December 2007

Year End Tax Planning
By Tim Gephart, CPA

        It's time once again to consider year-end tax planning as a way to keep more of your hard earned money. Here are a few tax saving ideas to help you keep what you can.

• Deferring income and accelerating deductions is always a good year-end tax saving strategy for a cash basis taxpayer if your tax rates will remain constant through next year. For individual taxpayers or cash basis businesses, plan sales and income to receive the cash in 2008. If you itemize deductions, it may help to prepay charitable contributions, real estate taxes, and state and local income taxes. Keep in mind that if you are going to pay alternative minimum tax (AMT), then prepaying taxes will not benefit you.
  
• Try to bunch your medical and miscellaneous itemized deductions. Because these expenses are reduced by income, there may be a benefit when bunching them in one year. Also consider the possibility of married filing separately to get increased benefits from these types of expenses.
  
• Consider 529 plans and other educational expense funding arrangements.
  
• Adjust your federal income tax withholding from now until the end of the year if your tax payments from both withholdings and estimates are not going to be at least 90% of your 2007 tax liability or 100% of 2006 liability (110% if AGI is over $150,000 for joint returns). By doing this, you will avoid any interest or penalties for underpayment.
  
• Hybrid Vehicle Credit or Alternative Fuel Motor Vehicle Credit (AFMV) may be taken if you purchase a qualifying vehicle. Hybrid credits can be as high as $3,000 and AFMV credits as high as $4,000. Check with our office for a list of qualifying vehicles and associated credits.
  
• The Energy Efficient Improvement credit is available for qualified improvements made to your principle residence. This credit is usually limited to a lifetime amount of $500 and is also limited by the type of improvement.
  
• Long-term capital gain and qualifying dividends are only taxed at 15% for taxpayers in the 25% or higher tax bracket and only 5% for those in lower brackets. The capital asset must be held for more than a year to qualify for the lower capital gain rate. Be aware that reporting large amounts of capital gains and qualified dividends could subject you to the AMT rules.
  
• Capital losses can be used to offset capital gains plus an additional amount of $3,000 is allowed as a deduction against other income. Any losses in excess of the $3,000 will be carried over to the following years until used. Watch out for the "wash sale" rule on losses. Your loss will be deferred if you purchase an identical security within 30 days before or after the sale date. Since there are no "wash sale" rules for capital gains, you could sell your assets and buy back the same assets in order to create gain to utilize loss positions in excess of $3,000.
  
• Consider health saving plans or cafeteria and flex spending benefit plans sponsored by your employer that allow you to pay premiums out of pre-tax income.
  
• IRA contributions for 2007 must be made by April 15, 2008. Contributions can be up to the lesser of $4,000 ($5,000 if 50 or older) or 100% of compensation from wages, salaries, self-employment income and alimony. If you or your spouse are active participants in an employer retirement plan and your Modified AGI (MAGI) exceeds certain limits, your deductions will be limited. Maximize any available deferment on income in a company sponsored retirement plan.
  
• For taxpayers over 70 ½, consider making charitable contributions with direct transfers from an IRA. There is no itemized deduction for the contribution as well as the income is not taxable and that may be a benefit by reducing adjusted gross income (AGI) which affects the taxability of social security benefits and the allowance of some itemized deductions.
  
• Consider making non-deductible IRA contributions that can be converted to Roth IRA's in 2010. There are no wage or age limitations on these contributions. Income from the conversion of traditional or non-deductible traditional IRA's in 2010 will be split between 2011 and 2012.
  
• Gifts to any person can be made up to $12,000 per year, per individual, to as many people as you like. If you are married, you and your spouse each can give $12,000 per year to each person. You may pay tuition and medical expenses directly to the school or health care provider and it will not count against the $12,000 limit. You receive no deduction for gifts, but they reduce your estate for estate tax purposes and may help you qualify for Medicaid coverage if done timely.
  
• Section 179 allows deductions up to $125,000 of the cost of qualifying depreciable property put in service in 2007 by business owners. The deduction cannot exceed your business net income and the deduction is phased out if property purchases exceed $500,000. Consider making equipment or tangible business property purchases before year end to take full advantage of the deduction.
  
• SUV's that have gross, or loaded, vehicle weight rating between 6,000 and 14,000 pounds are limited to $25,000 of Section 179 expense. The balance is depreciated over 5 years. Pickup trucks with loaded weight over 6,000 pounds and a cargo bed at least 6 feet are not subject to the SUV rule and can be expensed under Section 179 up to $125,000.
  
• Paying dividends in lieu of owner salaries could net more cash after taxes. Dividends are taxed at a maximum 15% tax rate. If your personal tax rate is 28%, your dividends will be taxed at only 15% where your salary would be taxed at the higher rate. In addition, you and your company will have to pay FICA and other payroll taxes on the salary paid. Dividends must be paid prorata to all owners and are not a deductible expense by the corporation, so weigh the effect on cash-flow with tax savings before doing so.
  
• Evaluate whether any credits such as Disabled Access, Low-Income Housing, Work Opportunity, or Research could apply to your business and take advantage of the Domestic Activities Production deduction.

        These are just a few things to consider. Take time to review your 2007 tax situation now and consider planning strategies that will work for you and save you money. We are here to help, so please contact us to discuss your specific tax and financial concerns.

Certified Public Accountants

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