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As with any other topic, the internet provides a wealth of resources for taxpayers. Here are some websites and web pages that provide information, tools and resources to help you with year-round tax planning and assist in preparing your Form 1040.

www.att.com/ir/ss/tbi

When you sell stock you need to determine the “cost basis” of the shares sold so you can calculate your capital gain or loss. With the “divestiture” of ATT in 1984, and all the splits, both positive and reverse, spin-offs and mergers that have followed, determining the cost basis of ATT stock sold, as well as the basis of the various spin-off companies’ shares, is a real project. Go here for Tax Basis Worksheets for each individual event in the history of ATT from 1959 through the present.

www.oanda.com/convert/classic

This “address” will direct you to a foreign currency converter that can provide current and historical exchange rates for 164 currencies.

www.bigcharts.com

You can use this site to find the price of any listed stock or mutual fund on any exchange for any given date. If you inherit an investment, your cost basis is the fair market value of the investment on the date of death of the person from whom it was inherited. This information is generally reported on the federal estate or state inheritance tax return. However, when you sell the stock you inherited you do not always have ready access to this information. You can calculate your basis by going to this site and, under “Historical Quotes”, enter the ticker symbol of the stock and the date of death, or the business day closest to the date of death, to get a price quote. If you sell stock that you received as a gift, your basis is either what the donor paid for the stock or the fair market value at the time the gift was made. You can also use this site to determine a cost basis for gifted property.

www.kbb.com

While the rules for claiming a deduction for donating a car to charity have drastically changed, there are still situations where you will deduct the fair market value of the automobile. Click on “Used Car Values By Make and Model”, enter your zip code, enter the year, make and model of the car donated, and click on “Kelley Blue Book Private Party Value”. You will then enter detailed information on the car donated, such as mileage and condition, and get a value. You should do this on the day you donate the car to charity. Print out the result and file it with the paperwork for the donation.

www.calctools.com/newrmd.htm

You must begin to take annual required minimum distributions from a traditional IRA or employer pension account by April 1st of the year following the year in which you turn age 70 1/2. This address takes you to a calculator that will determine the amount of your required minimum distribution for the year.

www.investinginbonds.com

Click on “CALCULATORS” in the menu at the top of the page. Then click on “Taxable/Tax-Free Yield Equivalent Calculator”. This calculator will allow you to determine what you need to earn on a taxable investment to equal the tax-free yield of a municipal bond or a bond fund.

www.easysaver.gov/sav/sav.htm

This section of the website of the Bureau of Public Debt provides a variety of information, calculators and services for individuals who have invested in or are thinking about investing in US Savings Bonds (all series). Click on “Savings Bond Calculator” under the heading “What Are Your Bonds Worth?” to determine the amount of interest earned on a bond for the year if you have elected to report accrued savings bond interest annually on your tax return. You can also go here to find out if your savings bonds have stopped earning interest and to purchase bonds online.

www.gsa.gov

If you travel for business, instead of deducting your actual expenses for meals and incidental expenses you can elect to deduct the federal per diem amount for the location of the travel. Click on “Per Diem Rates” under “Travel Resources” to find the federal per diem rates for Lodging and Meals and Incidental Expenses for domestic business travel effective for 2005 and prior years. FYI, “incidental expenses” include fees and tips for porters, baggage handlers and maids, but does not include the cost of laundry or phone calls.

www.state.gov/m/a/als/prdm/2005

This address will take you to the State Department per diem rates for Lodging and Meals and Incidental Expenses for international travel during 2005. Ust these amounts if you travel overseas for buisness. To check the per diems for a prior year, substitute the year for 2005 in the “address”.

www.toolkit.cch.com/p07_2740.asp

This brings you to a calculator that will help you determine your allowable home office deduction. It is from Commerce Clearing House, the premier tax law publisher.

www.charitynavigator.org

This site will help you to make intelligent charitable giving decisions. It provides information on and evaluates the financial health of over 4000 charities. It also has articles and guide on contributing to charity.

www.redleafinstitute.org

The Redleaf National Institute helps child care providers successfully manage their business. The site offers news, information and publications on recordkeeping, taxes, IRS audits, contracts, insurance, and other child care business issues. It provides access to other child care business resources and organizations, and has a state-by-state listing of tax professionals who prepare tax returns for child care providers.

