Avoid getting caught unprepared at tax time

It’s that time of year; Christmas holidays — followed by tax time.

Did you know that nearly 94 percent of us wait until the eleventh hour to prepare our tax return and ante up what we owe to Uncle Sam?

Perhaps the following tax tips will help you be among the 6 percent who are not caught unprepared.

• Be aware of tax changes that affect your 2005 return. The Internal Revenue Service (IRS) includes a What’s New for 2005 section in its Form 1040 instructions.
• Make a checklist. A checklist helps you gather required documentation (e.g., W-2(s), 1099s, supporting documents for deductions). Just check the Internet as many tax preparers provide checklists at no cost.
• Maximize deferrals to your employer’s retirement plan. When you defer the maximum amount, you decrease federal income tax withholding and enhance retirement savings. If you are younger than age 50, then the maximum deferral is $14,000 (age 50 or older, the limit increases by $4,000).
• Fund a traditional IRA. You have until April 15, 2006, to open an IRA and contribute up to $4,000 deductible for 2005 (age 50 or older, the limit increases by $500). Remember your spouse may be able to contribute up to $4,000 to a separate traditional IRA — even if your spouse has little or no income.
• Use up your flex dollars. The IRS relaxed the “use it or lose it” rule this year. If your employer took advantage of this change, then you have up to 2.5 months after Dec. 31 to spend your 2005 flex dollars. Don’t forget that you can get tax-free reimbursements for over-the-counter drugs such as aspirin and antacids.
• Make the most of eligible deductions. Charitable contributions can help reduce your tax liability. The Katrina Emergency Tax Relief Act of 2005 (see story, this page) allows flexibility with this.
• Defer income. If you are self-employed, then you may have more latitude to defer income into 2006. Nevertheless, if you expect to receive a year-end bonus, then ask your employer to hold the bonus and pay it to you in January.
• Consider gifting. Take advantage of the annual gift tax exclusion, which allows you and your spouse to save gift and estate taxes by making gifts up to $11,000 to an unlimited number of individuals.
• Change your income tax withholding before year-end. Since the IRS treats withheld taxes as paid in equal amounts throughout the year, regardless of when withholding occurs in 2005, this can help you avoid underpayment penalties.

Editor’s Note — This article is intended to provide general information and is not to be relied upon as tax or legal advice. 

(GuideStone)