With the year coming to a close, it’s time once again to think of year-end tax planning. 2005 brought with it new tax acts: The Energy Tax Incentives Act of 2005 and The Katrina Emergency Tax Relief Act of 2005. Both effect personal taxes and provide opportunities for tax savings.

The key in any tax saving strategy is timing – knowing whether to accelerate or postpone income or deductions. The most common thinking is to postpone income and accelerate deductions. However, your individual situation may dictate the opposite. And many of the new tax law changes don’t go into effect until 2006, and parts of the existing tax law expire in 2005. We can help you sort through the tax changes and determine the strategies that best suit your particular financial and tax situation.

The Energy Tax Incentives Act of 2005 provides for new tax credits for various forms of energy conservation. There is a credit for purchasing an energy-efficient, hybrid automobile after December 31, 2005. Depending on the vehicle purchased, tax credits range from $400 to $3,400. This credit replaces the deduction for buying a hybrid automobile currently available.

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The current law, which expires December 31, 2005, allows for a deduction from gross income of up to $2,000 of the portion of the cost attributable to the alternative power source. At first glance, the new tax credit appears to be more advantageous than the deduction, since a tax credit is subtracted dollar-for-dollar from the tax you owe, but a deduction only reduces the income on which your tax is calculated. If you’re contemplating the purchase of a hybrid vehicle, we can discuss the tax consequences with you.

There are also credits of up to $500 for making certain energy-saving improvements around the house, and credits of up to $2,000 for photovoltaic, solar hot water, and fuel cell property installed in your personal residence, after December 31, 2005. To benefit from the new credits, you will want to postpone qualifying purchases until next year.

The Katrina Emergency Tax Relief Act of 2005 (KETRA) lifts restrictions that
limited charitable deductions, thus allowing taxpayers to claim bigger charitable contributions than in the past. Ordinarily, the deduction for charitable contributions is limited to 50% of adjusted gross income. KETRA raises the limitation for qualified cash contributions to 100% of adjusted gross income when combined with other donations. But this change is only temporary, the old limitations return after December 31, 2005. If the restrictions apply to you, you may want to consider accelerating your charitable donations into 2005.

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There are other tax provisions that expire with 2005 for you to consider. Unless Congress makes a change, the deduction for college tuition is scheduled to go off the books in 2005. You may wish to consider prepaying tuition that is not due until early 2006 to take advantage of the deduction. Likewise, the sales tax deduction is scheduled to expire this year. Accelerating the purchase of big-ticket items (such as cars, motorcycles, RVs, etc.) into 2005 in order to deduct sales tax in lieu of state and local income taxes may make sense for you.

The following list may help you identify possible courses of action to take before year-end. If you have questions about how any of these actions might benefit you, please contact us. We’ll set up a meeting to narrow down options and tailor a tax-saving strategy unique to you and your specific needs.

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• Review your investments to see if there are any losers to sell. The loss could offset capital gains recognized during the year and any excess, up to $3000, can be deducted against ordinary income on your return.


• Consider using a credit card to prepay expenses that can generate deductions this year.


• Business clients should consider the purchase of qualified depreciable property eligible for expensing up to $105,000.


• Make use of the $11,000 annual gift tax exclusion before year-end to save possible gift and estate taxes. (The annual exclusion amount increases to $12,000 in 2006.)


• If you own an interest in a partnership or S corporation, which has sustained a loss for the year, you may need to increase your basis in the entity to be able to deduct the loss this year.

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• You may be able to save taxes by applying a bunching strategy to miscellaneous itemized deductions, medical expenses, or other itemized deductions.


• Those facing a penalty for underpayment of estimated tax may be able to eliminate or reduce it by increasing withholding.


• Self-employed individuals should consider setting up a self-employed retirement plan. In some cases, although the plan must be set up before year-end, contributions to the plan may be made until the due date of the return.


• If you’re thinking of donating a used vehicle to charity, remember The American Jobs Creation Act of 2004 created tougher deduction and substantiation rules for donations made after December 31, 2004. It is now necessary to know whether the charity plans on selling or using the car in its charitable activities; the latter may yield a bigger deduction.


• Depending on your particular situation, you may want to consider deferring a debt-cancellation until 2006, electing to deduct investment interest against capital gains, or disposing of a passive activity to allow you to deduct suspended losses.

These are just some of the year-end strategies that can be used to save taxes. Contact us so we can discuss your situation and design a plan that’s right for you.

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