Top ten "to-do" list of smart 2007 year-end tax moves
With the end of the year quickly approaching, and tax filing season following shortly thereafter, now is an ideal time to organize your financial documents and records and assess your tax position in a number of areas that may be critical. A little preparation and organization now can help save you time and stress - not to mention some tax dollars - as the April 15 filing date draws near. However, you may find preparing now for the 2008 filing season a little overwhelming. For those who may not even know where to begin planning or organizing, and for those who need a helpful reminder of important considerations for this tax season, consider the following top ten "to-do" list:
(1) Decide whether deferring or accelerating taxable income to 2007 or 2008 will help. If you anticipate being in a higher tax bracket in 2007 than in 2008, you may want to delay the receipt of taxable income, if feasible, until next year. Consider whether deferring income until 2008 is economically sound under your particular circumstances, or whether delaying income could help prevent you from losing lucrative tax breaks that could be reduced or altogether eliminated as your income level rises.
On the other hand, it may be more beneficial in your particular situation to accelerate income into 2007, rather than deferring it until 2008. For example, one issue to consider is whether you need additional income this year in order to take advantage of certain offsetting deductions or credits that are set to expire before 2008.
(2) Decide whether accelerating or deferring deductible expenses will mean overall tax savings. Deduction planning can be complex. Remember that your ability to take deductions depends on your income level and filing status, as well as whether you plan to take the standard deduction. For example, if you are well within the standard deduction limit for deductions, postponing expenses that would generate deductions until 2008 usually makes sense.
(3) Estimate your potential Alternative Minimum Tax (AMT) liability. Although Congress is poised to pass yet another AMT "patch," and it is anticipated that such a patch will resemble the one enacted in 2006, uncertainty for taxpayers estimating their potential AMT liability remains. A good starting point for projecting your potential AMT liability is to estimate your income for the remainder of 2007 and also for 2008. In calculating your potential AMT liability, remember that certain items of income that are otherwise excludable under the regular tax rules become "tax preference" items that are not deductible under the AMT. If these items apply to you, include them in your AMT calculation:
- Personal exemptions;
- Deductions for state and local taxes;
- Home equity loans and other mortgage interest;
- Large capital gains;
- Incentive stock options;
- Private activity bonds (such as tax-exempt interest from private activity municipal bonds);
- Deductions for unreimbursed business expenses, and
- Certain other itemized deductions.
(4) Take control of passive gains and losses. The tax law only permits the deduction of losses from passive activities to the extent of passive activity gains. Any excess loss is suspended and carried over to a year in which offsetting passive activity gains are realized or the activity that generated the loss is disposed of. Any business activity in which the investor does not materially participate and most rental activities fall into the passive activity category. Making certain that no passive activity loss goes unused in 2007 may require certain action on your part before year's end.
(5) Review your investment portfolio. Examine your investments to determine whether your tax position would benefit from selling certain stock or securities you own or from holding onto them longer.
(6) Estimate your adjusted gross income. Estimating what you anticipate your adjusted gross income (AGI) to be for 2007, as well as 2008, is important because many tax breaks are tied to, or limited by, what your AGI is, and thus what tax bracket you fall into. For a good picture of what your 2007 AGI may look like, review your 2006 income tax returns and look at your 2007 pay stubs. For example, AGI limits overall itemized deductions, any itemized medical deductions and your "miscellaneous" itemized deductions, as well as your ability to take education credits, take a full deduction for your charitable contributions, or execute a Roth conversion.
(7) Watch out for any underpayment of estimated tax. Year-end tax planning also requires getting ready for January 15, when the fourth quarter estimated tax payment for 2007 is due. Falling short on estimated tax can mean a hefty interest penalty charge. For 2007, however, underpayments of up to $1,000 avoid the penalty this year. If it looks as if you will pay an estimated tax penalty, increasing tax withholding on your wages for the rest of the year will help make up the difference. So can having 25-percent withholding taken on any year-end bonus and other "supplemental wages" paid to you before year's end.
(8) Give the gift of money ...or stock. You may be in a position to reduce your 2007 income by gifting money to family and friends. For 2007 and 2008, you can gift up to $12,000 per person, per year, without paying any gift tax on the amounts transferred. Married couples can gift up to $24,000 per person, per year without paying tax on the amounts transferred. If you give stock, however, remember that the recipient takes over your tax basis and would be required to pay capital gains tax when the stock is sold. With a zero-percent capital gains rate for lower-bracket taxpayers starting in 2008, however, that might just add to the benefits of gift giving at year end and selling at the start of the new year.
(9) Make a charitable contribution. If you plan on making a charitable contribution in 2007, remember that cash donations of any size must be substantiated by proper paperwork, which can include either a cancelled check or a written note from the charity indicating the amount, date and name of the charity.
(10) Take advantage of tax breaks that may be easily overlooked. There are a number of tax breaks that you may be able to take advantage of in 2007, and that may considerably improve your tax position. Consider the following non-exhaustive list of credits that may apply to you:
- State and local sales tax deduction;
- Mortgage insurance premiums;
- Tuition and fees deduction;
- Educator deduction;
- Residential energy property credit;
- Earned income tax credit;
- Alternative motor vehicle credit;
- Child and dependent care credit;
- Adoption credit
-- Reprinted from the 2007 Hancock & Dana Client Newsletter