How to save on 2006 year-end taxes
As the year 2006 is about to end, you still have some time to make plans for your year-end tax savings. While you plan your savings, have a look at the options that can help you out.
1. Sell your principal residence before the New Year’s Day. This will give you the chance to get the maximum tax break. If you owned and occupied your house for at least 2 years out of the last 5 years prior to its sale, you will get tax exemption on $250,000 out of your capital gains taxes. For qualified married couples who file joint tax return, the exemption limit goes up to $50,000. This tax break provided by the Internal Revenue Service is available for only once in every 2 years.
2. Buy a house as your principal residence before the year ends. With fixed rate mortgages being offered at around 6%, you can start shopping for a home loan at your preferable terms and conditions. If you pay a home acquisition fee of 1%-2% of the loan amount, it becomes tax deductible as itemized interest. But you need to record the home purchase by the 29th of December, which is the last business day for 2006. Besides this, you can deduct mortgage interest paid in 2006 on your 2006 income tax returns.
3. You can refinance any existing mortgage for which you have paid a loan fee which is being amortized over the life of the loan. This will help you get rid of a variable rate mortgage. You can also get tax-free cash out of your home equity. In the year when the loan will be fully repaid with undeducted loan fees, these fees will become tax-deductible as itemized interest.
4. You can make your first monthly mortgage payment for 2007 in 2006 itself. Try to pay the first installment for 2007 well before 29th of December. If you can send the payments to the lender in time so that he can include it in your IRS 1098 interest deduction statement, you will be getting a higher itemized deduction for 2006.