12 ways to cut your '06 tax bill now

By Jeff Schnepper

Yes, I know, it's the holidays, and you really don't want to think about taxes. But I have a few ideas that could save you hundreds, maybe thousands of dollars.

Did that get your attention? OK, then. This is your last chance to make a host of moves that could cut your 2006 tax bill. Some of the breaks, like a college tuition deduction, just got onto the books, thanks to some frantic last-minute work by Congress.

But there's more you can do and should do. Once you slide into 2007, there's not much you can do to reduce your 2006 taxes. So here's a list of what has to be done now.

Get generous!

Make those last-minute charitable contributions. Low on cash? You can charge a contribution on your credit card and deduct it in the year of the charge -- even if you actually pay the bill next year.

Used up your credit line? Empty your closets and visit the Salvation Army. The value of noncash contributions can be deducted. Make sure you get those receipts. If you're audited, no receipt means no deduction. As of Aug. 18, 2006, donations of clothing and household items are limited to those items that are in good or better condition.

• Video: 2006 tax changes you need to know about

And this is good to know: If you did a lot of driving for Hurricane Katrina relief in 2006, you can deduct the mileage at a rate of 32 cents a mile. Business mileage deductions are 44.5 cents a mile.

One other incentive for making charitable donations in 2006: Starting in 2007, monetary donations will not be deductible unless you have a bank record, credit card statement or receipt that shows the name of the charity and the date and amount of the contribution.

Buy more stuff

If you live in a state where there's no income tax, this is a year to indulge yourself at a mall or the hardware store or wherever. In the legislation that extended the tuition break, Congress also agreed to extend the deduction for sales taxes in states that have no income taxes.

If you live in a state with a low state income tax, take a look at which -- the sales tax or income tax -- will give you the bigger deduction.

A warning, however: Watch out for how the deduction might pull you into the alternative minimum tax.

Buy a water heater, maybe new windows or doors

New for 2006 are tax credits for up to 30% of the purchase cost for energy-saving appliances and enhancements to your home.

Qualifying improvements include insulation, furnaces and solar-heating systems.

Bulk up your retirement nest egg

If you're contributing to a 401(k) or related retirement plan, always max your contributions to the extent they're matched by your employer. Even if you have to borrow to pay your other expenses, a 100% match is an immediate 100% return on your money.

If you can, put the maximum the law allows into your retirement fund. This year you can shelter as much as $15,000 in a 401(k) and $4,000 in an individual retirement account. (You can contribute up to $5,000 in an IRA if you're 50 or older.)

If you're age 50 or older, you can sock away an additional $5,000 in your 401(k) and $1,000 more in your IRA as "catch-up" contributions.

If you're self-employed and want to contribute to a Keogh plan (profit sharing or money purchase plans), you must establish that plan by Dec. 31. You'll have until the due date of your return, including extensions, to fund the plan. But it must be set up by the end of 2006, or you'll get no deduction.

Empty your flexible spending account

These are "use it or lose it" accounts. In years past, if the money wasn't spent by the end of the year, you lost it. This time, your employer may let you take until March 15, 2007, to empty the account. To be on the safe side, act now.

That means it's time for new glasses, contact lenses or laser surgery to repair your vision. Pre-pay your orthodontist. Stock up on drugs. (Take that smile off your face!) You can even use your flexible spending account for nonprescription drugs. If your employer sets it up, you can even use a debit card to make your purchases. Makes the paperwork a lot simpler.

Review your investments

Though it's been a pretty fine year for U.S. stocks, you may have some clunkers. Now is when your losers become valuable.

Sell those losers now. Use the losses to offset capital gains or as much as $3,000 in other income. Any excess losses are carried forward to future years.

Consider a municipal-bond swap

In a swap, municipal bonds in your portfolio are sold after they have gone down in value. They are then replaced with other municipal bonds of like quality, coupon, par value and yield.

Done right, you get equal or greater income with equivalent quality and maturity. You also get a tax deduction for the loss on your sale. Sounds like a good deal to me.

Accelerate your interest deductions

Make your Jan. 1 mortgage payment on Dec. 31. Use an amortization program to compute the added interest you paid.

 1 | 2 | next >