Filing season tax minimization ideas.
The AICPA AICPA
See American Institute of Certified Public Accountants (AICPA). has identified 10 ideas for minimizing taxes before April 16, 2007 (April 15, 2007 is a Sunday).
1. Claim all charitable deductions: Individuals should be sure to determine miles driven for charitable purposes, such as when driving children to a volunteer worksite. For 2006 returns, the charitable deduction rate is 14[cents] per mile. Also to be reported to be spoken of; to be mentioned, whether favorably or unfavorably.
See also: Report are any charitable contributions made through payroll deductions.
2. Claim all medical deductions: Mileage for medical purposes is deductible, similar to charitable miles, but at 18[cents] per mile or, if greeter, out-of-packet cost. Any premiums paid by Medicare for clients over age 64 should also be included.
3. Claim business mileage: The mileage allowance Mileage Allowance
A deduction of automobile expenses for people using their vehicles for business, charity, moving, medical or any other purpose that qualifies for a deduction. for business use of a vehicle is 44.5[cents] per mile for 2006. Most business use of vehicles probably costs more than this, at least in some metropolitan areas. For those accumulating significant mileage, computing actual cost versus the standard mileage rate might be worthwhile.
4. Be aware of minimum tax credit: Individuals owing alternative minimum tax are also likely generating a minimum tax credit to use against regular tax in the future. Be aware of the amount generated from prior years; such information should be included in any tax preparation software used, so it is net overlooked in future years.
5. Compare approaches: Tax preparation software makes it easy to determine optimal filing approaches (e.g., taking the standard deduction The name given to a fixed amount of money that may be subtracted from the adjusted gross income of a taxpayer who does not itemize certain living expenses for Income Tax purposes. versus itemizing). Married couples should compute tax liability filing jointly and separately, to see which is more beneficial.
6. Know the rules for taxation of state income tax refunds: Historically, the tax benefit rule has caused a refund of state income taxes deducted in a prior year to be taxable to the extent that itemized deductions that year exceeded the standard deduction. However, revised IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. Pub. 525, Taxable and Nontaxable Income nontaxable income
Income items specifically exempted from taxation. On federal returns, the interest from most municipal bonds, life insurance proceeds, gifts, and inheritances is generally nontaxable income. : Miscellaneous Income, states that the taxable amount is further limited to the excess of the state income tax deduction Tax deduction
An expense that a taxpayer is allowed to deduct from taxable income.
See deduction. over the state and local general soles tax deduction that could have been claimed. For example, X deducted $10,000 in state income taxes on his 2005 return, because it was higher than the $9,000 sales taxes he paid that year. If X receives a $3,000 refund of state income taxes in 2006, the maximum amount taxable would be $1,000 ($10,000 income taxes $9,000 sales taxes), because X could hove deducted S9,000 in any event. Consequently, even if the deduction for state income taxes exceeds that for sales taxes (i.e., the table amount plus taxes on major purchases), practitioners should take steps (including checking their software) to ensure that the potential sales tax deduction is as high as possible, to limit the taxable refund.
7. Contribute to Roth IRAs: Under the IRA Ira, in the Bible
Ira (ī`rə), in the Bible.
1 Chief officer of David.
3 Two of David's guard.
IRA. rules, taxpayers whose adjusted gross income (AGI (Artificial General Intelligence) A machine intelligence that resembles that of a human being. Considered impossible by many, most artificial intelligence (AI) research, projects and products deal with specific applications such as industrial robots, playing chess, ) exceeds certain levels ($160,000 for joint fliers and $105,000 if single) cannot contribute to a Ruth IRA. However, a change mode by the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA TIPRA Tax Increase Prevention and Reconciliation Act of 2005 (Federal Tax Legislation) ) now allows these taxpayers effectively to make contributions, even though their AGI exceeds these levels. Beginning in 2010, taxpayers can roll over amounts from traditional IRAs to Roth IRAs, regardless of their AGI. They can take advantage of this change now, by making nondeductible contributions to traditional IRAs, then rolling these amounts into Roth IRAs in 2010.
As a practical matter, taxpayers prohibited from making contributions to either Roth IRAs or traditional IRAs rarely make nondeductible contributions to a traditional IRA, thinking that they are investing after-tax dollars and de income, when distributed When distributed
When issued. (although tax-deferred), would be taxed at ordinary rotes (rather than long-term capital gain Long-term capital gain
A profit on the sale of a security or mutual fund share that has been held for more than one year. rates if such amounts were invested in growth stocks or similar investments). However, the TIPRA changes this. Making a nondeductible contribution for 2006 by April 15, 2007, up to de maximum of $4,000 per taxpayer ($5,000 for those 50 or older), enables u taxpayer to roll over such amounts to a Roth IRA in 2010. Any amount taxable in 2010 from such a conversion results in half of the amount being included in income in each of 201 1 and 2012. This two-year spread is only available for conversions occurring in 2010.
8. Have siblings claim siblings as dependents.' Effective in 2005 and beyond, a taxpayer can claim an individual as a dependent if de latter is a qualified child. Such individual generally must (1) live with the taxpayer for more than half the lax year, (2) be under age 19 (age 24 if a full-time student); and (3) meet a relationship test. One way the relationship test is met is if the individual is the taxpayer's brother or sister. Prior-law income and support legs hove been eliminated; as a result, a young adult living in the household who is not a qualifying child of his or her parents could claim a younger sibling as a qualifying child. This could be extremely beneficial when the income phaseout phase·out
A gradual discontinuation. rules eliminate the parents' ability to claim on exemption or child credit for de individual.
9. Split refunds between bank accounts: Taxpayers can elect up to three different bank accounts into which they may split their income refunds for deposit. In the past, only one hank account could be used.
10. Contribute to a Coverdell account: Formerly known ns education IRAs, these accounts are limited to $2,000 per child per year, and must be made by April 15th of the year following the year to which de contribution applies. The beneficiary must be under age 18 when the account is opened, unless he or she has special needs. The ability to contribute to these accounts phases out for joint fliers with adjusted gross income (AGI) between $190,000 and $220,000, and single fliers with AGI between $95,000 and $110,000.
by Lisa A. Winton, MBA MBA
Master of Business Administration
Noun 1. MBA - a master's degree in business
Master in Business, Master in Business Administration , MST See micro systems technology. , AICPA Technical Manager--Taxation, Washington, DC