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Eleventh-Hour Tips Can Reduce 2005 Tax Burden
"CHICAGO -- During the holiday season, visions of sugar plums are typically dancing in our heads, not Uncle Sam. But by taking the time to do a few simple tasks before the year-end, you will be able to carry that warm holiday feeling all the way through to April 15."December is typically the time of year to spend, but it can also be the time to save," says Brian Whitlock, chairman of the Illinois CPA Society. "CPAs can look at your total tax situation and provide personalized advice on which strategies will allow you to hold onto the maximum amount of your hard-earned money."The Society recommends these 10 tasks to consider before Dec. 31 to minimize your 2004 tax bill:Maximize Retirement Account Contributions. If you haven't contributed the maximum to your tax-deferred 401(k) retirement savings account, some employers allow you to catch up for the current year. For 2004, you can contribute a maximum of $13,000 ($16,000 if you're over 50 years of age by the end of the tax year). Since your contributions are made with pre-tax dollars, your current taxable income is lowered.Give to Charity. Giving money or other items to a charity is a great way to save on taxes and help others. If you itemize, your contribution is tax-deductible. Just be sure to get your donation postmarked or in the hands of your favorite charity by Dec. 31 and to obtain a receipt for donations of $250 or more. Warning: Congress limited the donation for used autos that the charity intends to sell. The deduction after Oct. 22 is limited to the cash realized by the charity.Use Flexible Spending Account Dollars. Many companies offer flexible spending accounts that enable you to set aside pretax dollars for qualified healthcare costs. Be aware that you forfeit any money left unspent in your account at the end of the year. As long as you expend money on eligible healthcare items by Dec. 31, you can be reimbursed from your account after year-end. So order extra contact lenses, schedule an extra dental cleaning, or stock up on prescription medications now.Boost Miscellaneous Itemized Deductions. Items such as tax preparation fees, job-hunting expenses, certain unreimbursed employee business expenses, and some investment costs are deductible as miscellaneous itemized expenses. To qualify, they must exceed 2% of your adjusted gross income (AGI). For example, if your AGI is $50,000 and you've already incurred the minimum of $1,000 in miscellaneous deductions, you've met the 2% floor and should check into accelerating additional miscellaneous deductions into 2004.Prepay Your Mortgage Payment. If you itemize deductions, consider paying your January 2005 mortgage payment by Dec. 31 to deduct the interest this year.Sell Loser Stocks to Offset Gains. Tally up your investment winners and losers for 2004. Then, determine whether it makes sense to take tax losses by selling your unattractive stocks. If your losses exceed your gains, you can deduct up to $3,000 in capital losses ($1,500 for married couples filing separately) against your other income, reducing the amount on which you must pay taxes. Losses in excess of $3,000 can be rolled over into subsequent years.Defer Income. If you're self-employed or have sideline income, consider deferring income into 2005 by delaying billing. Employees don't have a choice of when they get paid, but if you're in line for a year-end bonus, you might ask your employer to hold off until January. Of course, it only makes sense to defer income if you expect to be in the same or lower tax bracket next year.Tally Your Sales Tax. A change for 2004, you may deduct the larger of your State income taxes paid or your State sales taxes paid. If you made a number of large purchases this year or added on to your home, you may be better off keeping track of your sales tax paid for 2004. Save your credit card receipts and cancelled checks. Get your builder to breakout the sales taxes that were paid on the building materials used in your addition.You're a Teacher? Stock Up on Supplies. Eligible educators who work at least 900 hours during a school year may deduct up to $250 of qualified expenses for purchases of books and classroom supplies. This is an "above the line" deduction, which means that you don't have to itemize in order to claim this tax break. Be sure to save the receipts to substantiate your expenses.Organize Your Tax Records. Organizing your tax records and paperwork early gives you time to request copies of any missing documents and makes it less likely that you will miss valuable deductions when you file your 2004 tax return. If you are unsure of the documents you need to complete and support your tax return or to take advantage of other tax-savings opportunities, consult a CPA.The Illinois CPA Society, founded in 1903, is the fourth largest state CPA society in the nation, with more than 22,000 members. Visit the Illinois CPA Society: www.icpas.org This article is new this week in The Business Journal's small business how-to section. To see what else is new, click here or click on the "how-to" tab at the top of The Daily Business Journal Online home page."