Looking for Tax Savings?
Consider the real opportunities—avoid the fraudulent schemes

• Complete your contributions to a traditional IRA or open one before the April filing deadline. If you have a traditional Individual Retirement Account (IRA), you may complete contributions for up to the new maximum allowed of $4,000 ($4500 for those over 50) before the filing deadline. If you don’t have an IRA and you determine that a traditional IRA (as opposed to a Roth IRA) is appropriate, then you may establish one and make contributions for 2005 before the April deadline for filing 2005 income taxes. The contributions you make to a traditional IRA are tax-deductible.
• Did you purchase a hybrid vehicle in 2005? If so, you may qualify for certain tax deductions in 2005. Check out the facts at www.fueleconomy.gov.
• Are you taking all the deductions and credits for which you qualify? If you don’t currently itemize, it may be worthwhile to research what deductions you may qualify for, then “run the figures” and compare whether taking the standard deduction or itemizing will save you more money. See the Tax Topics on itemized deductions from the IRS. Some individuals may also qualify for such potential savings as deductions for tuition and fees or credits for child and dependent care expenses. For more about some (but not all possible tax credits) see the IRS Tax Topics on credits. If you feel that you may need some help to sort out these issues, Tips for Choosing a Tax Preparer from the IRS provides some guidance for choosing a qualified, reputable tax professional.

• Consider tax incentives for buying a hybrid vehicle in 2006. The Energy Policy Act of 2005 replaced tax deductions for clean-fuel vehicles with a new variety of one-time tax credits taken in the year certain hybrid and alternative fuel vehicles are placed in service for personal use. The amount of credit varies based on the type of fuel, the fuel economy and the weight class of the vehicle. The range for hybrid vehicles goes from $650 to $3400. You can get more information from www.fueleconomy.gov.
• Some energy saving improvements to your home may qualify for tax credits in 2006. The Energy Policy Act 2005 also contains provisions that allow home owners to claim tax credits up to a maximum of $500 total for making certain energy efficient improvements to their primary homes in the U.S. or adding certain energy efficient appliances. See details in my October 2005 Remar’s Review.
• Planning for 2007, does your employer offer Flexible Spending Accounts for Health Care Expenses and/or Dependent Care Expenses? (Employers provide either or both FSAs as part of employee benefits. They may be called cafeteria plans, 125 plans, or 125 cafeteria plans.) If appropriate for you, the plans allow you to reduce taxable income by setting aside via payroll deduction a set monthly amount to help you pay for either expected health care costs not reimbursed by your health insurance or expected costs of caring for legal dependents who cannot care for themselves (such as a child under age thirteen or a disabled adult dependent). Ask your company’s human resources office whether they offer these benefits and for information to help you decide if one or both may be right for you or your family. You may sign up for either plan or both, depending on your needs.

• Improper and fraudulent use of business deductions and charitable deductions. In these long-lived favorites, promoters argue that taxpayers can set up certain kinds of businesses and then legitimately deduct various personal expenses as business expenses. Not true: only actual business expenses (spelled out by the tax code) are deductible. In another version, the taxpayer transfers income and/or assets to a non-profit tax-exempt organization (often one the taxpayer creates) but still has the use of those assets. Of course, the promoter charges big bucks for helping the victim set these up. Again, this ploy is illegal and all the arguments (no matter how logical they seem) are bogus.
• Misuse of trusts. Various, properly established trusts can be legitimate ways to transfer wealth to future generations or to manage other types of financial concerns. However, many unscrupulous promoters claim that they can set up trusts for individuals that shield income, pay personal expenses, depreciate personal assets like a home, and avoid tax returns. Of course, they charge a bundle for setting up such trusts but the person establishing the trust remains responsible. The IRS actively and constantly pursues trust misuse. If you wish to look at legitimate trust options, first do your homework thoroughly and then consult an experienced, reputable professional.
• Frivolous arguments that taxes are “illegal” or “unconstitutional” or that individual citizens don’t owe taxes. In their books, websites and seminars, the promoters of these schemes are slick. They may claim the government doesn’t have the constitutional power to levy taxes. They may argue that wages aren’t income and present illegal schemes for paying no taxes such as filling your return with zeros. They may claim that filing a tax return is voluntary. All such arguments are false—and the courts have so ruled. Many of the promoters have also gone to jail.