The end of 2006 is fast approaching. There is not much you can do to save 2006 taxes after Dec. 31. What tax planning can you do before year-end?

• Be more energy efficient.

You can get a tax credit of up to $500 per home for select energy-efficiency measures put into place in 2006 or 2007. These measures, which must meet standards in the law, include central air conditioning, heat pumps, water heaters, furnaces, insulation and residential exterior doors and windows.

For example, if you install a new hot-water heater, you can claim a credit for up to $150 of the purchase price. If you replace your roof (this is something you might want to plan for 2007), you can take a credit of 10 percent of the cost, up to $500. This $500 credit is a total lifetime maximum, not a credit that can be claimed each year.

You can also claim a tax credit for the purchase a hybrid vehicle. How much you qualify for will depend on which model you buy and when you make the purchase.

The highest credit currently available is $2,600 for a 2005, 2006 or 2007 Ford Escape Hybrid.

• Compare standard versus itemized deductions.

Figure out how much your standard deduction is and compare it to what your 2006 itemized deductions will be. If your itemized deductions exceed the amount of your standard deduction, you will pay less tax by choosing to itemize your deductions.

If your itemized deductions are lower than your standard deduction, you may be better off shifting any year-end expense into 2007 and planning to itemize next year. For example, if you can't itemize in 2006 but can in 2007, consider making your annual charitable donation in January instead of December.

• Contribute to a retirement plan.

Contribute to or open a retirement plan, such as a 401(k), 403(b), traditional IRA, Simple IRA or SEP. For 401(k) and 403(b) plans, you must make the contributions on or before December 31, 2006.

Depending on how your plan is written, you may be able to make a catch-up contribution.

For IRAs, you have until April 17, 2007 to make contributions for 2006.

• Make IRA charitable contributions.

For 2006 and 2007 only, IRA owners who are 70½ and older can make charitable contributions of up to $100,000 for 2006 and again in 2007 from their IRAs without realizing income.

These charitable contributions count as satisfying the minimum required distribution. To use the $100,000 in 2006, the transfer to the charity must be completed by Dec. 31, 200. The benefit is not cumulative and cannot be carried over to make a $200,000 income-taxfree contribution in 2007.

• Make charitable contributions of appreciated property.

If you have appreciated stock that you've held for more than one year, you might want to keep the cash in your pocket and donate the stock. You'll avoid paying tax on the appreciation, and will still be able to deduct the full value of the stock.

• Plan ahead for Roth conversions in 2010.

Beginning in 2010, the $100,000 income limit to convert traditional IRAs to Roth IRAs is eliminated. You can begin maximizing that opportunity now by maximizing contributions in 2006 and each year thereafter to a nondeductible IRA that can then be converted into a Roth in 2010.

• Take your investment losses.

The best strategy is to take enough losses to offset your capital gains for the year, plus another $3,000 that can be deducted against ordinary income. Be careful to avoid the wash sales rules. If you buy the same security that you sold within 30 days before or after the sale, the loss is disallowed.

• Defer income; accelerate deductions.

Hold off pressing for that bonus and try to delay freelance income or other irregular payments until January 2007. Pay your January mortgage payment before Dec. 31, and you can deduct another month's worth of mortgage interest.

Other things you can pay early before year's end to accelerate deductions are realestate property taxes, quarterly-estimated state income taxes and deductible educational tuition and fees. You can use your credit card to make your purchase or pay deductible expenses and pay the credit card bills next year.

Watch out for the "side effects" of any action that changes your adjusted gross income from one year to the next. The amount of your adjusted gross income can increase the taxable amount of Social Security benefits; reduce or eliminate the ability to make deductible IRA contributions; "phase out" your itemized deductions and personal exemptions.

A higher adjusted gross income could also affect your eligibility for the tax credits for dependent children and college education expenses, Roth IRA contributions, conversions of regular IRAs into Roth IRAs and college education loan interest deductions.

• Beware the AMT.

If your income is above about $75,000 and you have a large number of personal exemptions, state and local income and property taxes or interest on a home equity loan not used to actually improve the house, you are possibly subject to the alternative minimum tax. Also, look out for this if you exercised incentive stock options or had lots of capital gains.

When it applies, the AMT is an add-on tax over and above your "regular" tax amount. Get a copy of IRS Form 6251 and complete it using this year's numbers without potential year-end planning moves to see whether or not your are subject to AMT.

If you already are subject to AMT, the usual advice about accelerating deductions is not good for you. Accelerating deductions into a year when you owe AMT means you will be losing the deductions.


Patti Spencer, Esq., can be reached at 320 Race Ave., Lancaster, PA 17603; 394-1131; or Patti@spencerlawfirm.com. Her recently published book, "Your Estate Matters," is available at Borders Book Shop and amazon.com. It can also be ordered by calling (888) 280-7715.