This is but one new feature of the tax code worth taking advantage of before 2005 ends. Other perks are extensions or hikes of existing benefits and deductions. For instance, like last year, taxpayers may opt to deduct their state sales tax instead of their income tax, a perk for residents of the nine states without income taxes and for shoppers in general. "This is the last year sales taxes will be deductible," says Bob Scharin, editor of the journal Practical Tax Strategies. "If you're planning on making a substantial purchase -- a car, jewelry, appliances -- do it before the year ends."
If you have a large amount of appreciated stock, it might be good to start "gifting" it to your children or grandchildren, says tax analyst Mark Luscombe of CCH Tax & Accounting. Long-term capital-gains tax rates are currently only 5% for people with incomes lower than $29,700 this year -- most children fall into this category -- compared with 15% for those with higher incomes. You can give up to $11,000 a year to a recipient without having to pay the gift tax. And you can exceed that limit as long as you don't give more than $1 million in your lifetime. But children under age 14 cannot receive more than $14,000 a year without being subject to the "kiddie tax" -- they're taxed at the donor's rate after that level.
Of course, not everything in the tax code this year is a gift. Millions of Americans will suffer again from the alternative minimum tax (AMT), which disallows deductions for people in high income brackets -- and sometimes for those in the middle, too. In fact, an AMT exemption, created in 2001, expires at the end of this year. Unless Congress votes to extend it, the ranks of AMT sufferers will explode. "About 3 million people will be subject this year," says tax expert Martin Nissenbaum of Ernst & Young. "Next year there'll be 12 million to 13 million unless something is done." Because of that risk, Nissenbaum recommends that taxpayers not subject to the AMT this year accelerate their deductions, such as paying January real estate taxes in December, to avoid taking a hit next year.
When doing your tax checkup, also consider the following:
-- Higher-education deduction: Individuals may take a $4,000 deduction to pay for college expenses if their income does not exceed $65,000 ($130,000 for married couples). Those with incomes lower than $80,000 ($160,000 for married couples) may take a $2,000 deduction.
-- IRA contributions: You have until Apr. 15, 2006, to contribute up to $4,000 ($4,500 if you're 50 or older) for 2005.
-- Medical expenses: These must exceed 7.5% of your adjusted gross income to be deductible. If you're near that threshold, you may want to have elective surgery or dental work done now and pay for it before yearend. By Lewis Braham