« IRA Withdrawal Question From Reader | Main | When It Comes to Personal Finance, Teens Aren’t Making the Grade »
Day 18 - Taxes
By JLP | April 24, 2006
After much prodding from SingleMom, I am determined to finish up this series before it becomes “24 Months” or worse, “24 Years.”
By now you are probably sick of taxes. Me too! However, there’s no better time to plan for next year’s taxes than right now. So, with that in mind, let’s look what you can do now in preparation for your 2006 taxes.
Looking ahead, it might be good to know what the 2006 tax brackets are. If you received a big refund this year and expect the same next year, you can adjust your W-4 so that you have more money to live on through-out the year rather than letting Uncle Sam use your money interest-free for a year.
Unfortunately, the sales tax deduction will not be available on your 2006 taxes. This stinks because I live in Texas and we don’t have state income tax. However, we do have sales tax and local taxes that are fairly high. That made the sales tax deduction nice for us. But, there are still lots of other deductions we will use unless we get slapped with the Alternative Minimum Tax (AMT), which seems to be trapping more and more taxpayers every year. My guess is that congress won’t do a thing about it since they like the nice revenue stream it produces.
Here are some other things you can do to reduce your taxes (either now or in the future):
Max out your 401(k) contributions. Check with your human resources department to find out how much you can contribute. Contributions made this year reduce your taxable income dollar-for-dollar. This can be a great way to reduce your tax bill.
Contribute to an IRA. A traditional IRA, if you qualify, is deductible on your taxes. A Roth IRA is not deductible now but produces tax-free income upon retirement (as long as you are over 59 1/2 and have had the IRA for 5 years). Which is better? It depends on when you want to pay your taxes: now or later. The Roth IRA is excellent in that you don’t have to take distributions if you don’t want to. And, if you do take distributions during retirement, they are not considered income which means they won’t count against you when figuring social security taxes. That’s some pretty nice flexibility.
Although it is too late to affect your 2006 taxes, you should consider using a flexible spending accout in 2007. You can plan ahead by keeping track of how much you spend on medical and dental-related expenses as well as dependent care. More on this in a later post.
I’m sure I’ll be blogging more about taxes in the future. It is important to note that I am not a tax professional and therefore you should consult either a CPA or a tax attorney for advice. This post is meant only to be a guide.
Here’s what other bloggers have to say about taxes:
It’s Your Money:
”So You’re Withholding, Are You?”
FatPitchFinancials:
FreeMoneyFinance:
Tax Law Changes You’ll Need to Consider for 2005 Income Tax Returns
Top 10 New Year Tax Resolutions
The Fastest Tax Refund Possible
Five Common Tax Filing Mistakes
Tax Savvy Ways to Save for an Education
The Basics of Tax Record Keeping: What Should You Keep?
FiveCentNickel:
Flexible Spending Account Improvements
How Flexible Spending Accounts SHOULD Work
PoliticalCalculations:
Topics: Tax Planning, Taxes |
April 26th, 2006 at 5:50 pm
You’re 24 Days Series is so incredibly helpful. I appreciate the time you are taking to spell everything out, especially since I am somewhat a novice with issues relating to personal finance. I’ll definitely be back.
Thanks.
April 27th, 2006 at 12:53 am
The sales tax deduction might be available. I’m in Texas, too, and like you would really appreciate it coming back.
The deduction is part of what is known as extending legisaltion that is awaiting House and Senate conferees to get their acts together. Congress is notorious for passing tax bills late in the year and making them retroactive (this is what happened the first year the sales tax deduction went into effect, in October 2004 but made effective back to Jan. 1).
I’ve been following this, blogged on it a couple of times (http://dontmesswithtaxes.typepad.com/dont_mess_with_taxes/2005/12/tax_cuts_step_o.html and http://dontmesswithtaxes.typepad.com/dont_mess_with_taxes/2005/12/tax_overhaul_ov.html), but am waiitng for Capital Hill to get its act together to elaborate more.
December 31st, 2006 at 12:37 am
Does the series stop at Day 18? I can’t seem to find Days 19 through 24. Any help would be appreciated.
Thanks