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Year-End Tax Planning

While the average taxpayer will avoid2006. The same concept applies for
thinking about income taxes until themiscellaneous deductions.If you expect
approach of the April deadline forcesto be able to itemize, and you are
him to do so, once the ball drops on Onemaking quarterly state estimated tax
Times Square at midnight on Decemberpayments, make the 4th quarter payment
31st and the New Year is rung in therein December, instead of waiting until
is very little that can be done to cutthe January 16, 2006 due date, so you
your tax bill.However, during the lastwill be able to deduct the payment on
two months of the year you can do ayour 2005 Schedule A.4) If you do not
great deal to reduce your taxhave the cash available to pay for the
liability.Sit down with paper and pencildeductible items you have scheduled as
and list your anticipated income forpart of your year-end plan, you can use
2005 and all your allowable deductionsa credit card to pay for the item and
to date. What you want to do is, usingstill get a 2005 deduction. Allowable
your 2004 return as a guide, prepare aexpenses charged to a credit card (VISA,
projected 2005 return. Once this isMaster Card, American Express, Discover)
done you can decide what steps to takeare deductible in the year charged, and
to make sure you pay the absolute leastnot in the year that you actually pay
amount of federal and state income taxfor the charge.5) The option to deduct
possible for 2005 and 2006. Taxstate and local sales tax paid instead
information for 2005 (i.e. standardof state and local income tax paid will
deduction and personal exemptionexpire on December 31, 2005. This
amounts, tax rates, etc.) is availableoption will not be available for 2006.
on the WHAT'S NEW FOR 2005 Page at areIf you are planning to buy a new car
some year-end tips:1) Traditional(other than a qualifying energy-saving
year-end planning calls for postponinghybrid - see tip #6), SUV, motorcycle,
the receipt of taxable income until 2006or other "big ticket" item in the near
and accelerating allowable deductions tofuture you may want to do so before the
be claimed in 2005, the idea being toend of the year to be able to deduct the
reduce your 2005 taxable income to asales tax.6) The Energy Tax Incentives
minimum. This strategy will generallyAct of 2005 creates new tax credits for
apply if you expect to be in the samecertain energy-saving autos, consumer
tax bracket for both 2005 and 2006, orproducts and home improvements beginning
if you will be in a lower bracket inin 2006. You may want to postpone any
2006.If, however, you anticipate apurchase of qualifying energy-saving
substantial increase in taxable incomeitems until next year to be able to
in 2006, which will push you into aclaim the credit.7) While postponing
higher bracket, you should do theincome and accelerating deductions may
reverse and accelerate the receipt ofreduce your "regular" income tax for
taxable income to 2005 and postpone2005, these actions may backfire and end
deductible expenses until 2006. Incomeup costing you if you fall victim to the
received in 2005 will be taxed at adreaded Alternative Minimum Tax (AMT).
lower rate, and deductions claimed inWhy? Because taxes and miscellaneous
2006 will yield a greater taxexpenses are not deductible in
savings.Not sure what your 2006 incomecalculating AMT, and medical expenses
will be. Follow the rule of "when inare only deductible to the extent they
doubt - defer" - go the traditionalexceed 10% of AGI. When preparing your
route and postpone income and accelerateprojected 2005 return be sure to
expenses.2) It does not pay to itemizedetermine if you will be subject to AMT
unless the total of your allowableand plan your strategies accordingly.8)
deductions exceeds the standardWhen preparing your projected return you
deduction that applies to your filingshould review the performance of your
status, plus any additions for age orinvestment portfolio for the year. Add
blindness. If you decide to accelerateup all your realized gains and losses
allowable deductions to claim them infrom actual sales of stock, bonds and
2005, you can accelerate all you want,mutual fund shares for the first 10
but it will be wasted unless your totalmonths of the year, with separate net
"itemizable" deductions exceed yourtotals for short-term (held one year of
applicable standard deduction.Let us sayless) and long-term (held more than one
you usually do not have enoughyear) activity. Gains and losses from
deductions to itemize. However, afterinherited property are always considered
preparing your projected 2005 return youlong-term. Include in the long-term
discover that, because of some specialcalculation any "capital gain
circumstance, you will be able todistributions" from mutual funds.Now do
itemize this year. During the last twoa similar calculation for unrealized
months of the year you should incur, and"paper" gains and losses on the
pay for, as many deductible expenses asinvestments you still hold. You may
possible.If, on the other hand, yourwant to sell some of your investments
projected return indicates that you dobefore the end of the year at a loss to
not have anywhere near enough deductionswipe out year-to-date gains, or at a
to be able to itemize, postpone makingprofit to take advantage of year-to-date
any deductible payments until 2006.losses in excess of $3,000.00.There are
Making these payments in 2005 would notno written in stone year-end tax
produce any tax savings, while it isplanning rules that apply to all
possible that by deferring them untiltaxpayers in all cases. As with any
next year you may be able to itemize inother transaction, year-end strategies
2006.3) The timing of deductions ismust be evaluated in the context of the
especially important when it comes tospecial facts and circumstances of your
medical expenses and miscellaneousindividual situation. You may want to
job-related and investment expenses.review your year-end situation with your
You are allowed to deduct medicaltax professional.And remember - your
expenses only to the extent that theyfirst criteria for evaluating any
exceed 7 1/2% of your Adjusted Grossfinancial transaction you are
Income (AGI), and most miscellaneousconsidering should always be economic.
deductions are only deductible to theTaxes are second.Robert D Flach is a tax
extent that the total exceeds 2% ofprofessional with 34 tax seasons of
AGI.If you anticipate a 2005 AGI ofexperience preparing 1040s for
$70,000.00 you must exclude the firstindividuals in all walks of life. He
$5,250.00 of medical expenses - thewrites THE WANDERING TAX PRO weblog (
first $5,250.00 is not deductible. Ifthe NJ TAX PRACTICE BLOG ( and the
your medical expenses to date are closewebsite which has a wealth of tax
to or more than %5,250.00, and you willplanning and preparation advice and
be able to itemize, pay any outstandinginformation. He also writes and
medical bills and schedule, and pay for,publishes THE FLACH REPORT, a quarterly
check-ups, doctor visits and neededtax newsletter. For more info on THE
dental work in November and December.FLACH REPORT go to The above article
If medical payments to date areis taken from postings to THE WANDERING
substantially less than $5,250.00, putTAX PRO.
off paying any more medical bills until



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