FSI Tax Corp is alerting taxpayers about year-end actions they can take to reduce their 2006 tax bills. After the New Year, it will be too late to take advantage of many tax-saving opportunities, such as reducing 2006 income. , explore available tax credits, and search for all legitimate 2006 write-offs.
1. Minimize your income
Because you pay taxes on your annual income, the easiest way to reduce your tax bill is to reduce your income. It may not seem like a strategy that can save you money, but postponing your income until 2007 can reduce your taxable income for 2006.
If you have customers, you can delay your bills or delay due dates until after January 1, 2007. It won’t count as income if you don’t receive it this year, but you will still receive what is owed to you. It will give your clients a much-needed break over the holidays, and your patience will pay off in April. If you’re an employee, see if your employer can delay your vacation bonus until after the New Year.
2. Tax Credits
People tend to focus more on deductions than tax credits when it comes to planning for tax season. However, there are many tax credits available that, if you qualify, can save you a lot on your tax bill. Below is a list of tax credits; Detailed explanations of each credit can be found on the IRS website.
• Retirement Savings Credit: Available to low- to moderate-income taxpayers who contribute to a retirement savings account. This credit can save up to $1,000 or $2,000 if you file a joint return.
• Credit for the Aged or Disabled: Taxpayers with limited income may qualify for this credit if they are age 65 or older or permanently disabled.
• Adoption Tax Credit: If you adopted a child this year, you may be eligible for this credit which reimburses adoption expenses up to $10,639 in 2006 or about $5,000 for each adopted child.
• Child Tax Credit: Low-income parents with children under the age of 17 may qualify.
• Child and Dependent Care Credit: This is for parents who have children under the age of 13 and place their children in day care or with babysitters so the parents can work.
• HOPE Credit: Students may qualify for a tax credit of up to $1,500 for tuition and fee assistance.
• Lifetime Learning Credit: A credit of up to $1,000 for which students (including part-time students) and students who are not in school due to post-secondary degree pursuit or business purpose may qualify.
The Energy Tax Incentives Act was signed into law in August, and while critics of the law argue that it is aimed at providing benefits to large energy companies, it also includes tax credits for consumers. Under the new law, taxpayers can take credit for:
• Home energy efficiency improvements, such as window and door insulation.
• Solar energy equipment for residences.
• Hybrid vehicles, fuel cell vehicles and others that save energy or use alternative energy.
• Other purchases of energy equipment, such as electric heat pumps and water boilers.
3. Deductions
In addition to delaying income and taking advantage of tax credits, accumulating deductible expenses in 2006 can also reduce your taxable income. Taxpayers should be careful to include only legitimate deductions because the IRS will look at each deduction. Here are some ideas:
• Pay your state and local taxes in advance. If you withheld state and local taxes this year and plan to itemize them, it would be advantageous to pay the taxes in advance now and the payment will count as a federal deduction.
• Increase your 401(k) contribution to reduce your taxes and increase your retirement savings. Some 401(k) plans allow “catch-up” contributions instead of annual maximum contributions. According to SmartMoney.com, a taxpayer in the 28% tax bracket can save $280 by contributing an additional $1,000. They pay you to save!
• Include additional deductible mortgage interest by paying your January mortgage bill now.
• Do not postpone the payment of tuition and university fees. Pay now for next year’s education and save. In some states, contributions to your 529 college savings plan may also be deductible.
4. Donate to charity
The holiday season is “giving season” and a great time to donate to your favorite charity. Not only does it feel good to give to those less fortunate, but you can also help yourself by donating before January 1 and including the contribution on your 2006 tax return. For more information on charitable giving, visit [http://www.irs.gov/newsroom/article/0],,id=164997,00.html.
You can also donate stock to charity, avoid paying taxes on appreciation, and deduct the full value of the stock.
For contributors seeking maximum generosity and time to consider how to give back, a donor-advised fund may be the answer. For a contribution of at least $10,000, you can deduct the full amount now and distribute the funds over time.
In one word
There are many ways to work the tax system to your advantage, as long as you’re willing to roll up your sleeves and dig into the details. These last-minute year-end tax tips are a good place to start.
Contact:
FSI Tax Corporation
9212 Berger Rd.
Columbia, MD 21046
1-877-437-4669