Act now for year end tax planning

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Act now for year end tax planning

by Tony Novak, CPA, MBA, MT
, revised 11/16/11

The Internal Revenue Service reminds taxpayers that only a few weeks remain for making their final financial moves for the tax year. Taxpayers can take the first step tax planning by reviewing tax law changes at www.irs.gov. A little advance planning now could save both time and money later.

End-of-the-year planning may be useful for educators who may claim out-of-pocket classroom expenses, students who may deduct interest on college loans and spouses who make alimony payments. These items are among the tax deductions that can reduce taxable income.

Some taxpayers may benefit more by itemizing their deductions on Schedule A of Form 1040. Taxpayers should consider using Schedule A if their itemized deductions exceed the amount of the standard deductions. On average, approximately one-third of the nation’s taxpayers itemize their deductions.

The standard deduction changes each year and is lower for taxpayers filing as single or married filing separately, higher for individuals filing as head of household and taxpayers filing as married filing jointly.

Among the common deductions itemized on Schedule A are state and local income taxes, real estate taxes and mortgage interest. Charitable donations also are deductible on Schedule A and taxpayers should keep a record of their contributions. Certain medical expenses, such as laser surgery or obesity weight loss programs, are deductible if the total medical expenses exceed 7.5 percent of gross income.

Also, for the current tax year, taxpayers may make gifts of up to $11,000 per person and exclude the amount from the gift tax. Those receiving the gift are not required to pay taxes on the amount received.

Tax-free flexible spending accounts also can lower taxable income amounts and the IRS recently ruled medical spending accounts can be used to purchase non-prescription medication. Again, taxpayers should keep receipts.

For investors, year-end planning may include deciding which stocks should be sold or purchased. The maximum tax rate for most capital gains has been reduced to 15 percent for lower-income individuals.

In most cases, the expenditures must take place during the tax year in order to be deductible. However, taxpayers do have time next year to contribute to their Individual Retirement Accounts. The maximum IRA contribution for the 2003 tax year is $3,000. Taxpayers who are age 50 or over by Dec. 31 can contribute $3,500.

Taxpayers should consider seeking out additional information through a year-end consultation with a tax professional.

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