YEAR-END TAX CONSIDERATIONS

Individual Income Tax Considerations

• Defer bonus and salary if your employer will allow the payments to be made in January 2006. Then, those amounts will not be taxed until next year. (Your employer may still be able to claim a deduction on its 2005 tax return.)
• Consider holding stock and bond sales until after Jan. 1, since gains and losses are determined on the trade date. For 2005, the last trading day is December 30. Likewise, sell those stocks with losses before the end of the year to reduce any other gains you may have. Don’t forget that in the case of an individual, if losses exceed gains from security transactions, only $3,000 of the excess can be deducted currently. The balance will carry over to next year. You also need to be mindful of the length of time that you have held the investment – favorable long-term capital gain rates are applicable when you have held the property for more than one year. Don’t spoil that favorable long-term capital gain rate with a short-term capital loss.
• Charge deductible expenditures on credit cards to get a current deduction even though payment will not be made until next year.
• Set up and fund a health savings account.
• Make charitable donations with appreciated stock. The fair market value is used to measure the donation, and there is no tax on the difference between your cost and the fair market value. (If the fair market value is less than your cost, then consider selling the item to recognize the loss and contribute the cash proceeds.)
• Make the maximum contribution to retirement arrangements whether employer sponsored or an IRA (see retirement plan limits chart).
• Look carefully at medical expenses that may be deductible if they exceed a limitation based on adjusted gross income. Reschedule and pay for medical procedures this year to get the benefit of a 2005 medical deduction – or reschedule to next year for a 2006 deduction. (If you pay more than one-half the support of a parent or child, regardless of their qualification as a dependent, and you pay the medical expense, it is deductible on your tax return.) Also includable as medical expenses are transportation, medical insurance premiums, certain long-term care premiums, prescription drugs and certain medically prescribed programs, such as weight-loss.
• Review your tax basis in partnerships or S corporations that may have a current year loss. If tax basis is insufficient to claim the loss, you may need to make a contribution to the capital of the business.
• Dispose of a passive activity with suspended losses. When a passive activity has suspended losses, those losses become deductible in the year that the activity is sold.
• Consider an installment sale of property rather than collecting all proceeds this year.
• Review your tax liability position and determine whether to reduce your payroll tax withholding or adjust any estimated tax payments. You don’t want to be in a position where you will be penalized for underpaying taxes, nor do you want to give the government an interest-free loan.

Tax Considerations for the Self-Employed

• Send out invoices in late December if you use the cash basis method of accounting, so that collections will not be made until January.
• Set up a retirement plan.  The deduction is allowed on the current year return even if funded just before you file the return next year (see retirement plan limits chart).
• Establish a medical insurance plan or convert to or establish a high deductible health plan.
• Employ your minor children to perform administrative tasks and avoid Social Security taxes on the wages.  This shifts income to a lower bracket.  (The children may establish IRAs to gain significant benefits for the future.)
• Review your meal and entertainment expenditures to make sure you have proper substantiation.
• Consider your eligibility for home office expenses.

Tax Considerations for Business Entities

• Acquire and place equipment into service before the end of the year to take advantage of the immediate deduction of up to $105,000. Limitations may apply if total expenditures exceed $420,000.
• Offer additional benefits such as a Roth option to existing 401(k) plans.
• Look at adopting the LIFO inventory method.
• Evaluate the new deduction for domestic production activities.
• Establish a retirement plan.  The deduction is allowed on the current-year return even if funded just before you file the return next year (see retirement plan limits chart).
• Trade in fully depreciated business assets instead of selling at a gain.
• Consider the status of any final estimated tax payment requirements.  A penalty for underpayment of taxes can be costly.

Retirement Plan Limits

Type of plan	Contribution limit	Additional catch-up contribution over age 50
IRA	$4,000	$500
SIMPLE	$10,000	$2,000
401(k)	$14,000	$4,000
SEP IRA	$42,000	--

Maximum compensation to be taken into account for plan limits is $210,000

Alternative Minimum Tax

An increasing number of clients have become subject to the alternative minimum tax in recent years.  Once considered a tax on the wealthy, by virtue of its construction, the AMT is catching more individuals.

Taxpayers who happen to have significant deductions, such as those who live in states that have relatively high personal income tax rates and high real estate taxes, are vulnerable.

The AMT makes year-end planning difficult and potentially dangerous if done in a vacuum.  By reducing regular tax liability through deductions, deferral and overall rate reductions, the alternative minimum tax liability exposure has increased.

All planning must consider multiple years to be truly effective.  While a credit for prior year AMT may be available against regular income tax in a subsequent year, there is no guarantee that the AMT will ever be recovered.

Gift and Estate Tax

If your estate is large enough to be subject to the estate tax, the rates are higher than the income tax rates. It makes sense to minimize any estate tax and provide that the largest possible amount ends up with your heirs and not with the federal or state government.

The federal annual exclusion for gifts is $11,000 to any individual. If you are married and your spouse consents, the annual exclusion can effectively be $22,000. This provides a good opportunity to transfer income-producing assets to heirs who may also be in a lower income tax bracket. In addition to the annual exclusion per person, up to $1 million may be transferred without additional tax.

If you are making gifts to limit or reduce future estate tax and you have reached the annual exclusion, you need to be aware that payments of tuition and medical expense for that individual are not subject to gift tax. There is an unlimited exclusion of amounts paid directly to educational organizations for tuition (not books, fees, etc.) and health care providers for medical expenses.