As we enter into the final month of the year, it's time to get organized to make sure you take advantage of all the Internal Revenue Service (IRS) tax deductions that can help put more money into your pocket come next April 15th. If you wait until after December 31, you may miss on some of these tax breaks.
Itemizing Deductions: Take the time to calculate whether or not you'll itemize your deductions for 2005 or taking the standard deduction. The "marriage penalty" of a lower standard deduction that many thought they would have last year and in 2005 was extended beginning last year to give married couples a larger standard deduction.
If you'll be itemizing your tax deduction, then getting in as many of the below benefits as possible will be in your interest, but if you'll be taking the standard deduction, you'll want to wait until 2006 to do as many as possible. You can pay a number of 2006 bills in December 2005 to increase your itemized deductions. This includes your January mortgage payment and any real estate taxes due in January. By making payment on them in December, it will allow you to add these to your itemized deductions in 2005 and thus maximize them.
Charity: If you're planning to make charitable contributions in the near future, doing so before December 31 makes sense if you'll be itemizing. Donations by check need only be postmarked by Dec. 31 to qualify for itemized deduction in 2005 even if it doesn't arrive to the charity until early 2006. If you make a donation by credit card
the charge must show up on your credit card statement with a December 2005 date next to it (even if it happens to arrive as part of your January 2006 payment bill) to qualify.
If you have extra vacation days or sick days that you won't use before the end of the year, you may want to contribute them to victims of the Katrina Hurricane. The IRS has set up a special program where you can donate
unused sick or vacation days (Under Notice 2005-68) to help those affected by the tragedy.
A good year-end house cleaning can also reduce those taxes. Anything that you find that you're not using, you can donate to a local charity such as Good Will or the Salvation Army to receive a tax deduction.
If you're considering donating an old car or boat to charity, the
rules on how much you can deduct have changed for this year. Your donation of these vehicles is only worth what the charity actually receives for it at auction rather than the "fair market value" which was used in the past.
Hybrid Car Deduction: If you purchased a hybrid car this year or will before the end of the year, make sure that you put it into use before the beginning of the new year. There may be a
$2000 hybrid car "clean fuel" deduction for new cars purchased and put into use before December 31, 2005.
Use Your Flexible Spending Account Money: Make sure to use any money still left in your health care or child care flexible spending account. While there is a new rule that allows companies an option to extend the deadline for use of money in the accounts until March 15, don't assume that your company has done so since many still have not. At the very least, check with your human resources department to find out if your deadline date is December 31 or march 15. Any money left in the account after the cut-off date is automatically forfeited.
Make Year End Purchases: If you have been keeping receipts to take advantage of the
state and local sales tax deduction, you may want to make an year end purchase for any large items you have planned to purchase in early 2006. Unless Congress renews this law, 2005 will be the last year you are able to deduct state and local sales taxes instead of income taxes on your federal return.
The sales tax deduction is of special benefit to taxpayers that purchased a car, boat or motorcycle this year (or plan to before the end of the year). The law provides that taxpayers that purchased big ticket items such as cars, motorcycles and boats can deduct the actual sales tax paid on the purchase in addition to the amount listed in the IRS tables. If you don't have your receipt for your auto purchase, take the time to go to the dealership to get a duplicate receipt.
Sell Your Investment Losers If you have stocks and mutual funds that have lost money and aren't part of your retirement accounts, if you plan to sell them, do so before the beginning of the New Year. Any losses can help offset any taxable gains. If your losses happen to exceed your gains, $3,000 can be deducted from your regular income.
2005 Year End Tax Deductions Not To Miss
