Janell A. Israel & Associates
December 2005 Tax Newsletter
Merry christmas!
Major Tax Deadlines
For December 2005
December 31 - Deadline for taking required minimum distributions from IRAs and other retirement accounts.
December 31 - Deadline to complete 2005 tax-free gifts of up to $11,000 per recipient. ($
December 31 - Deadline for paying expenses you want to be able to deduct on your 2005 income tax return.
December 31 - Last day to set up a Keogh or 401(K) self-employed retirement plan for 2005. Deductible contributions for 2005 can be made any time up to the filing deadline for your 2005 return.
What's New in taxes:
More Vehicles Certified For Clean-fuel Deduction
The 2006 Ford Escape Hybrid and the 2006 Mercury Mariner Hybrid are the latest vehicles to be certified by the IRS for the clean-fuel deduction. Taxpayers who are the original purchasers of a clean-fuel vehicle are entitled to a tax deduction of up to $2,000 on their 2005 tax returns. The deduction is an above-the-line deduction, which means that it can be taken even by those who don’t itemize their other deductions.
The IRS has published the following listing of vehicles certified for the deduction:
* 2006 Ford Escape Hybrid
* 2006 Mercury Mariner Hybrid
* 2006 Lexus RX 400h
* 2006
* 2005 Ford Escape Hybrid
* 2005 Honda Accord Hybrid
* 2003 and 2005 Honda Civic Hybrid
* 2001 through 2005
* 2000 through 2005 Honda Insight
The clean-fuel deduction expires after this year and is replaced by a tax credit of up to $3,400 for the purchase of a clean-fuel vehicle.
Seven Year-end Moves To cut Your taxes
Time is running out on tax decisions and actions you can take to reduce your 2005 tax bill. Here are some year-end tax-cutting moves to consider.
1. If you think you might be hit with a penalty for underpaying 2005 taxes, have your employer withhold extra taxes from your last few paychecks. The IRS treats wage withholding as being spread evenly over the year.
2. Max out your 401(k) at work. For 2005, you can contribute up to $14,000. Anyone 50 or older by December 31 can contribute an extra $4,000. ($
3. Sell your losers. You can deduct investment losses realized in your taxable accounts against your gains. Plus, you can claim up to $
4. Make gifts before year-end to utilize your tax-free $11,000 gifting allowance for 2005. You can give this amount to as many individuals as you like. ($
5. Think about sales taxes. You might want to purchase certain big-ticket items before the end of the year. This year, instead of deducting your state and local income taxes, you can instead claim sales taxes paid during the year, including taxes paid on vehicles, boats, motorcycles, RVs, and home-building materials.
6. Evaluate the benefits of the new Roth 401(k). Effective January 1, 2006, most 401(k) retirement plans will give you the option of contributing to a Roth 401(k). Yes, you lose out on the current tax deduction for your contribution, but future qualifying withdrawals will be completely tax-free.
7. Update your estate plan for any 2005 changes in your life. Letting your estate documents become outdated could expose you to higher taxes.
What's New in financial strategies
Yield On I Bonds Jumps To 6.73%
The Treasury has increased the yield on its I Bond savings bonds to 6.73% on bonds purchased from November 2005 through April 2006. The previous rate had been 4.8%.
The rate for I Bonds is in two parts, one part that is fixed for the life of the bond and one part that is adjusted for inflation every six months.
The fixed rate for I Bonds was cut to 1% from 1.2%; this rate will stay the same for as long as the investor holds the bond. The inflation component will next be adjusted on May 1, 2006. Investors must hold bonds for at least twelve months and will be subject to a penalty if the bonds are cashed before five years.
Got Mutual Funds? Pay Attention to Year-end Tax Issues
If you’re among the millions of Americans who invest in mutual funds, you need to be aware of the year-end issues that could affect your 2005 tax bill.
* Year-end distributions. One key fact to be aware of is that mutual funds are usually required to distribute their income annually to shareholders. If you purchase a mutual fund just before a distribution date, you will receive the distribution and be required to include it in your taxable income. Since the price of the fund shares before and after a dividend distribution reflect the amount of the dividend, you are actually paying income tax on part of your own purchase price.
* Your tax basis. Your taxable gain on sales you’ve made during the year will generally be the sales price minus your tax basis. Note that transactions such as check redemptions and exchanges are usually treated just like sales.
Your tax basis is generally the purchase price plus any related transaction costs, such as sales charges and brokerage fees. Your basis also includes reinvested dividends.
The IRS allows several different ways of determining basis when you’ve bought your shares at different times and don’t sell them all at once. Mutual fund companies will often report your average cost basis, which divides the total cost of all your shares by the number of shares you own. A second option is the first-in, first-out method which assumes the shares sold were the earliest ones purchased. The specific identification method lets you choose which group of shares you’re selling. Before selling, check to see which method will provide you with the lowest tax bill.
* Where to hold your funds. Of course, if you’re holding mutual funds in a retirement account, your investment gains shouldn’t trigger any immediate tax. Just be aware that when distributions are made (other than from a Roth IRA), they’ll be taxed at ordinary income rates. If you anticipate significant appreciation, you may want to own those mutual funds outside of a retirement plan so any future gains would be eligible for the preferential capital gains rates.
* Tax planning. Please call us so we can help you do the planning that will minimize the income taxes on your mutual fund investments.
Take a break
Check these interesting facts:
* Scientists say that if you go back 30 generations or so, everyone on earth is related to everyone else.
* The names of all the continents begin and end with the same letter (Africa, Asia,
* A blue moon isn’t blue. It’s another name for the second full moon in the same month — something that occurs about once every 30 months.
* A trillion is a very big number. At the rate of one number per second, it would take 31,688 years to count to one trillion.
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The information contained in this newsletter is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information on anything in the ONLINE ADVISOR, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.
Notice required by U.S. Treasury Regulations: Be aware that this communication is not intended to be used, and it cannot be used, for the purpose of avoiding penalties under