Family finances: Year-end tax breaks

Taxpayers traditionally make year-end donations to their favorite charities as a way of sharing the spirit of the holiday season while trimming their tax bills. This year the donations arrived a few months early, as charitable contributions surged in response to Hurricane Katrina. Now Uncle Sam offers his own dash of pre-holiday cheer, in the form of a few extra tax breaks.

• Hurricane help. Families who opened their homes to storm victims rent-free for 60 days or more can claim an additional personal exemption of $500 for each evacuee, up to a maximum of $2,000.

Storm victims can deduct the full amount of their uninsured casualty losses. Normally, you must reduce your actual loss by $100 and then by 10 percent of your adjusted gross income. But in response to Katrina, Congress decreed that residents of the affected areas aren't bound by those restrictions.

Residents of any presidentially declared disaster area can claim their casualty loss on an amended 2004 return (Form 1040X) to speed the refund process. Or you can wait to claim the deduction when you file your 2005 return next spring.

• Consolidate deductions. For taxpayers unaffected by hurricanes, the best year-end tax strategy is to reduce your taxable income as much as possible. If, for example, your itemized deductions are close to the amount of the standard deduction, you may be able to boost your tax savings by loading deductions into one year and claiming the standard deduction in alternate years.

To maximize deductions for 2005, make all charitable contributions and pay medical bills before Dec. 31. If necessary, use a credit card. "The deduction is available in the year you charge the expense, even if you don't pay the bill until the following year," says Bob Scharin, editor of RIA's "Practical Tax Strategies."

(Note: Charitable contributions are fully deductible if you itemize, but only medical expenses that exceed 7.5 percent of AGI are deductible.)

• Speed up payments. For some taxpayers, accelerating tax-deductible payments that are due in January — such as mortgage interest, property taxes or quarterly estimated payments for state and local taxes — into the current tax year is another way to ease the tax bite.

But this strategy doesn't work if you're subject to the alternative minimum tax, a parallel tax system with its own set of rules. Before prepaying any of your January bills, check to see if you're vulnerable to the AMT.