A Trickier Tax Season
Nothing's simple, not even the filing deadline. But there are savings to be had if you know where to look
Income under the cap still typically faces low tax, but once that level is reached, advisers suggest focusing more of a youngster's portfolio on tax-deferred long-term growth and tax-free municipal bonds and limiting taxable dividends and other income.
Conserving energy and tax. Saving cash at the gas pump with a fuel-efficient car can also trim income tax. Starting with 2006, buyers of hybrids can get a tax credit that saves $1 of tax for every $1 of credit. (That's better than a tax deduction, which only reduces the amount of income on which tax is figured.)
The credit—from $250 to $3,150—depends on the make and model of car and when it was bought. One twist is that a model's initial credit phases down and eventually vanishes on future sales once an automaker's overall hybrid deliveries top 60,000, something already happening for Toyota and Lexus models.
Another green incentive is a credit of up to $500 for part of the cost of improving your home's energy efficiency by upgrading heating and cooling, windows and doors, and insulation. The items must be certified by the maker as qualifying, and the maximum $500 credit applies to 2006 and 2007 combined.
11th-hour nest egg. A time-honored way to save on your taxes is to rush to make a tax-deductible deposit to an IRA or other retirement plan before the deadline for 2006 contributions. The most you can stash away depends on such factors as your income, employment, other coverage, and the type of plan.
People who qualify for a deductible IRA have until the April filing deadline to put in as much as $4,000, with an extra $1,000 allowed for people 50 or older. A married couple can save up to double the caps, even if only one spouse is employed.
Self-employed people, including those who run a business part time, have a choice of Keogh, SEP, and other retirement plans. With a filing extension, they typically can wait until even after April to make a deposit that counts for 2006, which in some popular programs can be as much as $44,000, all tax deductible.
April is also the deadline for making a 2006 deposit to a Roth IRA, which has easier eligibility rules than a deductible IRA. There's no tax deduction, but withdrawals of deposits and investment earnings from a Roth are generally tax free, unlike those from a deductible IRA.
Opening a Roth for a youngster with income from a job can pay off handsomely over time. Giving up a traditional IRA deduction may mean little or no additional tax now while the account grows into a future potential tax-free nest egg.
No thanks. Be wary of a new option to directly deposit a refund into an IRA.
Potential hitches: having a deposit for 2006 treated by the firm handling your IRA as one for 2007 or having the transfer fail if your account and financial routing numbers aren't precise or the institution isn't prepared to handle such transfers. You might want to make your own deposit with the refund or other cash.
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