Tax Planning for 2006
by Gerald Townsend, Financial Editor

Have you ever noticed that most articles you read about tax planning don’t show up in newspapers or magazines until the very end of the year? Of course, the publishers know their readers are realizing that the year is rapidly coming to an end and are desperately searching for ways to reduce their tax bite, so the timing is not unusual.

However, waiting until the end of the year is like hitting your brakes after you notice the Highway Patrol car hiding behind the bushes – it is a little too late. Instead, with the pain of filing your 2005 tax return still fresh on your mind, let’s look at a few positive things you can implement now to save some tax dollars:

Examine your Tax Return
I know it is like ripping a bandage off a wound, but go ahead and do it anyway. What were the sources of income? Did you claim all the deductions you should? Do you need to adjust your withholdings or estimated tax payments? Discuss planning opportunities with your tax advisor.

Reducing Taxes on Earned Income
If you work as an employee and receive a W-2, what amount of contribution to an employer 401(k) or other retirement program did you make last year? For 2006 you can contribute up to $15,000 into a 401(k) and up to $20,000 if you are 50 or older. If you are self-employed, there are many different retirement plans to choose from and substantial tax savings can be achieved by contributing to them. Don’t wait until the year is too far along – start now.

Reducing Taxable Interest Income
If you had taxable interest, consider converting this to tax-exempt interest or at least postponing taxation through tax-deferred annuities. Alternatively, consider the tax advantages of dividends being taxed at a maximum federal rate of 15% instead of the ordinary income tax rate that is applied to regular interest income.

Reducing Taxes on Social Security Income
If you currently receive Social Security income, did you have to pay any taxes on that income last year? Depending on your overall income, your Social Security income may not be taxed at all, or you may have to report up to 85% of it as income, subject to taxation. Sometimes by slightly altering the other types of income you have or when you receive that income, you can reduce the taxes you have to pay on Social Security income.

Reducing Taxes on Capital Gains
Take a close look at Schedule D of your tax return. Did you have capital gain income? Was it short-term or long-term? If you hold your investments at least a year before selling them, you qualify for long-term capital gain treatment, and your maximum federal tax rate is 15%. In some cases, your capital gain tax rate can be as low as 5%!

Avoiding or Minimizing AMT
The dreaded “Alternative Minimum Tax” affects more and more taxpayers. The AMT is essentially a second way to calculate your tax. You compare it to your regular tax calculation – and depending on which one is higher – well, you can guess which one you have to pay. If you paid AMT in 2005, you will have Form 6251 attached to your tax return. Even if you were not subject to AMT in 2005, you may well be in 2006. Talk with your tax advisor and understand how the AMT might impact you and what strategies you can take now to avoid or minimize the bite of AMT.

Taking positive action now will make 2006 taxes a little less taxing!

Gerald A. Townsend, CPA/PFS,CFP®,CFA® is President of Townsend Asset Management Corp, a registered investment advisory firm in Raleigh, NC. His email address is Gerald@AssetMgr.com.