The above web addresses, and many others, are listed on the FEDERAL LINKS Page of my website at www.robertdflach.net

Copyright (c) 2005 by Robert D Flach LLC

Robert D Flach is a tax professional with 34 tax seasons of experience preparing 1040s for individuals in all walks of life. He writes THE WANDERING TAX PRO weblog (http://rdftaxpro.tripod.com/weblog) and the free monthly online newsletter STUFF AND SUCH (http://rdftaxpro.tripod.com/stuffandsuch). He also writes and publishes THE FLACH REPORT, a quarterly print tax newsletter.

Tags: Federal Income Tax, federal tax, Income Tax, tax, tax planning, tax resources, tax returns, taxesFederal Income Tax, federal tax, Income Tax, tax, tax planning, tax resources, tax returns, taxes

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Most taxpayers concentrate on ways to reduce their “taxable income”. However, beginning with the Tax Reform Act of 1986, your “Adjusted Gross Income”, or AGI, has become the most important number on your tax return.

Many tax credits and deductions are phased-out, or altogether eliminated, based on your AGI, or in some cases a “Modified” AGI (no gift from this MAGI), and several items of income are increased and some deductible losses are reduced as this number grows.

The Tax Reform Act of 1986 started the ball rolling by limiting the allowable rental loss deduction for taxpayers with an AGI in excess of $100,000 and phasing-out the amount of IRA contributions that could be deducted based on an AGI threshold. The Budget Reconciliation Act of 1990, the Taxpayer Relief Act of 1997 and the many tax Acts passed under George W all continued the trend of limiting credits and deductions based on AGI.

Items that are affected by your AGI (or MAGI) include:

* the taxable portion of interest on US Savings Bonds used to pay for education,

* losses from rental real estate activities with active participation,

* the taxable portion of Social Security and Railroad Retirement benefits,

* deductible traditional and spousal IRA contributions,

* the ability to contribute to a ROTH IRA, and to convert a traditional IRA to a ROTH,

* student loan interest,

* the deduction for tuition and fees,

* medical and dental expenses,

* charitable contributions,

* casualty and theft losses,

* job expenses and most other “miscellaneous” deductions,

* total Itemized Deductions,

* the deduction for personal exemptions,

* the dreaded Alternative Minimum Tax (AMT),

* the Credit for Child and Dependent Care Expenses,

* the Credit for the Elderly or Disabled,

* the HOPE and Lifetime Learning education credits,

* the Retirement Savings Contributions Credit,

* the Child Tax Credit,

* the Adoption Credit,

* the Earned Income Credit,

* Coverdell Education Savings Account contributions, and

* the safe harbor amount for quarterly estimated tax payments.

Each of the items listed above has a separate set of AGI thresholds. For some items, such as the education credits and the deductions for student loan interest and tuition and fees, the amount for joint filers is twice that for unmarried taxpayers; for some it is not. For the reduction of Itemized Deductions the threshold is the same whether you file as Single, Head of Household, Married Filing Joint or Qualifying Widow(er). In some cases married taxpayers filing separately are not allowed the deduction or credit at all; in others the threshold for separate filers is half that for joint filers.

While qualifying dividends, capital gain distributions and long-term capital gains are taxed separately at a lower rate, both for the regular tax and the AMT, these items of income are included in your AGI, as well as your Alternative Minimum Taxable Income (AMTI), and can reduce or eliminate the various deductions and credits affected by AGI, and cause you to become a victim of, or increase, the AMT.

Because of the way the taxable portion of Social Security and Railroad Retirement benefits is calculated, for every additional $1.00 of AGI you could be taxed on as much as $1.85. For a taxpayer in the 15% federal tax bracket who finds himself in this situation a $1,000 increase in AGI could increase the tax liability by $278.00 - almost 28%.

There are several moves you can make to reduce your AGI:

* Maximize “pre-tax” contributions to your 401(k), 403(b) or other pension or deferred compensation plans, including any “catch-up” contributions for participants age 50 or older.

* Maximize the amount of wages set aside in an employer-sponsored “pre-tax” medical expense or dependent care flexible spending account.

* Postpone the receipt of a year-end bonus until next year.

* Postpone billing clients until January, accelerate or prepay business expenses at year-end, and maximize contributions to a SEP, SIMPLE or Keogh plan if you are self-employed.

* Accelerate or prepay expenses at year-end if you own rental property.

* Sell investments at a loss to take advantage of the maximum $3,000 net capital loss deduction.

* Maximize deductible contributions to a traditional IRA, including catch-up contributions.

