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Client Alert - Winter 2005/2006

Planning Ahead
By Mike Engleman, CPA

As 2005 draws to a close, there is still time to reduce your 2005 tax liability and plan ahead for 2006. The following highlights several potential tax-saving opportunities for you to consider.

More tax-saving opportunities continue for retirement planning in 2005 than in previous years due to the availability of Roth IRAs, changes that make regular IRAs more attractive, and other retirement savings incentives. Contribution information for various retirement plans is as follows:

Traditional and Roth IRAs

" $4,000 Maximum Contribution
" $500 "Catch-up" Contribution if age 50 or older by 12/31/05

401(k) Contribution

" $14,000 Maximum Contribution
" $4,000 "Catch-up" Contribution if the plan permits

Simple Plan Contribution
" $10,000 Maximum Contribution
" $2,000 "Catch-up" Contribution if the plan permits

Deduction timing is also an important element of year-end tax planning. Remember to keep the following deductions and credits in mind as the end of the year approaches:

Charitable Contributions

The Katrina Relief Act removes the 50% of adjusted gross income limitation for contributions made to any charitable organizations on or after August 28, 2005, through December 31, 2005.

Medical and State Deductions
For federal purposes, medical expenses are deductible only to the extent that they exceed 7.5% of AGI. In addition, you may deduct medical expenses on your New Jersey income tax return that are in excess of 2% of your New Jersey gross income.

If you anticipate a state income tax liability for 2005 and plan to make an estimated tax payment, consider making the payment before the end of 2005. Keep in mind that state taxes may create an alternative minimum tax (AMT). It would be wise for us to analyze your AMT exposure, because the AMT is very complex.

Qualified Higher Education Expenses
Expenses of up to $4,000 are deductible from gross income subject to certain income limitations.

Student Loan Interest

A deduction of up to $2,500 is available for interest paid on any qualified education loans. The deduction is phased out at certain income levels.

Investment Gains and Losses
You may want to time the sale of assets (stocks) so as to have offsetting capital losses and gains. Capital losses may be fully deducted against capital gains and may offset up to $3,000 of ordinary income.

Business Deduction

Your business can elect to expense equipment purchases of up to $105,000 if the equipment is placed in service during 2005 subject to certain income and purchase limitations.

Child Tax Credit

A tax credit of $1,000 is available for each child under age 17 subject to certain income limits.

Post Secondary Education Credits
Hope credit is $1,500 for qualified tuition and fees paid for the first two years of education for students enrolled at least half-time. Lifetime learning credit of $2,000 is available on tuition and fees of $10,000 at 20%. Credits are phased out at certain income levels.

Credits available for 2006

There are two credits available beginning in the year 2006. The credits are available for the purchase and installation of energy efficient property such as photovoltaic, solar water heaters, natural gas, propane, oil furnaces, and hot water boilers.

Income Phase Out Levels
  Married Filing Joint Single
Traditional IRA $70,000-$80,000 $50,000-$60,000
Roth IRA $150,000-$160,000 $95,000-$110,000
Education Credits $87,000-$107,000 $43,000-$53,000
Educational Expenses $130,000-$160,000 $65,000-$80,000
Student Loan Interest $105,000-$135,000 $50,000-$65,000
Child Tax Credit $110,000-$130,000 $75,000-$95,000


Although this article is informative, each taxpayer's situation is unique. Please call us to make an appointment to discuss your specific tax issues as well as implementation of the ideas and topics enclosed in the letter. We welcome the opportunity to meet with you and determine how to customize a variety of tax strategies to maximize their effectiveness for you.

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