CHECKLIST TO CUT YOUR TAXES

by Andrew D. Schwartz, CPA

It's not too late to cut your 2006 tax bill.  Prior to December 31^st:

• Increase your 401(k) and 403(b) contributions if you haven't been contributing at the maximum rate all year.  This year you can put up to $15,000 into your 401(k) or 403(b) plan.  Anyone 50 or older by December 31st can put away an additional $5,000.  If you’re self-employed, consider setting up a Solo 401(k) by 12/31.  Contributing to a 401(k) or 403(b) plan at work is one of the best tax shelters available to you during your working years.

• Take a look at your withholding and instruct your employer to withhold additional taxes if you haven’t had enough taxes withheld during the year to avoid getting hit with an underpayment penalty.

• Consider selling your investments held in non-retirement accounts that have decreased in value since your capital losses can offset other capital gains realized during the year (including from your mutual funds).  Excess losses can then be used to offset up to $3,000 of wages and other income.  Make sure to wait at least 31 days before buying back a security sold at a loss, or the IRS will disallow the loss under the "wash sale" rules.

• Send in your January, 2007 mortgage payment early enough so it will be processed prior to 12/31/06.  By sending in your payment a few weeks early, you can deduct the interest portion of that payment a full year earlier.

• Clean out your closets and donate your clothing and household items to a charitable organization, since "non-cash" contributions are deductible if you itemize.  Don’t forget to get a receipt.  And you should make a list of each item donated, along with its condition.  Effective August 17th, only donations of clothing and household items in "good condition or better" qualify for a deduction.
   

• For gifts of money, making your donation by credit card before December 31st allows you to deduct the donation on this year's return, even if you don't pay your credit card bill until 2007.  And you always have the option of donating appreciated investments to charities. You get to claim your donation based on the value of the assets donated, without paying any capital gains taxes on the appreciation.

• Pre-pay your projected state tax shortfall if you'll be itemizing your deductions and not subject to the alternative minimum tax.

• Pre-pay and pay off your medical bills if your total medical expenses exceed 7.5% of your income and you itemize.

• Evaluate whether you'll save any taxes by postponing 2006 income or deductions into 2007 or by accelerating 2007 income or deductions into 2006.

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IRS ANNOUNCES HIGHER STANDARD MILEAGE RATES FOR 2007

by Andrew D. Schwartz, CPA

The IRS announced that the standard mileage rate will increase to 48.5 cents per business mile driven in 2007.  That is an increase of approximately 9% over the 44.5 cents allowed in 2006.  According to the IRS, the primary reasons for the higher rates were higher prices for vehicles and fuel during 2006.

When you use your car for business, driving between job sites is deductible.  So is driving between your home and a temporary job site, job interviews, and conferences.  Commuting between your home and a regular place of business generally isn't tax deductible.

There are two ways for you to calculate your automobile expenses.  You can either claim $.485 per business mile driven in 2007 (increased from $.445 for 2006), or you can base your deduction on the percentage of miles your car was driven for business multiplied by the actual costs incurred during the year.  Allowable costs include gas, insurance, repairs, parking at home, and either your lease payments, or if you own your car, a factor for depreciation.

Generally, unless you drive your car relatively few miles each year, with most of those miles being allowable business miles, you're better off basing your deduction on the standard mileage rate.

For Example

Let's say you lease a car for $400 a month that you drive only 3,000 total miles during the year.  And of those miles, 2,000 qualify as deductible business miles.  By calculating your deduction based on the standard mileage rate, you'll end up with a deduction of just $970 (2,000 business miles * $.485 per mile).

What would your deduction be based on the actual expenses incurred, assuming you spend $1,200 on insurance, $.10 per mile driven for gas, and $1,200 on parking at home?  Based on $7,500 of total automobile expenses (including the lease payments), multiplied by two-thirds (2,000 business miles divided by 3,000 total miles), your allowable deduction for your automobile expenses jumps to $5,000 - more than five times the $970 allowed using the standard mileage rate.

Now let's see what happens if you drive 20,000 total miles during the year.   Assuming your allowable business miles remains at 2,000, you can either claim an automobile deduction of $970 based on the standard mileage rate, or $920 based on one-tenth (2,000 business miles divided by 20,000 total miles) of your actual automobile expenses incurred.

How to Claim The Deduction

Taxpayers who are compensated as employees generally will claim their deductible automobile expenses as an unreimbursed employee business expense. These type expenses are reported on a Form 2106 and are deducted as a miscellaneous itemized deduction on the Schedule A.  Keep in mind that miscellaneous itemized deductions are only allowable to the extent they exceed 2% of your income, and are not allowable when calculating the Alternative Minimum Tax (AMT).

Those taxpayers compensated as independent contractors will generally claim their allowable automobile expenses directly against their self-employment income. For these taxpayers, automobile expenses should be reported the Schedule C.

Other Deductible Miles

The use of an automobile in connection with a charitable activity is deductible at a rate of 14 cents per mile in 2007 and should be reported with other charitable contributions as an itemized deduction of the Schedule A. 

Any mileage driven in connection with a qualified move is deductible at a rate of 20 cents per mile in 2007, up from 18 cents per mile in 2006, and should be reported on a Form 3903, Moving Expenses.

And don't forget that medical related mileage is also deductible.  For 2007, medical mileage is allowable at 20 cents per mile, and should be reported with all other medical expenses on the Schedule A.

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TAX AND FINANCIAL PLANNING CALENDAR FOR DECEMBER, 2006

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2006 & 2007 TAX FACTS

• For 2006, the standard deduction for a single individual is $5,150 and for a married couple is $10,300. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes (or sales taxes), real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses.
• For 2006, the personal exemption is $3,300. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  
• The maximum earnings subject to social security taxes is $94,200 for 2006, and increases to $97,500 in 2007.
  
• The standard mileage rate is $.445 per business mile for 2006, increasing to $.485 per mile in 2007.
  
• The maximum annual contribution into a 401(k) plan or a 403(b) plan is $15,000 for 2006, increasing to $15,500 in 2007.  And if you'll be 50 or older by December 31, 2006, you can contribute an extra $5,000 into your 401(k) or 403(b) account this year.
• The maximum annual contribution to your IRA is $4,000 for 2006 and 2007.  And if you turn 50 by December 31st, you can contribute an extra $1,000 that year.  You have until April 15, 2007 to make your 2006 IRA contributions. 

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copyright - 2006 - CPANiche, LLC

Tax and financial planning calendar for December, 2006


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