* Instead of deducting the total fee for tax preparation as a “miscellaneous” deduction on Schedule A, allocate a portion of the fee, if applicable, to Schedule C and/or Schedule E.

* Invest in tax-free municipal bonds or tax-deferred US Savings Bonds instead of bank CDs (remember that tax-exempt interest is included in the calculation of taxable Social Security and Railroad Retirement benefits).

Let us look at an example where reducing AGI by $1,000 could result in $913 less federal tax - a 91.3% tax savings!

John and Jane Q. Taxpayer anticipate an AGI of $130,450 for 2005. They will be in the 25% tax bracket. John and Jane have three dependent children, two under age 17 and one who is a college freshman. They paid $5,000 in college tuition and their miscellaneous deductions are more than 2% of their AGI.

If J and J gave an additional $1,000 to charity before year-end they will save $250 in federal income tax. If, instead, they can reduce their AGI by $1,000 they will put an additional $913 in their pocket.

By reducing their AGI from $130,450 to $129,450 they will be able to deduct an additional $2,000 in tuition and fees as an “adjustment to income”, which will further reduce their AGI. This brings their total AGI reduction to $3,000. As a result they will be able to deduct an additional $60 in miscellaneous deductions on Schedule A. The taxable income on their 2005 Form 1040 is reduced by a total of $3,060, which will translate to $763 less income tax.

The Child Tax Credit is phased-out by $50 for each $1,000, or part thereof, that a married couple’s AGI exceeds $110,000. By reducing their AGI by $3,000 John and Jane will increase their Child Tax Credit by $150. The total tax savings is $913 - $763 in reduced tax liability and $150 in increased Child Tax Credit.

Robert Flach is a tax professional with 34 tax seasons of experience preparing 1040s for people in all walks of life. He writes THE WANDERING TAX PRO weblog (rdftaxpro.tripod.com/weblog), the NJ TAX PRACTICE BLOG (rdftaxpro.tripod.com/newjerseytaxpractitionernetwork) and the tax planning and preparation website http://www.robertdflach.net, which provides a wealth of tax advice and information. He also writes and publishes THE FLACH REPORT, a quarterly tax newsletter. This article is expanded from a 2004 posting to THE WANDERING TAX PRO.

Tags: avoiding income taxes, federal income taxes, individual income taxes, tax, tax planning, taxesavoiding income taxes, federal income taxes, individual income taxes, tax, tax planning, taxes

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While the average taxpayer will avoid thinking about income taxes until the approach of the April deadline forces him to do so, once the ball drops on One Times Square at midnight on December 31st and the New Year is rung in there is very little that can be done to cut your tax bill.

However, during the last two months of the year you can do a great deal to reduce your tax liability.

Sit down with paper and pencil and list your anticipated income for 2005 and all your allowable deductions to date. What you want to do is, using your 2004 return as a guide, prepare a projected 2005 return. Once this is done you can decide what steps to take to make sure you pay the absolute least amount of federal and state income tax possible for 2005 and 2006. Tax information for 2005 (i.e. standard deduction and personal exemption amounts, tax rates, etc.) is available on the WHAT’S NEW FOR 2005 Page at www.robertdflach.net.

Here are some year-end tips:

1) Traditional year-end planning calls for postponing the receipt of taxable income until 2006 and accelerating allowable deductions to be claimed in 2005, the idea being to reduce your 2005 taxable income to a minimum. This strategy will generally apply if you expect to be in the same tax bracket for both 2005 and 2006, or if you will be in a lower bracket in 2006.

If, however, you anticipate a substantial increase in taxable income in 2006, which will push you into a higher bracket, you should do the reverse and accelerate the receipt of taxable income to 2005 and postpone deductible expenses until 2006. Income received in 2005 will be taxed at a lower rate, and deductions claimed in 2006 will yield a greater tax savings.

Not sure what your 2006 income will be. Follow the rule of “when in doubt - defer” - go the traditional route and postpone income and accelerate expenses.

2) It does not pay to itemize unless the total of your allowable deductions exceeds the standard deduction that applies to your filing status, plus any additions for age or blindness. If you decide to accelerate allowable deductions to claim them in 2005, you can accelerate all you want, but it will be wasted unless your total “itemizable” deductions exceed your applicable standard deduction.

Let us say you usually do not have enough deductions to itemize. However, after preparing your projected 2005 return you discover that, because of some special circumstance, you will be able to itemize this year. During the last two months of the year you should incur, and pay for, as many deductible expenses as possible.

