Year-End Tax
Planning & New Law Summary
The 4th quarter is the ideal
time to discuss year-end tax planning strategies and consider recent tax law
changes.
Tax Law
Changes. May of 2007 brought us
the Small Business and Work Opportunity Tax Act of 2007 (“2007 Act”). Two
highlights of the 2007 Act are:
1) Kiddie
Tax: Changes to the Kiddie Tax rules will subject more children to this
tax. For 2007, children subject to the kiddie tax pay tax at their parents'
highest marginal rate on the child's unearned income (i.e. investment
income) over $1,700. For 2007, a child is subject to the kiddie tax if he or
she has not attained age 18 before the close of the tax year. Beginning
in 2008, the kiddie tax is expanded to apply where the child:
- is 18 or younger, or turns age 19-23 if a full-time student, before the
close of the tax year; and
- the child's earned income (i.e. wages) for the tax year doesn't exceed
one-half of his or her support: and
- the child has more than $1,800 of unearned income.
2) Section 179 Depreciation: On a positive note, for years beginning
in 2007, the 2007 Act increased the amount of the cost of qualifying fixed
assets that businesses can elect to expense in the year of purchase (rather
than depreciate over several years) to $125,000 (up from $112,000).
Changes
taking effect in 2008:
1) Zero
long term capital gains/qualifying dividends rate coming for some.
For 2007, a non-corporate
taxpayer's long term capital gain & qualifying dividends are taxed at a
maximum federal rate of 15%. However, if the they would otherwise be taxed
at a rate or 15% or below if it were ordinary income, they are taxed at only
a 5% rate. This 5% rate changes to a zero percent rate for 2008
through 2010.
2) Starting
in 2008 the state of Arizona will provide individuals with a subtraction
from Arizona income for contributions to Internal Revenue Code (“IRC”)
section 529 college savings plans. The
subtraction is limited to $750 for single and head of household filers, and
$1,500 for a married couples filing jointly.
Some items
that you may want to pay special attention to are as follows:
1)
Charitable contribution reform.
(a) taxpayers 70 ½ or older, can take tax-free distributions of up to
$100,000 from IRAs if they are donated directly to a charity. This is
currently set to expire after 2007; (b) deductions for contributions of
clothing and household items are prohibited unless they are in “good used
condition or better”. A deduction may be approved for clothing or a
household item not in good used condition or better if it is backed up by a
qualified appraisal. We recommend taking pictures to document the nature and
condition of the donated items; and, (c) in the case of a charitable
contribution of money, regardless of the amount, the donor must maintain a
cancelled check, bank record or receipt from the donee organization.
Therefore, if making cash contributions to churches, temples, etc., we
recommend using envelopes with your name and address so you can request a
statement at the end of the year.
2)
Roth IRA. Under current law, only
taxpayers with $100,000 or less in modified adjusted gross income (MAGI) can
convert a regular IRA into a Roth IRA. Beginning in 2010, taxpayers with
more than $100,000 of MAGI will also be able to convert a regular IRA into a
Roth IRA. To make such conversions more attractive in 2010, taxpayers who
convert in 2010 spread the income and resulting tax payments on the
converted funds over two years—2011 and 2012.
Year-end
Planning. Year-end tax planning
will be more challenging than usual because of uncertainty over whether and
how Congress will extend AMT relief to avoid millions more becoming
entrapped by it in 2007, and whether Congress will extend a number of
important tax breaks expiring at the end of 2007. For individuals, these
include the option to deduct state and local sales tax, the above-the-line
deductions for qualified tuition and educator expenses, and the tax credit
for making qualifying energy saving improvements to a home. Some year-end
tax planning strategies to consider:
-
Depreciation: Consider purchasing before year-end furniture and
equipment which will be used for business purposes. For 2007, IRC section
179 allows businesses to elect to expense in the year of purchase (rather
than depreciate over several years) up to $125,000 of the cost of qualifying
fixed assets. Note that for SUVs weighing more than 6,000 lbs and less than
14,000 lbs, IRC section 179 depreciation is limited to $25,000.
-
Postpone income until 2008 and accelerate
deductions into 2007 to lower your 2007 tax bill. Postponing tax generally
is a primary goal of year-end tax planning. It's particularly effective if
it helps you to claim larger deductions, credits, and other tax breaks that
are phased out over varying levels of adjusted gross income.
One
opportunity for accelerating deductions that is often overlooked is to pay
your anticipated Arizona tax liability before year-end, rather than waiting
until you file your tax return in 2008. By paying your state tax liability
prior to year-end, you accelerate into 2007 the itemized deduction for state
taxes paid, rather than having to wait to claim the deduction on your 2008
tax return.
-
Harvest capital losses. If you are holding onto stocks or mutual
funds in nonqualified accounts (i.e. not a retirement account, annuity, or
other tax deferred account), and have lost value since original purchase,
consider selling before year-end to capture the capital losses for tax
purposes.
-
Take advantage of the Arizona School Tax Credits. Qualifying
contributions made before December 31, 2007 will generate a
dollar-for-dollar state tax credit as well as a federal itemized deduction
for charitable contributions. Maximum donations to a qualifying private
school are $500, or $1,000 if married filing jointly (MFJ). Maximum
donations to a qualifying public school are $200, or $400 if MFJ. You
can take advantage of both the private & public school credits in the same
year.
-
Take advantage of the Arizona Charitable Tax Credit. Similar to the
School Tax Credits, qualifying contributions made before year-end can
generate a state tax credit and a federal itemized deduction for charitable
contributions. The total available credit is $200, or $400 if MFJ.
Contributions made to charities that assist the Working Poor qualify. A list
of these charities appears on the ADOR website
http://www.revenue.state.az.us/Refunds%20and%20Credits/certifiedcharities.pdf.
The one twist to this credit is that in order to qualify, your total 2007
charitable contributions must exceed your baseline year (typically 1996)
charitable contributions.
Other planning areas that
we can assist with throughout the year include:
-
Stock Option Planning
-
Retirement Planning
-
Mortgage Planning
-
College Planning
-
Estate Planning
The tax planning strategies
mentioned in this letter are general suggestions that may not apply to every
taxpayer. Please feel free to contact us to discuss your specific tax
situation. By doing year-end tax planning now, we can take a proactive
approach to reducing your taxes, rather than just being reactive.
