MoneyWatch

Athena financial & insurance services, inc.

Registered Investment Advisors
Text Box: This is the time of year that tends to put people in a giving mood. But if you’re like most of us, you’d prefer to confine that generosity to friends, family and good causes—not the federal government. That’s why it is important to put in place now strategies that will help reduce your 2006 income tax bill. Our first strategy is one of the simplest: accelerate your deductions and defer your income. A cash basis company might send December bills to customers later in the month than normal, with the expectation that the income will not be received until January. Individuals can hold off asking for their bonus, freelance income or other irregular payment until January which means the taxes on this income won’t be due until 2008 instead of next April. Pre-paying January expenses before the end of the year will accelerate some of your 2007 tax write-offs into 2006. Mail out your January mortgage payment before the end of December, and you can include another month's worth of deductible mortgage interest in this year’s return. You can also prepay real-estate property taxes, quarterly-estimated state income taxes and educational tuition and fees and claim them as itemized deductions on your 2006 return. Most small businesses are S-corporations meaning the company pay no taxes—all income is reported on the owner’s personal income tax returns. So an owner and the company can benefit greatly by setting up a retirement program such as a 401(k) plan. For the contributions to be tax deductible for 2006 the plan must be set up no later than Dec. 31 but funding the plan can be delayed until the company's extended tax-return date or 9 1/2 months after the plan's year-end, whichever is earlier. Individuals in such plans should consider increasing their contributions for the last few pay periods of the year in order to take advantage of maximum 401(k) contribution limit of $15,0000 ($20,000 if you’re are over age 50). This will let you simultaneously sock away a little more for retirement while cutting your income taxes. Examine your portfolio; investment losses can be a powerful way to reduce your tax bill. Capital losses can be offset dollar for dollar against capital gains plus an additional $3,000 of losses can be deducted without any offsetting gains. Businesses need to take advantage of the Section 179 deduction. This is a small-business incentive which allows a company to write off the first $112,000 of capital expenditures in 2006 rather than depreciating the expense over several years. A company has to have income to use the deduction, and once capital expenditures exceed $450,000 the deduction is reduced. Be charitable. If you are planning a gift to charity consider giving appreciated stock. You’ll get a full tax deduction for the value of the stock and avoid having to pay capital gains taxes on your profit. If you have at least $10,000 that you'd like to give to charity but wish to spread the donation out over a number of years, a donor-advised fund might be for you. These accounts allow you deduct the entire amount you contribute now and invest the funds to be dispersed at a later date. Most donor-advised funds are associated with major mutual fund families but operate independently as registered 501(c)(3) organizations which are nonprofit and tax-exempt with the IRS. That status enables you to take an immediate tax deduction for your full contribution even though the money won’t reach the charity until some point in the future. Finally, become energy efficient. Install a new hot-water heater and the IRS says you can claim a credit for $150 of the purchase price. Install new metal roof and you’ll be able to claim a deduction for 10% of the cost—up to $500.▲

Preparing for next April 15th...

Volume 17, Issue 23

November 20, 2006

Tax Planning Strategies