Year-end Tax Moves

Jeff Schnepper at MSN Money has some year-end moves that could reduce your 2006 tax bill. The following are the summary of the article. For details, click here.

The easy stuff

  • Charitable deductions. Make the charitable donations before December 31.
  • Use up your flexible spending account (FSA) dollars. Use them  or lose them. The IRS allows purchases made up through March 15, 2007, to count.
  • Make your January 1, 2007, mortgage payment on December 31, 2006. So you deduct the interest payment for 2006. However, you can’t deduct it again from 2007 return.
  • Pay your taxes early. Pay real estate taxes due in the beginning of 2007 by December 31 to get the deduction a year earlier.
  • Medical and miscellaneous deductions. If you expect you are going to exceed the limit on medical expenses (7.5% of AGI) and miscellaneous itemized deductions (2% of AGI), speed up your spending before the year end.
  • Maximize your pension or IRA contributions. You can contribute $15,000 this year to retirement plan such as 401(k) or 403 ($15,500 for 2007).
  • Make the most from capital gains and losses. If you have net capital gains, sell losers to offset those gains.

New breaks from the new tax laws

  • The “kiddie tax” age has been increased to 17. This tax applys to children who are 17 or less and earn no more than $1,700 (in 2006) in interest, dividends, capital gains and other non-wage income.
  • Tax-free IRA distributions to charities. If you’re age 70 1/2 or older, for 2006 and 2007, you can distribute as much as $100,000 directly from your IRA without recognizing any income.

What’s ahead

  • Larger contribution limits to retirement plans. The $4,000 limit on contributions on IRAs will rise to $8,000 in 2008 and will be indexed to inflation after 2010.
  • Reduced tax rate on capital gains and dividends extended through 2010. The maximum tax rate of 15% on long-term capital gains is extended until 2010.
  • Income limitation for Roth conversions disappears in 2010. Starting in 2010, anyone can convert IRAs to Roth IRAs.

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