Worried About My Potential Tax Liability
This has been a big year for me. I started a new stage in my IBM career with a position that may force me to relocate a couple times in the near future. I took on an improvement project to my home, and then later rented it out for a positive cash flow. I began renting a room from a friend of mine to minimize rent expenditures. All these events add up when it comes to my tax bill.
With only about 1 month to go in the tax year I finally started thinking about what I need to do to make sure I don't have a potentially large tax liability. At the end of the year I estimate my work income will be about $10,000 more than last year, and I have lost about $4,500 of deductions from the property taxes and mortgage interest on the conversion of my home to a rental property.
In a perfect world my goal would be to find an additional ~$14,500 in deductions over last year to avoid paying any additional federal income taxes (I already feel like I pay too much). I had been planning on buying a new house which would have helped reduce this exposure, but after months of searching I haven't found a home that has met my criteria yet.
So far I can add the following to my list of additional items to minimize my tax increase:
-$1,000 for the 401k limit increase this year
-$500 - a rough estimate of the additional charitable contributions I have made above and beyond last year
-$1,000 - loss from rental activity, there is still a LOT of number crunching I need to do here, but I am currently estimating that my loss from the 6mos of renting my house will be about $1,000 when I factor in maintenance costs, mortgage interest, taxes and depreciation. I did a rough estimate a couple months ago when I hoped it would be a larger loss, but it turned out that the positive cash flow would minimize the deductions the and net loss looks to be only about $1,000. I definitely need to do a better analysis of the rental activity.
So this still leaves me with potentially $12,000 more in tax exposure over last year. That means I could roughly owe about $3000 more in income tax above last year.
So what else can I do?
-MM set up an individual 401k that sounds like it has possibilities. However I don't really have any self-employment income. I think a good goal for 2006 would be to start creating some additional sideline income and then this option may be a good strategy to defer taxes on some of this income.
-I have already made Roth IRA contributions this year, but I was thinking maybe I could also take advantage of a Traditional IRA to shield another $4,000, but a quick search reminded me that I can only contribute a total of $4,000 to a Roth or Traditional IRA. Long term I think a Roth IRA is a better bet so I will stick to sending my contributions to my Roth IRA.
-Jonathan over at mymoneyblog had a great post about a sure way to beat the market that I would love to try especially with the large loss I am holding in Pfizer stock. Unfortunately I have already nearly maxed out my $3k tax loss from capital gains this year so it won't help me with this year's taxes.
-I recently discussed increasing my charitable giving, this may be a good time to get this started.
-I could accelerate some expenses for my rental property - I need to think about what items/services I need for my rental property (since I will buy them anyway) to increase my rental activity loss.
Unfortunately this doesn't look good. Other than increasing my charitable giving and rental expenses I don't see any easy ways to avoid paying additional income taxes. I guess I also need to start setting up a reserve to pay this potential tax bill.
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