Money Matters: End of year planning: tax

In the midst of the Holiday Season and the frenzy to get the perfect gift before it disappears from the shelves, there is an opportunity to take steps to maximize your tax deductions and insure your retirement plan is growing.

Individuals are cash basis taxpayers, meaning only the cash they receive during the year or spend within the calendar year is reported on the annual tax return. This permits planning to take place, since the individual controls when they spend the cash. By taking a few minutes now to determine your current tax position, the knowledge will permit you to determine what additional tax deductible expenditures should be paid this calendar year versus next year.

While there are thousands whose annual tax return data barely changes from one year to the next, their need for tax planning may be unnecessary. Tax planning may not be required for these individuals; however, the second part of this conversation, retirement planning, is always beneficial to review. Confirming you are on track to have the retirement assets you desire is always better to check often and check early. Not checking until you are nearing retirement may cause
\you to work more years than you prefer or keep you from ever reaching your goal.
hose whose income or deductions vary from year to year have the opportunity to fine tune your tax bill. If this is new to you, you might be asking what tax deductions you have that can be controlled as I am suggesting. For the employed and those not running a business, there are a few deductions which are controllable. Your charitable giving is one, as well as the timing of the payment of your property taxes and insurance premiums.

As an example, if you have incurred high medical expenses this year, you may want to consider paying ahead on your medical premiums or your long-term care coverage. Since you will incur these costs anyway, if by paying them now you increase your medical expenses to where they are now above the 7.5% limit of your AGI and you now have a deduction on your Schedule A that would not have been there. Those of you that own real estate recently received your annual property tax statement. Though the government offices would like to have the bill paid this calendar year, the bills can be paid January 2007 and thus deductible next year rather than this year. If your tax circumstances this year indicate you would get little benefit from paying your real estate taxes in 2006 yet deferring the payment to January may be slightly more expensive, it may be appropriate and save more in tax dollars in 2007 than the small fee to defer the payment. This deferral is only possible for those that pay their real estate taxes directly rather than escrow the payments through a mortgage company.

Charitable giving is another deduction fully under your control as to when it is given and thus deductible. If your income is higher this year due to capital gains, bonus, or other reasons, you may want to consider shifting some of your 2007 giving to 2006. This would be beneficial only if the increase in deductions will lower your income taxes and not subject you to the Alternative Minimum tax. While it is rare for most individuals to be subject to this additional tax, it does warrant verification if you want avoid surprises on tax day.

In addition to managing deductions you may pay to others, there are also the deductions you pay to yourself, retirement contributions. If you are not presently contributing to a plan or are a member of a defined benefit plan offered by your employer, you need to be. There is no question about it. Social Security will provide supplemental income to you during retirement, but it is not designed to meet all of your income needs. Thus, putting money back today is necessary if you want to have more than movie money during retirement. Unlike the other deductions discussed above, contributions to your IRA can be taken on your 2006 return even if your contribution occurs next year but prior to April 15, 2007.

Like many deductions, retirement contributions are subject to other rules which stipulate whether the contributions are deductible or not. If you are not familiar these tax rules and regulations, you should seek assistance from a professional.
What you pay in taxes or have at retirement is not predetermined. It is a direct result of your actions or lack thereof.

Here's to proper planning and your successful retirement!

Would you like a response to a financial question? Send your question to Doug Horn, 115 W. Broadway, Maryville TN 37801. Be sure to mark your envelope Money Matters.

Doug Horn, CFP, is an area financial planner with more than 21 years financial experience and founder of Quality Financial Concepts, located in downtown Maryville on Broadway.

Doug Horn, CFP, Registered Investment Advisor in Tennessee and Texas and Registered Principal, Branch Office of and Securities offered through CUE Financial, Member NASD, SIPC.

© 2006 All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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