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Year End Tax Planning Tips.

CHICAGO -- With 2006 coming to a close, Grant Thornton LLP offers the following last-minute tax planning tips:

1. Accelerate deductions and defer income. Generally, it is advantageous to accelerate deductions into the current year by prepaying some of next year's deductible expenses and to defer income, where possible, until next year. This can work particularly well if you are self-employed or have some degree of control over when you get paid. This planning, however, requires consideration of the alternative minimum tax. Some deductions (e.g., state and local income taxes, real estate taxes), which may be deductible for regular tax purposes, may not be deductible for AMT purposes.

2. Give careful thought to charitable contributions and charitable giving rules. By contributing appreciated property to charity, you may get a charitable contribution deduction for the full value of the property without paying tax on the capital gain. By selling depreciated property and donating the proceeds of the sale to charity, you can claim both a capital loss and a charitable contribution deduction. Make sure, however, that you are familiar with limitation and substantiation rules before making a charitable contribution as they have undergone many changes in the past few years. Also, be aware that you may only deduct (with certain exceptions) your out-of-pocket expenses when donating services.

3. Maximize benefits that generate "above-the-line" deductions. Above-the-line deductions are those expenses you can subtract from your income in determining your adjusted gross income (AGI). Traditional Individual Retirement Account (IRA) and Health Savings Account (HSA) contributions, moving expenses, self-employed health insurance costs and alimony payments are some above-the-line deductions that can help lower your taxable income. Contributions to a traditional IRA may be made as late as April 15, 2007, and will still be eligible for deduction in 2006.

4. Consider selling stocks with a loss position. If you have a capital gain position for the year, consider selling stocks with a loss position to offset capital gains and up to $3,000 of ordinary income. To the extent you have a capital loss in excess of $3,000 for the year, you may want to consider selling stocks that will generate capital gain to offset the excess capital loss.

5. Consider transferring minimum required distributions to charity. A provision in the Pension Protection Act of 2006 allows taxpayers who are 70' or older to transfer up to $100,000 per year from their traditional IRA to a public charity without having to include such amount in their gross income. Thus, if you are 70' and do not need all or part of the minimum required distribution you are to receive this year, consider directing the fiduciary of your IRA to pay such amount to a public charity. While you are not entitled to a charitable contribution deduction for this amount, the exclusion of this amount from your gross income may make you eligible for other deductions that are subject to AGI phase-out limitations.

6. Be mindful of the phaseout of itemized deduction and personal exemption reductions. As part of the Economic Growth and Tax Relief Reconciliation Act of 2001, the itemized deduction and personal exemption reductions applicable to high-income taxpayers are being phased out and repealed. 2006 marks the beginning of the phaseout periods. If you are subject to these reductions in 2006, the haircut will be reduced by ao (i.e., the haircut will be reduced to ao's of its original amount).

7. Take advantage of the extension of capital gain and qualified dividend income tax rate reductions. The Tax Increase Prevention and Reconciliation Act of 2005 signed this year extends the capital gain and qualified dividend income tax rate reductions enacted in 2003 through 2010. Under the 2003 legislation, the capital gains tax rates for individuals are reduced from 10 percent (for taxpayers whose highest marginal income tax rate is 15 percent or lower) and 20 percent (for taxpayers whose highest marginal income tax rate is higher than 15 percent) to 5 percent and 15 percent, respectively. These rates also apply for qualified dividend income. However, you should consider whether you should make an election to treat such income as investment income to allow you to take advantage of any excess investment interest expense you may otherwise have for the year.

8. Maximize 401(k) contributions. It is not too late to change your 401(k) contributions in order to maximize your elective contributions for the current year. The contribution limitation for 2006 is $15,000 ($20,000 if you are over 50) and any amount contributed to your 401(k) account is excluded from your taxable income. You might also consider contributing to a Roth 401(k) if your employer offers such an account. These accounts offer the same tax advantages of a Roth IRA, but unlike regular 401(k) contributions, are not excluded from your taxable income.

9. Utilize employer-sponsored programs. The end of the year is the time to start thinking about which employer-sponsored programs you should take advantage of in 2007 as the open enrollment period for employer-sponsored programs is about to begin (or has already begun). Participation in these programs can reduce next year's taxable income. While there are many employer-sponsored benefit programs that allow pre-tax dollars to be used for various personal expenses, the most common programs available to employees are flexible spending accounts for dependent care and/or medical expense reimbursement and HSAs.

10. Jump start a 529 plan for education. The Pension Protection Act of 2006 made the tax advantages of 529 plans permanent. Thus, if you were previously wary about setting up a 529 plan because of the uncertainty of its tax-advantaged future, now is the time to act. Distributions from 529 plans are tax-free if used to pay qualified higher education expenses. You may elect to treat a current-year contribution to a 529 plan as having been spread over five years for gift tax purposes, and thus, make a current year contribution of $60,000 per donee without gift tax consequences (assuming you have not previously made contributions to a 529 plan for a particular donee).

11. Do not forget to make gift tax annual exclusion transfers. If you are financially able, you should consider establishing a gifting program for your children and grandchildren to take advantage of the gift tax annual exclusion. Gifts of up to $12,000 per donee ($24,000 for married couples) are generally excluded from gift tax. Annual exclusion gifts can be made to any number of donees.

12. Consider contributing to a Roth IRA. While contributions to a Roth IRA are not tax-free, earnings on such accounts are tax-free. In addition, Roth IRAs are not subject to the minimum distribution requirements for traditional IRAs. You may contribute to your Roth IRA until the original due date of your income tax return (i.e., April 15, 2006). Also note that as part of the Tax Increase Prevention and Reconciliation Act of 2005 signed this year, the AGI limitation ($100,000) for the conversion of IRAs and qualified retirement plans to Roth IRAs will be eliminated in 2010. If you intend to take advantage of this provision, you will need to start planning now so that you will be able to pay the income tax liability associated with the conversion.

13. Perform an overall financial checkup. The end of the year is always a good time for you to assess your current financial situation and plan for your future. Included in this assessment should be cash flow planning, health care planning, retirement planning, investment planning and estate planning. You should also update wills, powers of attorney and health care proxies for changes that may have occurred during the year. Remember, it's never too early or too late to start planning for the future!

"Keep in mind that these tax tips are general tax advice and may not be applicable to your particular circumstances," said Justin Ransome, a partner in Grant Thornton's National Tax Office. "Make sure that you consult with your personal tax advisor before implementing any changes or additions to your tax planning strategy."

Tax Professional Standards Statement

This document supports Grant Thornton LLP's marketing of professional services, and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the subject of this document we encourage you to contact us or an independent tax advisor to discuss the potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this document may be considered to contain written tax advice, any written advice contained in, forwarded with, or attached to this document is not intended by Grant Thornton to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

About Grant Thornton

Grant Thornton LLP is the U.S. member firm of Grant Thornton International, one of the six global accounting, tax and business advisory organizations. Through member firms in 112 countries, including 49 offices in the United States, the partners and employees of Grant Thornton member firms provide personalized attention and the highest quality service to public and private clients around the globe. Visit Grant Thornton LLP at
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Publication:Business Wire
Date:Nov 13, 2006
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