- The Washington Times - Sunday, October 15, 2006

It’s not too early to start thinking about tax strategy, even if April seems like a long way off.

That’s because claiming certain exemptions, deductions and credits generally requires action before the end of the year. And recent changes in income tax law, including those wrapped into the newly enacted Pension Protection Act, may prompt some taxpayers to rethink retirement savings, charitable giving and college savings plans.

Tax specialists say that the first thing people should do is to take stock of what their income is this year compared with last year. They also should look at anything likely to change deductions, such as the birth of a new baby.

“Pull up last year’s return and see if things are going to be significantly different,” said Rande Spiegelman, vice president of financial planning at the Schwab Center for Investment Research. He noted that some tax preparation software allows users to project tax liabilities.

“If you do your review now, you can tweak your withholding or estimated payments,” he said. “You don’t want to be paying too much — but you don’t want too little, either.”

Next, make sure you’re taking full advantage of your company’s retirement plan.

“In this area, there’s only so much you can do between now and the end of the year,” Mr. Spiegelman said. “But you can look at what you can do next year.”

Workers put pretax money into company-sponsored retirement plans like 401(k)s; this both lowers their taxable income and provides savings for future use. And many companies match some or all of their workers’ contributions, generally up to about 5 percent.

This year, workers can set aside up to $15,000 in 401(k) accounts. Those 50 and older are eligible to contribute an additional $5,000.

The alternative for many workers is a tax-deductible individual retirement account, which can be set up at a bank or brokerage. The contribution limit for IRAs is $4,000, with a $1,000 catch-up provision for those 50 and older.

Contributions to 401(k) accounts must be made by the end of the year. Those into IRA accounts can be made until the April due date for filing a federal income tax return, which is April 16 this year because the traditional April 15 filing deadline falls on a Sunday.

Mr. Spiegelman said that investors should look to “harvest losses” from their investment portfolios by selling losing stocks. These losses can be used to offset portfolio gains dollar-for-dollar or up to $3,000 in ordinary income.

“You can combine portfolio rebalancing with this exercise,” he said. “As you rebalance, identify losses you can take.”

Tax attorney Donna LeValley, contributing editor for J.K. Lasser’s “Your Income Tax 2007,” said that many taxpayers will benefit next April from recent changes in tax law.

For example, there are new credits for energy-efficient home improvements made in 2006 and 2007.

“If you’re going to be making home improvements, do it with an eye to the possible tax credits,” she said.

Taxpayers will be able to claim up to $500 for qualified home improvements. A new furnace or hot water boiler, or example, could garner a $150 credit, while windows could be worth a $200 credit.

Even larger credits — up to $2,000 — are available for solar panels and solar water heating systems.

There also are credits of up to $3,400 for certain hybrid passenger cars and light trucks. The Internal Revenue Service maintains an extensive list of vehicle credits on its Web site www.irs.gov.

ASSOCIATED PRESS


Copyright © 2018 The Washington Times, LLC. Click here for reprint permission.

The Washington Times Comment Policy

The Washington Times welcomes your comments on Spot.im, our third-party provider. Please read our Comment Policy before commenting.

 

Click to Read More and View Comments

Click to Hide