Year-End Tax-Cutting Tips

Top 10 things you can do to keep money in your pocket

In November alone the IRS issued more than 15 notices, revenue procedures and revenue rulings. Do you have any idea how many of these changes affect you and your finances?

And what about the recently enacted Pension Protection Act? There are several provisions tucked inside that legislation that will also have an impact on your tax, retirement and charitable giving strategies. Read more.

For those reasons and more, tax planning will be especially important as 2006 draws to a close. In general, this is the best time of year to review your finances -- when the there's still time to make changes, move funds, and adjust withholding.

Here are 10 things you can do to cut your obligations to Uncle Sam and keep more of your more in your own pocket:

1. Check your retirement balances

That overfunded IRA or pension plan is well worth looking at before the year is over if you're at or approaching retirement age. Review your current medical expenses and other itemized deductions, and your overall taxable income to see if you can withdraw money from those accounts tax-free or at very low tax rates (10% - 15%). This is the time to start reducing those balances if they are very high -- say over $500,000. When you're over 59 1/2 there are no early-withdrawal penalties. So people running up expenses far in excess of taxable income, say seniors paying substantial wages or fees for in-home care, may be able to pull money from those retirement accounts without paying taxes on it.

2. Use up your medical reimbursement plan

Review the medical bills you have now, and those coming up next year. If you haven't spent as much as you'd planned, take care of few things before the year is up. New for 2005/2006: you have until the end of March to finish getting treatment and submitting those bills through your reimbursement account at work. So go see your optometrist or ophthalmologist. Get new glasses or contacts. Sink your teeth into your dental problems. Get your teeth cleaned or that filling replaced. Planning any elective surgery, like laser eye surgery, or a tummy tuck? Prepay enough to use up that whole shortfall. You can still schedule the surgery for next year -- and allocate those expenses to next year's medical reimbursement plan.

3. Review your contributions to your company's retirement plan

You may have been getting those nasty little notices about excess contributions because other people in the company didn't contribute enough. Before the end of the year is a good time to get your excess contributions back.

4. Review your alternative minimum tax situation

If you're likely to be subjected to the alternative minimum tax, it's time to start looking at your expenses to see if they really should be itemized or if it's possible to split some of the expenses between Schedule E, Schedule C and Schedule A. Reducing your adjusted gross income will help, but reducing your itemized deductions is beneficial all around. But only do it if the splits are truly justified.

5. Don't buy any mutual funds in December

That's when they post all their capital gains for the year, which you will pay tax on all of even if you only own the fund for a day. Instead, wait until January -- unless you have a lot of capital loss carryover, in which case it's a good idea to buy mutual funds in December. But don't suspend a periodic investment plan just because it will mean picking up a few shares in December. That may save a few tax dollars, but it could cost you in lost appreciation. Chuck Jaffe has more.

6. Deal big stock winners

Suppose you have stocks showing substantial gains that you'd like to sell, but you're already in a high tax bracket. See if anyone close to you (very close family member or friend) is sitting on a high capital loss carryover. Especially one they have no hope of using up in their lifetimes. Consider gifting them your highly appreciated stock. They will get the stock with your low basis. But they won't pay any tax because their capital loss carryover will eat up the profits.

7. Update your family tax records

Build a file for each family member. The file should include a recent photograph, a copy of each person's Social Security card, or Individual Taxpayer Identification Numbers confirmation, copy of their birth certificate and passport. You never know when you will need those things. And if you do need them in a hurry, having them in one place will save time and money.

8. Corral cash receipts

Start gathering and organizing the receipts you paid by cash. It's time to enter them into your books so that you can use them to calculate deductions.

Get your appointment calendar out and see if you have any lunches, dinners, etc. for which you paid cash that you've never recorded. Remember to take into account parking meters, pay phones, valets, tips to doormen, porters, hairdressers, etc. Look through your car, at your visor, pockets, etc. for the various receipts you've been stashing.

9. Check your withholding totals

Review your federal and state withholding to see if it will cover all the sources of income you had outside of work. It may be time to change the amount you have withheld, while there are still some 2006 payrolls coming up. Otherwise you could end up owing quite a bit come April 15.

10. Review your benefits

This is open enrollment time for many corporate or government employees. Don't miss your employer's deadline. Review your coverages and options. And make sure to update your benefits and choices based on your current personal and family needs. Remember to take into account any changes you're expecting in your life next year.