Released: November 07, 2006

Smart year end tax moves

Source: By Mary Beth Franklin, Kiplinger's Personal Finance

Normally, this is the time of year that you think about turkey, not taxes. But now is a good time to get a head start on end-of-year tax planning by harvesting investment losses and spreading some holiday cheer around to your favorite charities, lowering your tax bill in the process. Make these moves now, and you’ll be giving thanks next spring.

This year there are new tax credits for installing energy-saving home improvements and buying hybrid cars. And, older taxpayers can take advantage of a new two-year window to take tax-free distributions from their IRAs that they donate directly to a charity. But for most people, the best way to cut your tax bill today is to maximize your retirement savings for tomorrow, says Mark Steber, vice president of tax resources for Jackson Hewitt.

Max out your 401(k). You can contribute up to $15,000 to your 401(k) or other tax-deferred retirement account, such as a 403(b) for teachers or a 457 plan for police and other local government workers by the end of the year. That’s $1,000 more than last year’s limit. Tell your employer to adjust your remaining paychecks to boost your contribution if necessary, or if you receive a year-end bonus, ask if you can defer some or all of it to your retirement account. If you’re 50 or older, you are allowed to shelter up to $20,000 of your salary from federal and state taxes this year (although you’ll still be nicked for payroll taxes.)

Think green. Record-high gasoline prices earlier this year and concerns about heating fuel costs this winter may have you thinking about outfitting your home with new storm doors and windows or buying a gas-efficient hybrid car. 

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