether or not [a self-employed or retired person] will be filing under the alternative minimum tax scheme,” Lawson said.
“State income taxes are not deductible for AMT purposes,” he explained. “So a lot of times, we?ll look to see whether or not it?s advantageous for someone to make the fourth-quarter Maryland [estimated] income tax payment in December.”
According to Michael Eisenberg, of the American Institute of Certified Public Accountants, reportable income may also be lowered by delaying work bonuses until the new year or by pre-paying non-escrow-handled property taxes.
