Tax-cutting time is ticking away
Check your tax situation before it's too late to act
The tax moves you make — or fail to make — before the end of the year can have a major impact on you and your business. Consider the following suggestions in light of new tax laws and other developments.
Time
your moves
All things being equal, the conventional tax-cutting wisdom is to push taxable income from this year into next year and pull deductions from next year into this year. The reason is simple: You generally aren't taxed on income pushed into 2008 until you file your 2008 return in 2009. At the same time, deductions pulled into 2007 can reduce the tax bill you must pay in a few short months.
To push income into 2008, consider these suggestions:
Invest
in obligations that will not mature until 2008. For example, buy short-term
certificates of deposit (CDs) or Treasuries with 2008 maturity dates.
Postpone
taking capital gains until next year, especially if the sale then qualifies
for lower long-term tax rates.
To pull deductions into 2007, you might do the following:
If
medical expenses will be deductible this year, squeeze additional medical services
into 2007.
Accelerate
state and local income tax payments due in January. The taxes are deductible
in 2007 if paid this year.
Pay
a college student's next semester tuition in December if you will qualify
for the tuition deduction (maximum deduction of $2,000 or $4,000 depending
on your income).
Be generous
If you donate appreciated property, you can generally deduct the property's fair market value if you've owned it for more than a year.
This year you can make charitable gifts of up to $100,000 directly from your IRA if you're age 70½ or over. Your donation is not included in, nor deductible from your income, but it does count as part of your annual required minimum distribution.
You might consider charging charitable donations via credit card in late December. You can then deduct the gifts on your 2007 return, although you don't pay off the charges until 2008.
Have a capital
idea
As the year draws to a close, plan transactions to offset 2007 capital gains and losses. A net long-term capital gain for 2007 is taxed at a maximum 15% tax rate (5% for individuals in the regular 10% or 15% tax brackets).
Watch out for the “wash sale rule.” If you reacquire substantially identical securities within 30 days of a sale, you can't deduct a loss from the sale.
Focus on retirement
There are steps you can take now to help build a nest egg for your future.
Increase deferrals to a 401(k) plan. The maximum you can set aside for 2007 is $15,500 ($20,500 if you're age 50 or over).
If you don't have a qualified plan for your business, start one. For instance, you can set up a Keogh plan if you're self-employed. You have until your tax return due date (plus extensions) to make 2007 contributions, but the Keogh must be established by year-end.
Don't forget about IRAs. For 2007, you can contribute $4,000 ($5,000 if you're 50 or older).
Check the home
front
If you're among the thousands who bought a home, refinanced a home mortgage, took out a home-equity loan, or faced foreclosure on a mortgage this year, be sure you factor the tax consequences into your year-end planning.
Remember the general rule for deductibility of mortgage interest: You can deduct interest on up to $1 million of mortgages on your first or second homes as long as you use the proceeds to buy, build, or substantially improve the homes. You can also deduct interest on up to $100,000 of home-equity debt, regardless of how the money is used.
Points paid on a mortgage to buy a home are deductible in the year of purchase. Points paid on a refinancing are not currently deductible except to the extent funds are used for home improvements; instead they're deducted pro rata over the life of the loan.
If you refinance for more than the balance on the original mortgage (plus $100,000 home-equity debt), your interest deduction is limited unless you use the excess funds for home improvement.
If you're concerned with a foreclosure, contact our office for details on how current law and any pending changes could affect the tax consequences in your situation.
Watch out for
the AMT
The dreaded alternative minimum tax (AMT) was intended to affect only the wealthiest individuals. But millions of middle-income taxpayers may have to pay the AMT this year. Have your situation assessed now so you can coordinate your personal tax moves.
Make business
decisions
Year-end tax planning can pay dividends for businesses, too. Here are some suggestions for small business owners.
Max
out on Section 179 deductions. You can currently deduct up to $125,000 for
2007 equipment purchases.
Document
efforts to collect bad debts. In general, you may deduct debts in the year
they become worthless, so intensify your collection activities.
Take
care of minor repairs on your business premises. Unlike building renovations,
repairs are currently deductible.
Cash
in on business credits, such as credits for research expenses and hiring workers
from targeted groups.
Not every tax-cutting strategy mentioned in this letter is appropriate for
everyone, and other options not discussed may be more suitable in your particular
situation. Contact us now for guidance in your 2007 tax review.