Take advantage of changes in tax code before it's too late

Your Money

December 19, 2004|By Tami Luhby

SURE THERE'S lots of talk of tax reform in Washington these days. But that doesn't mean you should change your tax strategy just yet.

President Bush has lowered some taxes in each year of his administration, and it's likely he'll continue that streak in his second term. On the table: reducing or eliminating the taxes on capital gains and dividends; expanding tax-advantaged retirement savings plans, and adding deductions for long-term care and health-insurance premiums.

Also under consideration is substituting a national sales tax for the federal income tax.

So far, though, it's just talk. "It's too nebulous at this point to take concrete planning steps," said Mark Luscombe, principal analyst with CCH Inc., a tax information provider in Riverwoods, Ill. "It's likely fundamental reform is at least two years away."

There are, however, things you can do before year's end to take advantage of tax changes enacted this year. If you plan to donate a car, do it in the next two weeks. Otherwise, you'll lose a lot of the tax advantages, said Martin Nissenbaum, author of The Ernst & Young Tax Guide 2005.

Under new tax laws enacted in October, if you donate the car after Jan. 1 and the charity then sells it, you can deduct only the amount the charity receives for the vehicle. Until then, you can deduct the car's fair market value, which is usually substantially more than the sale price.

Don't think you can get away with inflating the price either. The charity has to send the sales slip to the Internal Revenue Service, and you have to include it with your return.

Also, if you plan to buy a sport utility vehicle for your business, pick it up before New Year's Day so you can claim bonus depreciation on it.

In the new year, business owners still will be able to deduct the first $25,000 of the vehicle's price. But the bonus depreciation deduction - up to 50 percent of the balance - expires at the end of this year, said Stephen P. Valenti, a certified public accountant in Plainview, N.Y. The expiring deduction also applies to purchases of other business equipment for the remainder of the year.

Finally, if you bought some big-ticket items, you might want to take advantage of a new provision allowing filers to deduct either their sales taxes or state and local income taxes. This is certainly a big gift to residents of states that don't levy an income tax. However, it might pay for some who pay state income taxes to instead tally their 2004 sales taxes. That's especially true if you made expensive purchases but, like some retirees, have a modest income.

Then, of course, there are the standard year-end strategies to consider:

Send checks to all your favorite charities if you itemize your deductions.

Put more money into your 401(k) to reduce taxable income and boost retirement savings. This year, you can put away as much as $13,000, or up to $16,000 if you are age 50 or older. Also, consider contributing more to your traditional IRA (though you have until April 15 to do so).

Remember to spend all the money in your flexible spending account, which allows you to put aside pretax money for medical care and medications. If you don't, you'll lose whatever's left.

If you find yourself with capital gains, consider selling some of your money-losing stocks or funds so you can take a capital loss. You are allowed to offset up to $3,000 of ordinary income.

Check to see whether you may be subject to the alternative minimum tax. If you aren't, consider prepaying your mortgage and your state and local income taxes so you can claim a bigger deduction.

Tami Luhby is a staff writer for Newsday, a Tribune Publishing newspaper. E-mail her at yourmoney@tribune.com

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