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Year-End Tax Saving
Moves for 2007
Now is the time to plan your
final moves for the year to
cut your 2007 tax bill.
Don’t delay! If you wait
until you are preparing your
2007 tax return after
year-end to find ways to cut
your taxes, it will be too
late to use many of the
opportunities that are open
to you right now. The
following tax-saving ideas
can help...
USE-IT-OR-LOSE-IT BREAKS
The following breaks are
scheduled to expire at the
end of 2007...
 Residential
energy tax credit.
This chops up to $500 off
your taxes for purchases of
energy-saving home
improvements, such as
insulation, energy-saving
windows and doors, and
energy-efficient heating and
air-conditioning equipment.
Qualifying equipment must be
in service before year-end
in your main home (such as a
house, houseboat, mobile
home, or condominium).
To learn about eligible
equipment and rules, visit
the government’s Energy Star
Web site (www.energystar.gov)
and click on “Tax Credits
Under the Energy Bill.”
IRA
transfers to charity.
If you are age 70
or older, you can make a
direct transfer from your
IRA to charity of up to
$100,000. The transfer will
count against your required
minimum annual distribution
(good) but will not be
included in your taxable
income (even better).
Therefore, your adjusted
gross income (AGI) will not
be increased, and other
deductions and tax breaks
that are influenced by AGI
won’t be reduced by the
distribution. This year,
2007, is the last chance to
make such a transfer, unless
Congress extends this
provision.
Tuition
deduction for non-itemizers.
This deduction can be taken
for the cost of college
education even if you don’t
file a tax return claiming
itemized deductions. The
deduction can be as large as
$4,000, and is available to
those with AGI up to
$160,000 on a joint return
or $80,000 on a single
return.
Besides what you can take
for 2007 classes, you can
deduct tuition and fees for
an academic period beginning
in the first three months of
2008 if paid in 2007. So,
consider prepaying such 2008
expenses by year-end to get
a deduction for 2007. For
details, see IRS Publication
970, Tax Benefits for
Education.
State
sales tax deduction.
In 2007, you can deduct from
your federal income any
state sales taxes
you paid, rather than taking
the more typical deduction
of state income
taxes you paid, if this move
will produce a larger tax
savings. This opportunity
helps those who live in
states with no state income
tax, or with low state
income tax rates, or who
make “big ticket” purchases,
such as an automobile or
construction materials to
build a house, that can
really run up one’s sales
tax tab.
If using the sales tax
deduction makes sense to
you, consider making any
planned big ticket purchases
subject to sales tax before
year-end.
Mortgage
insurance premium deduction.
In 2007 only,
premiums on newly issued
mortgage insurance policies
are deductible for taxpayers
with AGI of up to $110,000
on either joint or single
returns.
TAX-SAVING STRATEGIES
Reduce
your AGI. The value
of many deductions and other
tax-saving breaks is
typically reduced as AGI
climbs.
Examples:
Medical expenses are
deductible only to the
extent that they exceed 7.5%
of AGI... casualty losses to
the extent that they exceed
10% of AGI... miscellaneous
expenses to the extent that
they exceed 2% of AGI...
personal exemptions and many
other deductions are phased
out completely as AGI rises
over various limits.
Thus, deductions that
reduce AGI can have “bonus”
benefits throughout your
return by increasing the
value of other tax savers.
These above-the-line
deductions (the “line” being
the one totaling AGI on page
one of your tax return)
include deductions for
contributions to IRAs, other
retirement plans, and health
savings accounts, as well as
for moving expenses,
alimony, student loan
interest, college tuition
and fees, educator expenses,
and self-employed health
insurance premiums. Make the
most of them.
How:
Maximize IRA and
other deductible retirement
plan contributions, make
alimony (and other
AGI-reducing) payments by
December 31, prepay college
expenses due in the first
quarter of 2008, etc.
Similarly, deferring
income from late 2007 into
2008 will not only save the
current tax on it, but also
increase AGI-limited
deductions on your return.
