Year-end Tax Tips

Know tax law changes

Start your tax planning by reviewing tax law changes that might affect you. If you were in the military, itemize deductions, drive an SUV or converted rental property to a principal residence you could be affected by 2004 tax law changes.

Military personnel - Military personnel who are eligible for the child tax credit or the earned income tax credit might get larger credits because of changes in the treatment of combat pay. The IRS now allows combat pay to be counted as income when figuring the child tax credit. Additionally taxpayers can choose whether they want combat pay included or excluded in income when figuring the earned income tax credit.
Sales tax vs. income tax - Taxpayers who itemize deductions now can choose between deducting state and local sales tax or income tax.
SUVs - As of Oct. 23, 2004, businesses can take a maximum first year deduction of $25,000 for certain SUVs. This limit was lowered from $100,000 for SUVs placed in service on Oct. 22, 2004 or earlier.
Property sales - Taxpayers who convert rental property into a principal residence now must use that house as a principal residence for five years or more to get a capital gains exclusion on sale of the property.

As you look for tax savings, do a complete analysis of income and expenses for the year now concluding and a projection for the year ahead. Doing so can help you determine whether what seems to be a tax saving move really is or if it will create a bigger problem next year.

One area that has affected even middle income taxpayers in recent years is the alterative minimum tax or AMT. This tax was originally designed to ensure wealthy people paid their fair share of taxes but sometimes also gets middle class taxpayers, especially if they exercise incentive stock options.
Tried and true tax tips

With those caveats, the following are tax tips that generally are worth investigating:

Defer income
Increase expenses by taking last minute deductions
Sell losing stocks and bonds to offset gains
Sell losing mutual fund shares before distribution
Max out your retirement contributions
Investigating Roth IRAs
Take minimum IRA distributions, if eligible
Sign up for flexible spending accounts

By: Marc Dean

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Marc Dean is a freelance writer who writes for Preferred Consumer. He has done significant research online on mortgage brokers, debts, and finances.