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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 |