Year end 2007 tax planning for individuals starts now
With 2007 drawing to a close, now is an ideal time to review your financial situation and evaluate what
strategies are available to help reduce your 2007 income tax bill. With a little advance planning you can
effectively minimize or defer your taxable income, and thus the taxes you owe on that income. While tax
planning for any individual must be customized to their particular circumstances, there are several
fundamental tax planning techniques, as well as new changes to the tax laws, that should be on everyone's
minds as the year end approaches.
Estimate your AGI
A key component of fundamental tax planning involves estimating your 2007 and 2008 adjusted gross
income (AGI). Estimating your AGI is essential because many tax breaks are tied to or limited by what AGI
range you fall into. When you know your tax bracket you can better predict the tax effects of certain planning
strategies. You can get a good idea of what your 2007 AGI will be by looking at your 2006 income tax return
and 2007 pay stubs.
Defer Income to 2008
By delaying taxable income you defer taxes. Therefore, look to even-out taxable income between 2007 and
2008 by accelerating or postponing transactions that either produce income or yield deductible expenses.
Delaying taxable income may also prevent you from losing lucrative tax breaks that can be reduced or
eliminated altogether as your income level rises. If you think that your adjusted gross income will be higher
this year than in 2008, or if you predict being in the same or higher tax bracket in 2007, you may benefit by
delaying receipt of taxable income until 2008.
Accelerate Income in 2007
Under certain circumstances, it may be more advantageous for you to accelerate income in 2007. If, for
example, you need additional income in order to take advantage of offsetting deductions or credits that are
set to expire by the end of 2007, or you project being in a higher tax bracket in 2008, you may want to
consider accelerating your taxable income in 2007 rather than deferring it until 2008.
Determine your Deductions
Accelerating or deferring income from one year also impacts your ability to take deductions. Deduction
planning can become complicated, as your ability to take deductions depends on your filing status (i.e.
single, head of household, etc.) as well as income level; as your income level rises, your ability to claim
deductions is reduced or eliminated altogether. Determine whether taking the standard deduction, or
itemizing deductions, will put you in the best tax position. For 2007, the standard deduction rates are: Single
($5,350); Head of Household ($7,850); Married Filing Jointly ($10,700).
If itemizing deductions may be more beneficial, remember that adjusted gross income limits on itemized
deductions will affect your deduction planning. Consider "bunching" deductible expenses into one year or
the next depending upon whether the standard deduction may be taken in one of the years, or whether the
adjusted gross income limits for medical (7.5 percent), or miscellaneous itemized deductions (2 percent),
may be more easily met.
Alternative Minimum Tax (AMT)
Don't forget to calculate both your regular income tax and your AMT. For 2007, the AMT exemption amounts
have been slashed to only $33,750 for individuals, and $45,000 for married couples filing jointly. Whether
Congress will pass yet another AMT "patch" or more comprehensive reform by year end makes tax planning
more uncertain and complicated for many taxpayers who may be hit by the AMT. Therefore, year end tax
planning must include calculating your potential AMT liability. While it is anticipated that Congress will enact
another round of temporary relief, there is no guarantee that this in fact will happen.
To start planning around the AMT, project your income for the rest of the 2007, as well as 2008. The AMT
calculation includes certain items of income that would otherwise be excluded under the regular rules. Items
that may affect your AMT liability, because they become "tax preference" items no longer deductible under
the ATM include:
Deductions for state and local taxes;
Home equity loans and other mortgage interest not incurred in buying, building or
improving your principal residence;
Incentive stock options (which may generate AMT income even when sold at a
Large capital gains;
"Private activity" bonds (such as tax-exempt interest from private activity
Deductions for unreimbursed business expenses; and
Other itemized deductions.
Review your investment portfolio
The end of the year is an ideal time to examine your investments (winners and losers) in order to take the
steps necessary to minimize your capital gains income and thus your taxable income. Consider taking the
following steps to maximize your tax position:
Sell off investments that have been consistently underperforming so that you can use the
losses to offset gains from winning investments.
Consider selling long-term investments, such as stocks held longer than 12 months.
Long-term capital losses can be used to fully offset long-term capital gains. Losses taken
in excess of gains can also be used to offset up to $3,000 in ordinary income (or $1,500
for a married couple filing separately).
Consider offloading short-term holdings that are underperforming. Short-term losses can
be used to offset short-term gains that are otherwise taxable at your ordinary income tax
rate (which can reach as high as 35 percent).
Moreover, in 2008 through 2010, the net capital gains rate is zero percent for taxpayers in the 10 or 15
percent tax bracket. Thus, accelerating income into 2007 in order to qualify for the zero percent rate in 2008
and/or delaying the sale of long-term capital assets until 2008 if you are within the 15 percent bracket should
be a consideration.
