With the holidays upon us, you might be tempted to delay any thoughts of your 2006 tax return until January–or even later. But while there are a very few tax strategies you can apply retroactively (primarily individual deposits to certain types of retirement accounts), most need to be implemented within the tax year. So take a few minutes now to consult with your tax advisor and consider what you can do before December 31 to reduce this year’s tax bill.
Don’t depend exclusively on the advice you got last year, says Brian M. Lewis, CPA, a certified public accountant in Maitland, Florida. Tax laws change every year. Also, at the end of the year, Congress often passes one huge tax bill designed to correct mistakes they made in earlier legislation. It’s called the Tax Reconciliation Act of the current year, and it’s typically passed in November before Congress breaks for the holidays. “Call your tax advisor the first part of December to find out if there are any changes in the tax code that will affect you and what else you can do to achieve the best outcome on your tax return,” Lewis says.
Lewis says individuals, small business owners, and investors should consider these points when planning their year-end tax strategy:
– Be sure your records are completely up to date. You need a clear picture of where you stand so you can make appropriate plans.
– Pay state and local taxes before the end of the year. Be sure your property Tax Advisors taxes are paid, even though your local jurisdiction might allow you to wait until 2007. If your state has an income tax and you make estimated payments, get them in before the close of the year so you can take the deduction on your current year’s federal return.
– If you are an employee with a 401(k) or other qualified plan at work, find out if you qualify to make additional contributions. Unlike an IRA or SEP, these contributions usually have to be made by the close of the calendar year. Also, keep in mind that if you participate in a retirement plan through an employer, you may not qualify to make an IRA contribution, so check with your tax advisor before you make any deposits.
– Accelerate equipment purchases. If you are a sole proprietor and are planning to make equipment purchases in the near future, you may want to do that before the end of the year so you can take the deduction this year. There are some exceptions to this strategy, and you’ll also need to determine if it’s better to take an immediate write-off or depreciate the equipment over a period of years.
– Take inventory and other write-offs. If you have inventory, check for goods that have been damaged, become obsolete, or have otherwise dropped in value and take an appropriate deduction. If you have worthless securities–that is, stocks, bonds, or other securities that have gone to zero value–you can usually deduct the amount you paid for them.