MONEY MANAGEMENTFrom the Virginia Society of Certified Public Accountants - Presented by Dean Knepper, CPA, CFP®
SUMMERTIME ADVICE FOR MANAGING YOUR TAXES
(May 23, 2005) - Summer is a great time to kick back and relax - just don't plan on taking a vacation from tax planning. Since many tax strategies take time to implement, don't miss this opportunity to take stock of your situation and put a plan into action, advises the Virginia Society of CPAs. Many valuable tax breaks, including the child tax credit, the education deduction and credits and the earned income credit, are phased out for individuals with adjusted gross incomes (AGI) above certain levels. If your estimated AGI this year will exceed the ceiling for a tax break, don't give up just yet. By starting early, you may be able to apply some of the following strategies to lower your AGI and become partly or fully eligible.
One option to consider is alternating between claiming the standard deduction
one year and "bunching" deductible expenses into the year
you itemize. For example, if you estimate your 2005 itemized deductions are likely
to be just over the standard deduction amount, you may want to move or "bunch" more
itemized deductions into 2005. (The standard deduction amounts for 2005 are
$10,000 for married filing jointly, $7,300 for heads of household, and $5,000
for single filers and married individuals filing separately.) Bunching refers
to timing your deductible expenses so they are higher one year and lower the
next. For example, in the year you plan to itemize you can boost your mortgage
interest expense by making your January mortgage payment in December or make
charitable donations planned for future years. Apply this strategy to other
deductions subject to AGI-based limits like medical expenses and miscellaneous
Contribute to a retirement plan
Unless you're putting the maximum allowable amount into your 401(k) plan,
examine your budget to see if you can increase your contribution. This can
reduce the income tax you currently pay, and help to ensure a secure retirement.
If you don't have a retirement plan at work, you may be able to deduct your
contributions to a traditional IRA. Many people wait until April to make IRA
contributions. But it may be easier to fund your plan with monthly deposits during the year, rather
than coming up with the entire amount at once. This method gives you the added benefit of dollar cost averaging. And, the sooner you put money in a retirement account, the sooner you start earning tax-deferred interest.
Offset gains with losses
Summer is a good time to review your portfolio for investments that are underperforming. When you realize a loss on the sale of stocks, bonds or mutual funds that you have held for more than a year, you can deduct those losses against realized capital gains. If total losses exceed total gains, the excess amount can be used to offset up to $3,000 of ordinary income ($1,500 for single filers). Of course, you should never base investment decisions solely on tax considerations.
Convert non-deductible interest
Now is a good time to consider whether it might make sense to convert non-deductible interest into a tax break by applying for a home equity loan. You can use the proceeds to pay off your high-interest credit card balances and, in most cases, fully deduct the interest you pay on home equity debt.
Meet with your CPA
Many people wait until tax time to meet with a CPA. But the "off season" is the best time to sit down and discuss tax saving strategies. Bring your CPA up to date on any life changes, such as getting married or divorced, buying a house, having a child or paying college tuition. This way, you can work together to develop an appropriate plan.
The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at www.vscpa.com.
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208 South King Street, Suite 201, Leesburg, Virginia, email@example.com
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