DALLAS (BP)–As 2004 draws to a close, tax planning may not be at the top of your “to do” list. Yet, it is important not to lose sight of certain tax breaks amid the excitement of the holidays. A recent flurry of tax legislation may have an impact on your year-end tax planning for 2004. Here are some important tax aspects to consider:
— The American Jobs Creation Act of 2004 creates tougher deduction and substantiation rules for post-2004 charitable contributions of automobiles. If you plan to donate an auto, do it before 2005.
— The Working Families Tax Relief Act of 2004 extends certain credits through 2005, keeps the child tax credit at $1,000 through 2009, extends marriage penalty relief and provides certain other tax advantages as well.
Other year-end tax tips include the following:
— Maximize deferrals to your retirement plan. By deferring the maximum amount, you decrease federal income tax withholding and enhance retirement savings.
— Deplete your flex dollars. If you don’t use all of your flex dollars, you lose them. Remember that you can get tax-free reimbursements for over-the-counter drugs such as aspirin and antacids.
— Take last-minute deductions. Charitable contributions are a worthwhile way to maximize itemized deductions. Consider donating appreciated stock or property instead of cash, thereby avoiding potential capital gains taxes.
— Defer income. If you are self-employed, you may have more latitude to defer income into 2005. Nevertheless, if you expect to receive a year-end bonus, ask your employer to hold the bonus and pay it to you in January.
— Convert a Traditional IRA to a Roth IRA. You will need to do the math, but if retirement is many years way, the tax-free distributions may prove worthwhile. And since a Roth IRA is not subject to the required minimum distributions rules (Traditional IRAs must begin to distribute funds at age 70.5), you can pass your Roth IRA account onto your heirs without settling them with a tax liability.
— Consider gifting. Take advantage of the annual gift tax exclusion. You can save gift and estate taxes by making gifts up to $11,000 to an unlimited number of individuals. You cannot carry over the exclusion to 2005.
— Beware of the Alternative Minimum Tax (AMT). Originally enacted to ensure that the wealthy pay their fair share of taxes, now the AMT impacts the middle class.
In light of the new rules, you may need a software program or tax professional to guide you.
Sherre Stephens is a certified executive benefits specialist and director of executive and institutional benefit design for GuideStone Financial Resources of the Southern Baptist Convention.