The end of the year in America means football, apple pie and, alas, tax planning.
Of the three, tax planning is the most complicated but also potentially the most profitable.
One thing Coloradans can plan on: a TABOR refund of $15 each, or $30 for couples filing jointly. The checks represent a flat amount per person – a fraction of the $144 to $451 taxpayers received in 2002.
To obtain the refund, file State Income Tax Form 104, regardless of whether you paid any income taxes, said Ro Silva, a spokeswoman for the Colorado Department of Revenue. Low-income residents who claim the Property Tax Heat/Rent Rebate don’t have to file their state income tax returns to get the refund.
As for tax planning, the main strategy is to take as many deductions as you can by Dec. 31 and defer as much income as you can, so you delay paying taxes as long as possible.
One example concerns the hated alternative minimum tax, which snags more taxpayers every year.
If you won’t be affected by the AMT this year but think you probably will be next year, you should consider accelerating certain types of deductions into this year. For example, you might want to go ahead and pay property taxes that aren’t due until early next year because you can’t deduct them under the AMT.
Conversely, there may be cases where accelerating income is the better strategy. Pending changes in your filing status because of events such as marriage or divorce could make a case for accelerating income into this year.
There are plenty of what-ifs when it comes to income taxes, such as some tax cuts and deductions are set to expire unless Congress acts.
Given all the unknowns, it’s best to go about your year-end tax planning without counting on anything from Congress. And when in doubt, always consult a professional adviser.
All that uncertainty for future years makes this a back-to-basics tax-planning season. Here’s what to look out for:
As always, pay yourself first. Max out your contributions to retirement plans, such as a 401(k), because that enables you to benefit from tax-deferred compounding of your money.
It’s especially important to participate if your employer matches your contribution, because that’s essentially free money to you.
This year’s 401(k) contribution limit is $14,000, which must be made by Dec. 31. If you’re turning 50 or older before the end of the year, you may be eligible to contribute an extra $4,000.
Remember too that the limits rise to $15,000 and $5,000, respectively, for 2006.
If you can, be sure to make your annual contribution to an Individual Retirement Account, as well. You may set aside up to $4,000 for this year, while people 50 years old and older may put in up to $4,500.
If you have losses in your taxable investment accounts, consider selling them to offset any gains. You have until Dec. 31.
If your capital losses exceed your capital gains, you can deduct only up to $3,000 of those losses a year against ordinary income. Any excess can be carried over.
Another thing to be aware of, charitable donations are getting a boost this year, thanks to Hurricane Katrina.
Congress passed a law that affects the deduction limit on cash contributions to charities by taxpayers who itemize. It essentially eliminated the deduction limit on cash gifts made to most public charities after Aug. 27, 2005, and before Jan. 1, 2006, so you may be able to deduct up to 100 percent of your income for your 2005 charitable contributions.
Generally, you can’t deduct more than half of your adjusted gross income, but the Katrina Emergency Tax Relief Act of 2005 removed the limit.
Also, Samaritans who took in evacuees sent by a charitable organization may be able to deduct the rental value and food given to their houseguests.
Denver Post staff writer Aldo Svaldi and Pamela Yip of the Dallas Morning News contributed to this report.
