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Eleventh Hour Savings

If you're earning more money this year than you will earn next year, consider deferring your income.


It's almost year-end, which means it's almost time to panic about your income tax. Although the days are numbered, there's still time to save some tax dollars.

Basic income tax strategy is that if you're earning more money this year than you believe you will earn next year, defer your income into next year, and accelerate your deductions into this year. The rationale behind this is to take advantage of the graduated income tax brackets, which allocate higher income tax rates for larger incomes. For example, the top federal income tax bracket is 35 percent. Someone in this bracket earning an additional $10,000 pays $3,500 of federal income tax on such funds. If someone else is in the 10 percent tax bracket, on $10,000 of income, he or she would pay $1,000 of tax. So your tax bracket is very important.

Income Deferral

If you have any control over your payroll or other sources of income, receive your December pay in January 2006, which will delay taxation on such funds until next year.

For sales of assets, capital gains and other income items, consider taking a partial payment this year and the balance of the payment next year. That way you can again defer income.

Remember to determine what tax bracket you are in so that you do not increase your tax bracket next year if you defer too much income.

Acceleration of Deductions

With deductible expenses, such as home mortgage interest, estimated state tax payments and charitable deductions, make sure to pay them by December 31, 2005, and take the deduction this year. If you pay your January mortgage payment by December 31, 2005, you can get the deduction now rather than next year.

Business Owners

It's much easier to do tax planning if you own your own business. If your business is on the cash method of accounting, consider sending out your invoices for November and December a bit later than normal, which will result in being paid possibly in 2006, versus 2005. Also self-employed people can now deduct 100 percent of their medical insurance without having to itemize their deductions. Remember to have the company pay the expense rather than you personally.

Business taxpayers should remember to expense any equipment purchases, up to $105,000 in 2005, for current year purchases, within limits. That means that even if your closely-held company financed 100 percent of the purchase, provided that it was put in service in 2005, you can write off the whole purchase price. In essence, if you're in the top tax bracket, the government is giving you about 40 percent of the purchase price through tax savings. (Federal top rate is 39 percent for corporations, plus state tax). That tax savings could be used to help reduce the debt.

Retirement Plans

If you can, remember to maximize your retirement plan contributions.

If you're not an active participant in your company's retirement plan, you can generally make tax-deductible contributions to an IRA. The 2005 limits are $4,000 for those under the age of 50 and $4,500 for those age 50 or older.

If your employer offers a SIMPLE plan, you can still elect to defer all income you have not received this year, up to $10,000 if you're less than 50?years-old and $12,000 if turning 50 by year-end.

If you're 50-years-old this year, you can also make additional contributions to almost every type of retirement plan. Check with your employer.

In 2005, some small businesses may take a new credit for expenses of establishing and running a new retirement plan, up to 50 percent of the first $1,000 for the first three years of the plan.

Also for 2005, an Employer-Provided Child Care Credit is allowed for a percentage of qualified childcare expenditures.

Richard Colombik, JD, CPA, of Richard M. Colombik & Associates can be reached through www.colombik.com.

Published: December 01, 2005
Issue: Holiday 2005