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A hint for getting a leg-up on taxes for 2005: Start now

Gosh, 2005 is almost over! Can you believe how time flies when you’re having so much fun? And, speaking of fun and the end of the year, why not take a moment and reflect on your upcoming taxes?

December tends to be the month that everyone waits for to do those things that are put off until there just isn’t any more time. Like tax-loss harvesting, for example. I know this is one that crops up every year but, let’s just cover the basics to make sure we’re all on the same page. First off, any losses that are to be accounted for in tax year 2005 must be taken in 2005. Period. No Januaries or April firsts here. Take the loss in 2005 - which means you have up to December 30th of this year to sell something out of your account and take the loss. The sell date is the important date, not the settlement date .

Remember the “wash” rule. You can’t buy a substantially equal security within 30 days of a sale or the loss will get “washed” away. If you sell Microsoft, DON’T buy Microsoft back within at least 30 days. There are however, ways to take a loss and swap into something that helps you maintain a presence in a specific sector or area if that is what you desire. Talk to your financial or tax advisor on the specifics.

RMDs — Required Minimum Distributions. Those individuals who have IRAs and are over the age of 70 _ may be required to take distributions out of those accounts prior to the end of the year. The required amount of distribution is based on the TOTAL IRA account value as of the end of the year - 2004 - that’s last year, by the way. By total, I mean, if you have more than one IRA, you must consider the total amount as an aggregate. You needn’t take distributions out of all IRAs; but, the amount taken must be based on that aggregate amount. Incidentally, Roth IRAs are treated differently and have no RMD requirement.

If you turned 70 in 2005, you could wait until April 1 to take your initial distribution and this could be a wise move for someone who has a significant tax liability for 2005 but is expecting that liability to be reduced in 2006. The problem with taking the distribution in April is that you probably will be required to take another distribution prior to the end of 2006. Understand that the opportunity to take a distribution in April is a one-time deal - it can only be used the first time you have to take distributions. I have run into people who thought they could wait until April of each year to take the distribution. NO! The IRS penalties for not taking the appropriate distributions when required are fairly stiff - like, 50 percent of the amount not distributed!

The reverse of a distribution is a contribution - that is, putting money into an IRA. In this particular case, you do have the option of waiting up to the filing deadline for the tax year in which the contribution is to be made. So, for example, if you wanted to make a contribution into your IRA for 2005 you do have until the tax filing deadline - April 15 - to make that contribution. However, unlike tax filing, you cannot request an extension.

And, don’t forget: If you are over age 50, there is a “catch-up” provision allowing you to put away more funds than would otherwise be allowed. Another thing to not overlook is if you have a non-working spouse you may be able to fund a “spousal” IRA as long as the spouse working outside of the home has enough earned income to make the contribution allowable.

Finally, I’ll mention something about SIMPLE plan contributions. A SIMPLE plan is an employer-sponsored retirement savings plan that allows employees to defer a portion of their salary. You may be currently contributing to a SIMPLE plan.

The deferred salary amount is not tax deductible because it is done with pre-tax dollars. However, due to a provision included in the tax reform act of 2002, there is a tax credit available to qualifying individuals! Understand, this is a dollar-for-dollar tax credit; not a tax deduction! So, for those who qualify, the tax savings could be substantial. Qualification is subject to AGI maximums so appropriate counsel is highly recommended.

As we pass through 2005 and on into 2006, I would like to take a brief moment and wish everyone a very happy, healthy and safe holiday and best of luck in the upcoming new year.


(Editor’s Note: Justin Freed is founder and principal of Action! Financial Solutions Group and can be reached at: (360)

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