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Time to trim your 2004 taxes


In between holiday parties, shopping, hanging the stockings and decking the halls, it’s a good idea to take some time in December to save on your taxes.

Although your federal income tax return won’t be due until April 15, 2005, most of your opportunities for limiting your 2004 taxes vanish at the end of the year. Here’s a look at some of the steps to consider taking before Dec. 31 to keep your tax bill as low as possible.

The Basics — Conventional wisdom holds that it’s better to pay taxes later rather than sooner – which means deferring income and accelerating deductions, when possible. Here are some examples: Push income into 2005. Professionals and self-employed individuals who operate on a cash basis may be able to push income into 2005 by delaying some year-end billings. Don’t try this if you’re on a salary, however: The IRS is known for scrutinizing bonuses that are payable at year-end but not received until the following year.

Sell assets later — If you’re planning to sell an asset near the end of the year, and you can wait a few months, you may avoid having to pay tax on the gain until 2006.

Hold bonds longer. — If you have U.S. Savings Bonds that mature late this year, you can delay cashing them until 2005. The bonds will keep earning income until you redeem them, but the taxes will be pushed into next year.

Watch your mortgage — If you itemize your deductions, you may be able to maximize this year’s deduction for mortgage interest by making your January mortgage payment in December. If you’re buying a house, closing before Dec. 31 may allow you to deduct closing costs and other appropriate expenses on this year’s taxes.

Take care of your health — Some itemized deductions such as medical expenses are only deductible when you cross a certain minimum threshold of expenses, usually measured by your adjusted gross income (AGI). When you have some degree of control over when you incur and pay these kinds of expenses, you may be able to “bunch” them in a way that allows you to take the deduction this year. For instance, if your medical expenses are likely to be above the threshold for deductions (7.5 percent of your AGI), you may want to schedule routine doctor, dentist or other health-related appointments before year-end to make the most of the deduction.

Mind your business (expenses) — Many businesses and independent contractors should make business-related purchases by Dec. 31. If you are self-employed, the lower reportable income reduces not only your income tax, but also your self-employment tax. If you plan on purchasing equipment that is depreciated for tax purposes, consider purchasing it and putting it into use by Dec. 31, to move up your depreciation schedule by a year and save money over time. (Note: Under the 2003 tax law, qualified depreciable property acquired after May 5, 2003, and before Jan. 1, 2005, is eligible for a 50 percent bonus depreciation in the year of acquisition.) It’s always a good idea for business owners and self-employed people to do a trial-run tax return to pinpoint trouble spots and take last-minute steps to minimize tax.

Look before you leap — Don’t automatically follow these steps every year – there are times when they could backfire. For instance, if you expect your income to be much higher next year – or if you expect to be paying a higher tax rate – you’ll want to report as much income as possible this year and delay as many deductions as possible until next year. Also keep in mind the alternative minimum tax (AMT). If the AMT will apply to you, your tax strategies may need to be adjusted significantly.



Jeff Francis is senior vice president and senior investment officer for First Tennessee Brokerage. For more information about this or other personal finance issues, call 971-2321 or visit your local First Tennessee financial center.



Next week’s topic will discuss how to handle your portfolio.

 

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