If, on the other hand, your projected return indicates that you do not have anywhere near enough deductions to be able to itemize, postpone making any deductible payments until 2006. Making these payments in 2005 would not produce any tax savings, while it is possible that by deferring them until next year you may be able to itemize in 2006.

3) The timing of deductions is especially important when it comes to medical expenses and miscellaneous job-related and investment expenses. You are allowed to deduct medical expenses only to the extent that they exceed 7 1/2% of your Adjusted Gross Income (AGI), and most miscellaneous deductions are only deductible to the extent that the total exceeds 2% of AGI.

If you anticipate a 2005 AGI of $70,000.00 you must exclude the first $5,250.00 of medical expenses - the first $5,250.00 is not deductible. If your medical expenses to date are close to or more than %5,250.00, and you will be able to itemize, pay any outstanding medical bills and schedule, and pay for, check-ups, doctor visits and needed dental work in November and December. If medical payments to date are substantially less than $5,250.00, put off paying any more medical bills until 2006. The same concept applies for miscellaneous deductions.

If you expect to be able to itemize, and you are making quarterly state estimated tax payments, make the 4th quarter payment in December, instead of waiting until the January 16, 2006 due date, so you will be able to deduct the payment on your 2005 Schedule A.

4) If you do not have the cash available to pay for the deductible items you have scheduled as part of your year-end plan, you can use a credit card to pay for the item and still get a 2005 deduction. Allowable expenses charged to a credit card (VISA, Master Card, American Express, Discover) are deductible in the year charged, and not in the year that you actually pay for the charge.

5) The option to deduct state and local sales tax paid instead of state and local income tax paid will expire on December 31, 2005. This option will not be available for 2006. If you are planning to buy a new car (other than a qualifying energy-saving hybrid - see tip #6), SUV, motorcycle, or other “big ticket” item in the near future you may want to do so before the end of the year to be able to deduct the sales tax.

6) The Energy Tax Incentives Act of 2005 creates new tax credits for certain energy-saving autos, consumer products and home improvements beginning in 2006. You may want to postpone any purchase of qualifying energy-saving items until next year to be able to claim the credit.

7) While postponing income and accelerating deductions may reduce your “regular” income tax for 2005, these actions may backfire and end up costing you if you fall victim to the dreaded Alternative Minimum Tax (AMT). Why? Because taxes and miscellaneous expenses are not deductible in calculating AMT, and medical expenses are only deductible to the extent they exceed 10% of AGI. When preparing your projected 2005 return be sure to determine if you will be subject to AMT and plan your strategies accordingly.

When preparing your projected return you should review the performance of your investment portfolio for the year. Add up all your realized gains and losses from actual sales of stock, bonds and mutual fund shares for the first 10 months of the year, with separate net totals for short-term (held one year of less) and long-term (held more than one year) activity. Gains and losses from inherited property are always considered long-term. Include in the long-term calculation any “capital gain distributions” from mutual funds.

Now do a similar calculation for unrealized “paper” gains and losses on the investments you still hold. You may want to sell some of your investments before the end of the year at a loss to wipe out year-to-date gains, or at a profit to take advantage of year-to-date losses in excess of $3,000.00.

There are no written in stone year-end tax planning rules that apply to all taxpayers in all cases. As with any other transaction, year-end strategies must be evaluated in the context of the special facts and circumstances of your individual situation. You may want to review your year-end situation with your tax professional.

And remember - your first criteria for evaluating any financial transaction you are considering should always be economic. Taxes are second.

Robert D Flach is a tax professional with 34 tax seasons of experience preparing 1040s for individuals in all walks of life. He writes THE WANDERING TAX PRO weblog (http://rdftaxpro.tripod.com/weblog), the NJ TAX PRACTICE BLOG (http://rdftaxpro.tripod.com/newjerseytaxpractitionernetwork), and the website http://www.robertdflach.net, which has a wealth of tax planning and preparation advice and information. He also writes and publishes THE FLACH REPORT, a quarterly tax newsletter. For more info on THE FLACH REPORT go to http://rdftaxpro.tripod.com/avoidtaxeslegally. The above article is taken from postings to THE WANDERING TAX PRO.

Tags: federal income taxes, income taxes, tax, Tax Deductions, tax planning, taxes, year end tax planningfederal income taxes, income taxes, tax, Tax Deductions, tax planning, taxes, year end tax planning

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