Maximizing contributions to your retirement plan enables you to reduce your adjusted gross income in direct
proportion to the amount of the contributions you make. End of the year 2007 tax planning should entail
maximizing the annual contributions you make to a retirement plan account, since one year's limit cannot be
added to the next year's if not taken in time.
It's also not too early to think about a Roth IRA conversion plan. Although this tax break is not available until
2010, you should consider rolling over 401(k) balances to an IRA if leaving employment, or investing in a
traditional IRA in anticipation of a conversion to Roth IRAs.
Moreover, taxpayers age 70 and 1/2 or older and who own an IRA or Roth IRA can exclude a charitable
contribution of up to $100,000 if the donation is made directly from the IRA to a qualified charity.
Additionally, the amount contributed will count toward your required minimum distribution. This opportunity
expires at the end of 2007, so if you think this may be a lucrative strategy for you, contact our office and we
can discuss how such a contribution fits into your overall year end tax planning goals.
Take advantage of the 2007 annual and lifetime gift-giving limits to reduce your income and estate tax
liabilities. For 2007 and 2008, you can transfer $12,000 per person, per year, without paying gift tax on the
amounts transferred. Married couples can gift $24,000 per person, per year without tax liability on the
New-for-2007 opportunities (and Pitfalls)
Tax law changes constantly, and therefore so must individual tax planning. The year 2007 is no exception.
While the fundamental techniques above should never be overlooked, you must also consider how
legislation passed in 2007 and before, and what yet remains to be enacted, may impact your year end tax
For 2007, a child under the age of 18 is subject to the "kiddie tax" (and thus pays tax at his or her parents'
highest marginal tax rate on unearned income in excess of $1,700). But in 2008, courtesy of the Small
Business and Work Opportunity Tax Act of 2007, the applicable age rises and the kiddie tax will apply to a
child under the age of 19 and full-time students under the age of 24. In light of this development, parents
should consider selling appreciated stock and other assets belonging to their children now, especially if their
children will fall into the one of these age categories in 2008.
A variety of popular tax credits are set to expire at the end of 2007, unless Congress extends them.
However, don't wait to see what Congress does. Assess your tax situation as if Congress won't extend the
tax breaks that apply to you. Tax breaks set to expire at the end of 2007 include the following:
State and local sales tax deduction. The American Jobs Creation Act of 2004 gave taxpayers who itemize
deductions the option of claiming either state and local income taxes or state and local general sales taxes.
Therefore, if you have been contemplating the purchase of a big-ticket item, such as a car or boat, you
should consider making it sooner rather than later because the deduction for state and local general sales
taxes expires at the end of 2007. However, first compute what any potential state and local income tax
deductions will amount to and then compare it to your potential sales tax deduction.
Mortgage insurance premiums. Premiums paid or accrued in 2007 for qualified mortgage insurance are
deductible as qualified residence interest. The insurance must be carried on acquisition indebtedness for a
qualified residence. A "qualified residence" is the principal residence and one other residence that is not
treated as business property. Acquisition indebtedness is debt incurred to acquire, construct, or substantially
improve a qualified residence.
Tuition and fees deduction. Taxpayers may deduct qualifying tuition and fees paid in 2007 that are
required for the student's enrollment or attendance at a post-secondary school. The tuition and fees
deduction can reduce the amount of a taxpayer's income subject to tax by up to $4,000 if your modified
adjusted gross income does not exceed $65,000 (single taxpayers) or $130,000 (married filing jointly). For
single taxpayers with an income of up to $80,000 ($160,000 if married filing jointly) the deduction is capped
at $2,000. No deduction is available for taxpayers with incomes higher than these amounts.
Educator deduction. Teachers, instructors, counselors and other educators can deduct up to $250 worth of
books, supplies, software, and other qualifying expenses. To be eligible for the deduction, a qualifying
taxpayer must work at least 900 hours during a school year as a teacher, instructor, counselor, principal or
aide in a public or private elementary or secondary school. The deduction is set to expire at the end of 2007,
unless Congress extends it.
Residential energy credit. Homeowners may be eligible to claim a credit of up to $500 for the costs of
making certain energy-efficient improvements to their principal residence if the improvements are made
Finally, taxpayers with the wherewithal and a charitable inclination, year end 2007 tax planning should
account for the following recent developments:
Cash donations. Starting in 2007, cash donations of any size must be substantiated by paperwork that
includes either a cancelled check or a written note from the charity indicating the amount, date and the name
of the charity.
Qualified conservation contributions. Also set to expire in 2008 is the contribution of a real property
interest exclusively for conservation purposes. A 50 percent contribution base limit applies, rather than the
30 percent limit for capital gain property.
Planning starts now
Effective tax planning involves preparation and thoughtfulness. Don't wait until the last minute to look at your
tax situation. Year end tax planning starts now.
If you would like to discuss how certain tax planning strategies can help minimize your tax liability, don't
hesitate to call our offices today. We can create a strategic plan that will help ease your tax burden this
coming April 15 and the next.