Example:
You defer taking $1,000 of
income from 2007 to 2008 by
delaying taking a short-term
capital gain until after
year-end, or you use funds
in a savings account to buy
a Treasury bill or bank
certificate of deposit that
matures in 2008, paying
interest only then. If you
are in the 28% tax bracket,
this will save you $280 of
current tax.
Make
and protect charity
deductions.
Deductible charitable
contributions can be made as
late as December 31.
But take care to protect
these deductions. Newly
toughened IRS documentation
rules can cause the loss of
deductions even for
perfectly legitimate
contributions to charity if
requirements aren’t met.
Examples...
 All
donations, including small
cash donations, must be
documented by a bank record
(such as your statement) or
letter from the recipient.
Formerly, donations of less
than $250 could be
documented by a diary or
log.
Donations
of used clothing and
household goods are subject
to strict rules, including
that they be in “good used”
condition or better and that
appraisals be obtained for
donations valued at more
than $500.
For full explanations of
documentation rules, see IRS
Publication 526,
Charitable Contributions.
Convert
a traditional IRA to a Roth
IRA. If you are in
an unusually low tax bracket
in 2007 (perhaps due to
business or investment
losses) or the value of your
traditional IRA has fallen
due to investment losses you
believe are temporary, now
may be an opportune time to
convert an IRA to a Roth IRA
-- to receive future
investment returns that will
be totally tax free.
Why:
The value of a
traditional IRA (minus any
nondeductible contributions
to it) is included in income
upon such a conversion. But
in the situations just
described, the tax bill may
be relatively low while
resulting future tax savings
could be great. Take
advantage by making a
conversion by December 31.
Safety:
If, down the line, the
conversion turns out to be a
mistake, because, for
instance, you were wrong
about the tax bracket you
are in, or you decide that
the conversion could be made
even more advantageously
later, you can reverse a
2007 conversion at any time
up to October 15, 2008. If
you’ve already filed your
2007 return, you’ll have to
file an amended return, Form
1040X, Amended US
Individual Income Tax Return.
Protect
exemptions and filing
status. If you
intend to claim an
individual (other than your
qualifying child) as a
dependent, be sure to pay
more than half the
individual’s support by
year-end and meet other
requirements that apply as
well. Similarly, if you wish
to claim head of household
filing status, be sure to
meet requirements that
apply.
More
information:
IRS Publication 501,
Exemptions, Standard
Deduction, and
Filing Information.
Adjust
wage withholding in your
last paychecks of the year.
After deciding on the
tax-saving moves you’ll
make, compare the taxes
you’ve paid to date for 2007
with the final tax bill you
estimate you’ll owe for the
year. If you are an
employee and you have
paid...
More
tax than you’ll owe, reduce
withholding from your last
paychecks to effectively get
your refund now, rather than
wait until you file your tax
return.
Less
tax than you’ll owe,
increase withholding from
your last paychecks. This
can let you escape tax
underpayment penalties for
earlier quarters of the year
retroactively, since
employee wage withholding is
treated as if it were paid
at an even rate all year
even if it was increased
only at year-end.
AMT
ALERT
The biggest danger facing
many taxpayers in 2007 is
the alternative minimum tax
(AMT).
If current law remains
unchanged, the AMT will
increase the tax bills of 25
million individuals in 2007,
up from about four million
in 2006, according to the US
Treasury.
While it is very likely
that Congress will do
something to prevent such a
great increase, nobody knows
exactly what that
“something” will be. So far,
the two houses of Congress
are pursuing conflicting
proposals...
The
Senate is proposing a
one-year “patch” that will
temporarily increase the
amount of income exempt from
AMT, as has been enacted in
recent years.
The
House is proposing a major
revision of AMT rules,
coupled with changes in
regular tax rules.
Trap:
Since nobody knows
what the final AMT rules for
2007 will be, there is
little that taxpayers can do
to plan to avoid it.
Best:
Stay informed and have your
tax adviser alert you to
developments that may affect
you.
Bottom Line
Publications
publishes the
opinions of
leading
authorities in
many fields. But
the use of these
opinions is no
substitute for
legal,
accounting,
investment,
medical and
other
professional
services to suit
your specific
personal needs.
Always consult a
competent
professional for
answers to your
specific
questions.
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