19 January 2006

Six don't-miss tax breaks?

CNNMoney has an article on six “can’t-miss” tax breaks for 2005 (they should really be doing 2006 so people will look ahead), most of which are changing consumer behavior type breaks or are so targeted that most people won't be able to use them.

I’m not a huge fan of changing consumer behavior in order to capture tax breaks. Usually, the amount of the tax break is not worth the hassle of changing behavior and the documentation required to sustain the break if it is ever looked at.

The sales tax deduction is useless unless you already itemize or made such a large purchase to push you over the standard deduction. The IRS publishes tax tables, that while probably set too low for most people can be relied upon unless you kept every single receipt from 2005 (I don't even do that). You can add a purchase to the tax tables for certain large purchases like cars. But make sure you have documentation because it may cause your return to be kicked out for further review.

The advice on the home office deduction (take every deduction you can) is really not terribly good advice. The problem is that any space that is used as a deduction for a home office is exempt from the capital gains exclusion when the house is sold. So, if you take 10% of your mortgage payment as a home office deduction, when you sell the house 10% of the gain will be immeadiately taxable, even if you have enough capital gains exclusion to cover it. Also, the home office deduction sends a red flag to the IRS. You can expect to be audited if you take such a deduction because there are a lot of people that follow the author's advice and goose the deductions.

The other breaks are fairly targeted. Do many divorcees not living on Wisteria Lane live off of alimony? How many people making under $25,000 contribute to retirement plans? And don't extend if you don't have to. Procrastination should never be the reason for the extension. Get it over with early and enjoy the rest of your year.

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