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Across My Desk: Year-end Tax Planning

Right along with the holiday season comes year-end tax planning. If you need some direction in that regard, the following tips from Wealth Management News Service might help.

Rande Spiegelman, vice president of financial planning at the Schwab Center for Investment Research, suggests investors to:

  • Double-check your withholding. Take the year-to-date income and withholding information on your most recent pay stub and extend it out to the end of the year. Make sure you're covered for this year and that you're not having too much (or too little) taken out in the year ahead.

  • If you make quarterly estimated state tax payments and the alternative minimum tax (AMT) is not an issue, make your Q4 payment by Dec. 31. You may also want to include your estimated state income tax balance so you can accelerate it all as an itemized deduction on this year's tax return.

  • Consider prepaying the second installment of your property tax before year end. Many counties bill taxpayers in two installments, the first one due in December and the second due in the spring. If you pay the second installment by December, you can take it as an itemized deduction on this year's tax return. Watch out for the AMT which disallows deductions for state and local taxes.

  • Make January's mortgage payment at the end of December to boost this year's interest deduction. Also consider converting non-deductible credit card debt to a tax-deductible home equity loan or line of credit.

  • Check if AMT is an issue for you. More taxpayers are facing the AMT -- particularly in high-tax states. If projections show an AMT liability, consider reversing the normal strategy by deferring payment of state and local taxes and accelerating ordinary income to the break-even point on AMT. This can get tricky, especially with the temporary AMT relief that was set to expire for 2006. While it's likely Congress will extend AMT relief, so far they have yet to take action.

  • Finally, provisions of the 2001 Tax Act limiting the phase-out of itemized deductions and personal exemptions for high-income earners are set to kick in for the 2006 tax year. These changes could impact your decision to accelerate or defer certain items of income or deductible expenses between 2005 and 2006."

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