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We give you some money-saving steps to take over the next six months.
With last year's 1040 behind you, you probably don't even want to think about taxes right now. But that would be a mistake. If you're not familiar with key changes to the tax code, you could miss out on some goodies, like higher limits for your 401(k) or other salary deferral plan. Now's the time to increase your pre-tax contributions to these plans. Or, if you've been toying with the idea of buying a new energy-efficient car or making some energy-efficient home improvements, get moving; you could be eligible for a tax credit.
There's another important reason to pay attention to taxes now. Congress has finally provided legislative relief to millions of taxpayers who would've become subject to the alternative minimum tax this year. However, the AMT hasn't been repealed and it will continue to affect some households in 2006. So talk to your tax adviser to find out if you'll be subject to it and what you should do now to minimize the possible tax bite.
Here's what you need to think about now.
With this year's higher contribution limits, make sure that you're maximizing your contributions. Retirement plans are one of the few areas where your investments grow tax-deferred. Higher contributions to your retirement plan will be even more beneficial if you're subject to the AMT (see the box on page 34).
If you have a SEP or a Keogh plan, the maximum contribution for 2006 is $44,000, a $2,000 increase. The limit on salary deferrals to a 401(k) or 403(b) plan increased by $1,000 to $15,000. If you're 50 or older, the limit is $20,000 (up from $18,000). There was no increase in the contribution limit for participants in SIMPLE plans (the maximum is still $10,000), but the additional catch-up contribution for those 50 and over is now $2,500, up from $2,000.
Yearly contributions to an IRA-either a Roth IRA or a traditional one-can make a big difference in your total retirement savings. Although the maximum contribution this year-$4,000-is the same as in 2005, savers 50 and over catch a break in 2006. Their maximum contribution goes up to $5,000 from $4,500.
Think about modifying support you give kids or parents
Personal exemptions and dependency deductions have all increased for 2006, so make sure you're taking full advantage of these filing categories. For instance, would you qualify to file as "head of household"? If you're single, divorced, or widowed at the end of 2006 and you maintained a household for your child, parent, or another qualifying relative, you'll be eligible for this lower tax rate if you meet certain support and residency requirements. If it looks as if your support may not meet the cutoff, consider contributing more so that you'll be eligible to file as head of household.
The personal exemption is now $3,300, an increase of $100. This exemption is phased out for singles whose adjusted gross income is between $150,500 and $273,000. If you can use head of household, the range is $188,150 to $310,650. (For married couples filing jointly, the AGI phaseout is $225,750 to $348,250. If you use married filing separately, the range is $112,875 to $174,125.)
The standard deduction has gone up, too. It's $5,150 (up from $5,000) for single filers and married people filing separately. Heads of households are up to $7,550 from $7,300, and married couples filing jointly can deduct $10,300, a $300 increase. You'll get a deduction of $850 for a dependent, up from $800. While those differences are hardly earthshaking, they still represent money in your pocket and are surely worth the minimal effort required to get them.