New Year, New Tax-Saving Opportunities

There's a lot to look forward to in 2006.

Tom Cruise is having a baby (with a baby), the new high-definition DVDs are scheduled to be released and you can get a tax credit for putting skylights in your kitchen.

And while the latter is not nearly as sexy as the others, at least it will save you money while you read Star magazine or watch Matt Damon in The Bourne Supremacy from your breakfast table. (What could be better?)

Along with some increases in 401(k) contributions and gift tax limitations, new energy-efficient credits that become available in 2006 are the big news for next year. So here's how you can start saving the environment and some money.

Find Your Green Thumb

If you're in the market for a hybrid car, put the purchase off until the new year. The deduction for buying a hybrid increases from $2,000 in 2005 to $3,400 in 2006, although it varies among the different cars available. For example, the credit on the Toyota Prius is $3,150, but the Ford Escape will only get you a $2,650 credit. Still, it's better than nothing. But keep in mind these credits are limited to the first 60,000 hybrids that the manufacturer sells. So if you buy the 60,001st car, your credit will decrease and eventually the available credits will be phased out completely.

On the home front, if you're doing work on your primary home in 2006, save those receipts. If you install new skylights, outside doors, windows or pigmented roofing, you'll be able to claim a tax credit for 10% of the cost. The same goes for high-efficiency furnaces, water heaters and central air conditioners. Unfortunately, though, the credit is a bit limited. The maximum credit is $500 and no more than $200 can be attributable to windows. Again, it's better than nothing.

But there's more. You can claim a 30% credit for the cost of solar energy systems that you install to heat the air or water in your home. Big note: If you install a heater in your pool or hot tub, that cost doesn't count. (Although feel free to invite me over.) This credit is capped at $2,000 apiece for home furnaces and water heaters, and is available for vacation homes as well.

More Help to Give and Save

If you're still behind the ball with your retirement savings, there's some good news for the over-50 crowd in 2006. Your catch-up contribution increases substantially. In 2005, the 401(k) limits maxed out at $14,000 a year, plus an additional $4,000 catch-up for the folks 50 and over. For 2006, the annual contribution increases to $15,000, with a $5,000 catch-up contribution, says Bob Scharin, editor of Warren, Gorham & Lamont/RIA's Practical Tax Strategies, a monthly journal written for tax professionals. So if you're in the 50+ crowd, you can contribute up to $20,000 to your 401(k) in 2006. That's a huge help, so do it if you can.

The IRA contribution limits stay the same at $4,000, although, again, the catch-up amount increases to $1,000 in 2006 from $500 in 2005.

Estate and gift tax limits will increase in 2006 as well.

In 2005, you could give $11,000 to anyone without incurring gift tax. In 2006, that number jumps to $12,000.

And on the estate tax front, a single person previously could exclude $1.5 million from estate tax. In 2006, $2 million will be estate-tax free. And remember, the estate tax is scheduled to go away in 2010, so if you can time your death, go for it. Better yet, if you can time the death of the person you stand to inherit money from...

Some More Money-Saving Miscellany

Remember, the sales tax deduction is supposed to go away at the end of 2005, but there's talk amongst our tax nerds that the big boys are thinking of extending it. So it wouldn't hurt to save your 2006 receipts just in case, especially if you plan on making a big purchase, such as a car, ring, watch or boat.

Teachers, you should save your receipts from classroom purchases too. While the $250 teacher's deduction is also scheduled to end in 2005, that too might resurface in 2006. So keep track of your out-of-pocket expenses.

And finally, there's a new saving tool in town. The Roth 401(k) will become available in January. Starting in 2006, if your employer's 401(k) plan allows it, you'll be able to designate part or all of your 401(k) contribution to a Roth IRA. As with a regular Roth IRA, your contributions to a Roth 401(k) are nondeductible, but the upside is that all of the income will be tax-free when you take it out in retirement.

Even better, the contributions in a Roth 401(k) follow 401(k) rules, not the regular Roth IRA rules. That means you can put up to $15,000 (or $20,000 if you're 50 and over) in a Roth 401(k), as opposed to only $4,000 (or $5,000) in a regular Roth. And there are no income limits to the Roth 401(k). So whereas a married couple filing jointly cannot contribute to a regular Roth if their adjusted gross income exceeds $160,000, the sky's the limit with a Roth 401(k). Be sure to ask your HR folks about this new offering.

And take advantage of all the good that's coming in 2006. We've got plenty of Hollywood gossip, tons of new techno gadgets and a fair amount of tax savings to keep us busy throughout the year.

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