Savvy year-end tax planning should include your itemized deductions.
- Medical expenses are deductible only to the extent they exceed 7.5 percent of your adjusted gross income (AGI). If you expect your AGI for 2005 to be about $60,000, for example, medical expenses over $4,500 (7.5 percent of $100,000) will be deductible.
If you’re over the threshold for 2005, you can pay for checkups, eyeglasses, etc., with deductible dollars before year-end. If you’re not close to the 7.5 percent mark, defer elective medical outlays into 2006.
- Follow the same strategy for miscellaneous itemized deductions (such as investment expenses and tax preparation), where the threshold is 2 percent of AGI. Send in checks before year-end for investment publications if you’re over the 2 percent threshold or wait if you’re far from that level.
- Prepay state and local income and property taxes, in order to get 2005 deductions for outlays you’ll have to incur anyway, early in 2006. However, check first with your tax pro to see if you’ll be subject to the alternative minimum tax (AMT) this year. If so, you’ll get no tax benefit from pre-paying state or local taxes.
