As you put the finishing touches on your 2005 tax return, you can knock off a few dollars by keeping these recent changes in mind:
Capital gains and losses — New rules require that you provide details about every investment transaction you made — the amount you received for every stock or fund you sold as well as your “basis” or cost. You can’t just list your overall net gain or loss. “Be sure to include all reinvested dividends and reinvested capital gains in your basis,” says David Kahn, partner at New York accounting firm Goldstein Golub Kessler L.L.P. “The higher your basis, the lower your capital gain or the greater your capital loss.”
Suppose you bought a mutual fund a few years ago for $10,000 and reinvested $2,000 worth of distributions over the years. Your basis is $12,000, not $10,000. If you sold all your shares in that fund last year for $15,000, your taxable gain is $3,000 ($15,000 minus $12,000), not $5,000 ($15,000 minus $10,000).
IRAs and Roth IRAs — You can make contributions to an IRA, including a Roth IRA, for 2005 until April 17, 2006. (April 15 falls on a Saturday this year.) For the previous three years, the maximum amount you could contribute was $3,000, or $3,500 for those who were 50 or older. For 2005, however, the maximum amounts were raised to $4,000 and $4,500.
Many will prefer to fund a Roth IRA, even though contributions aren’t tax deductible like they are with a traditional IRA. Five years after you open a Roth, all withdrawals are tax-free as long as you’re at least 59 years old. The catch? You must have earned income to be able to put money into a Roth IRA. Moreover, to make a full $4,000 or $4,500 contribution for 2005, your adjusted gross income (AGI) can be no more than $95,000 if you’re a single filer. If you’re filing jointly, an AGI up to $150,000 will permit either or both working spouses to make full contributions.
Sales tax strategies — Thanks to a law that took effect last tax season, this year you can deduct either the state and local sales tax you paid in 2005 or the state and local income tax you paid. “You can use IRS tables to find an average sales tax for your family size, income level, and state,” says Kahn. “If you paid sales tax on a boat, a car, a plane, a home, home building materials, or other big-ticket items, you can add that sales tax to the amount from the IRS tables.” The next step is to calculate how much you paid in state and local income tax in 2005. Either the total sales tax or the total income tax (but not both) can be deducted on Schedule A of your 2005 tax return. If you live in a state that doesn’t have income tax, and thus get no benefit from an income tax deduction, working through the sales tax numbers can be a tremendous tax trimmer.
Late breaks — If you’re