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Linda Winters     Linda Winters
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Year End Financial Tips to Reduce Your Taxes

Year End Financial Tips to Reduce Your Taxes

As the holiday season begins in earnest, taxes may be the furthest thing from your mind. However, by taking a little time to review your finances before the end of the year, you may be able to save yourself quite a bit when that dreaded April tax deadline rolls around.

Trevor Rice, a CPA for Stern, Kory, Sreden and Morgan in Santa Clarita, California, says, "The end of the year is the perfect time to look at your options as a taxpayer." To learn more, we sat down with Trevor and asked him for his advice on the subject. Here's what he had to say.

Retirement Accounts
Number one on Rice's list of suggestions is the ability to increase your contributions toward a tax-deferred retirement account based on any excess cash flow. In other words, instead of putting money into a savings account during the last two months of the year, put it into a retirement account. For 2006, the IRS has established a maximum contribution of $15,000 into your 401(k). However, if you are age 50 or older before year end, you may be able to make additional payments of up to $5,000. If your employer has a matching program, then you will also receive the added benefit of this "free" money.

Stocks
For anyone who has sold stocks at a gain this year, be prepared to pay taxes on those gains. If you've been successful in this area, it may be advantageous to also sell some of your stocks that are losing money. The reason is you can net these losses against your gains to zero out your tax liability. Any net losses in excess of $3,000 for 2006 may be carried forward and deducted in coming years.

Charitable Contributions
Whether it's giving a little extra to your favorite cause, or donating an automobile that's been sitting in your driveway, a charitable contribution is a noble way to gain tax deductions. Rice went on to say that the end of the year provides a perfect opportunity to do "a little house cleaning" as well. He advises going through closets and the garage and donating anything that's no longer of use to you to a qualified charity. Not only will this benefit someone else, it will also minimize your clutter and provide you with a tax break.

Paying Early
Mortgage interest, property taxes, and state income taxes are examples of items you could pay in 2006, ahead of their due dates in 2007. Deductions are based upon when the items are paid, not when they're due. Rice says if you're planning on doing this, be careful of AMT (Alternative Minimum Tax) which can eliminate the benefits of early payment of taxes for those who fall into this unfortunate category.

Grow Your Business
For business owners who are looking to purchase equipment for their companies, now is a great time to do so. The IRS allows for a deduction of up to $108,000 in the current tax year by way of accelerating the depreciation! Any remaining depreciation can still take place over the life of the asset.

Be Smart with Billing
Several years ago, an important change occurred in the IRS tax code which allows more businesses to operate on what's known as a "cash method". In other words, these businesses pay taxes depending on when a payment is received, not when it's billed. If cash flow permits, hold off on your December billing until the end of the month to ensure payment arrives in 2007. Rice points out that this practice can be used in conjunction with the aforementioned purchases of equipment. Let's say that you know in 2007 you'll be purchasing a large amount of equipment and that you will be utilizing its accelerated depreciation as a deduction. Rice says it then makes perfect sense to delay your December '06 billing, allowing those earnings to be taxed next year when they're collected.

Consider Incorporating
If you are a sole proprietor or operate as a partnership, it may make more tax sense to form a corporation. Rice cautions, however, that a corporation is not necessarily for everyone. He says that anyone considering this should seek advice from their tax preparer before making any moves.

The suggestions from Mr. Rice didn't end there. He went on to say that if you will receive a bonus at the end of this year and, at the same time, expect to be in a lower tax bracket in 2007, you may want to ask your employer to hold off on paying the bonus until early January. Rice says that your company may not agree because most employers will want to write your bonus off as a business expense this year. But it doesn't hurt to ask.

We ended the interview with Mr. Rice by asking him what's the best thing an individual taxpayer can do to mitigate their tax bill? Rice's response was the tax-deferred retirement account because it offers three benefits. He says, "One, it allows you to keep the money you earned; two, it helps you to plan for your retirement; and three, it's a nice tax deduction."

There you have it! Timely tax tips that will hopefully assist you in keeping more of your hard-earned money. As with many of the subjects we address in YOU Magazine, tax planning is serious business that requires the acumen of trained professionals. Our goal is not to turn you into a tax planning professional. Rather, it's to provide you with useful information you can discuss with your own CPA. Here's to good information, and here's to lowering your tax bill.

Trevor Rice has been a practicing CPA for the past eight years. A graduate of California State University at Northridge, Trevor also holds the title of CVA or Certified Valuation Analyst. He currently practices at Stern, Kory, Sreden and Morgan in Santa Clarita, California where he is also a shareholder. Trevor specializes in both individual and business taxation as well as business appraisals. He can be contacted via email at Trevor@SKSM.com.


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