Time to Begin 2005 Tax Planning

With less than two months left in 2005, taxpayers are running out of time to affect their personal tax returns and/or business returns. While taxes may not be your favorite subject, starting your tax planning now can save you hundreds or thousands of dollars on your 2005 taxes.

So what should you be doing now?

1) Assemble your tax documents. Why wait until 2006? If you don't keep organized records throughout the year, assemble your deduction receipts, transaction records and other appropriate information.

2) Estimate your 2005 income, withholding and deductions. Project your anticipated year-end figures using YTD information from your last paystub.

3) Evaluate your 2005 tax position. While 2005 tax schedules and forms are not available yet, you can use 2004 figures as a guide. Is your income or withholding significantly larger or smaller than last year? Are you withholding enough of your income to avoid penalties? The IRS also provides an online tool to help taxpayers estimate withholding requirements.

4) Make necessary adjustments in your withholding. Withholding amounts are treated as if they were paid quarterly, so if you are short, you can make up the difference in the last two months of the year without paying penalties. If you anticipate too much withholding, make adjustments for the last two months -- there's no benefit in having extra money withheld. When you receive a big tax refund, you have given the government an interest-free loan.

5) Look ahead for tax deference opportunities. Can you defer a bonus or sale until 2006? If you own a business, are you planning to make a significant investment early next year that you could make in 2005 instead?

6) Do you often fall just short of meeting itemization requirements? If so, it can make sense to double up on property taxes every other year.  So, if paying property taxes by December 31st will still not get you to the itemization threshold, or even barely does, then wait until January 2006 to pay property taxes, then re-evaluate at the end of next year. Use this same strategy for contributions and other expenses eligible for itemization to help load up itemized deductions every other year.

7) This is also a good time to gather up your old clothing and household goods and take them to Goodwill; you can deduct the thrift shop value as a contribution. You might also wish to make contributions of appreciated property such as stocks to your favorite charity. Give the stock, rather than selling the stock and using the proceeds to make the contribution; you get to deduct the value, which may be far in excess of basis, and there is no gain to report.  There are AGI (adjusted gross income) limitations, so any large gifts would need to be discussed with us.

8) If you own a business, you should contact Ablon & Company to discuss year-end planning to minimize both income taxes and Texas franchise taxes.  Even accrual basis corporations can only deduct compensation paid to controlling shareholders when it is paid.  So, for calendar year corporations, the compensation will need to be paid by 12/31 in order to deduct it.

9) Finally, if you have any questions or special situations, you should contact us for a consultation. Most deductions are only in effect for the year in which the expense was made, so it's usually too late to dramatically affect your tax picture in January. Plan now, and you can be certain to maximize your deductions.