Preparing to file your taxes!

2007 Tax Planning
Tax Planning Ideas for 2007

On planning the timing of your deductions . . .
-Your home . . .
Mortgage interest is deductible as is real estate taxes. Generally, if you pay points on your mortgage when you purchase your home, those points are deductible in full in the year your purchase the home. But, you can also choose to deduct them ratably over the life of the loan. This may make sense if you purchase your home very late in the year and will not otherwise have enough deductions to allow you to itemize in the year you make the purchase.
Points paid on refinancing a mortgage on the other hand are not fully deductible in the year the transaction takes place. Rather, the points can only be deducted ratably over the life of the new loan term. Remember to write off any remaining unamortized points though if you then subsequently sell the home and pay off the mortgage.
-Also, new for 2007, mortgage insurance will be deductible.
-Selling your home may allow you to walk away with a tax free gain.

-Your investments . . .
Review your investments.
Investment interest expense (ie margin interest) is deductible up to the amount of your net investment income. To the extent you do not have enough investment income to utilize the full investment interest deduction, you can carry over the excess to subsequent years.
If you are holding mutual funds that expect to pay large year end dividends consider selling the funds prior to the dividend record date if you have owned the fund for more than one year. In effect, you will have converted the dividend which is taxed as ordinary income into capital gain income which can be taxed at a lower rate. If you sell a fund at a loss, be aware of the wash-sale rule if you then want to go back into the same fund which could prevent you from utilizing the loss.Be wary of buying mutual funds late in the year in any non-retirement account.

-Avoiding underpayment penalties . . .
If you are facing an underpayment tax penalty for failing to make sufficient estimated payments toward investment or other sources of income during the year, increase the amount of your employee W-2 withholding tax. In order to avoid underpayment penalties you need to prepay 90% of 2006 actual tax or 100% of 2006 tax (or 110% if Adjusted Gross Income for 2006 was more than $150,000 - married filing jointly). Estimated tax payments cannot be "made up" at year end (unless that is when the additional income was actually earned). However, employee withheld taxes are treated as being paid evenly throughout the year. Therefore, extra withholding late in the year can overcome prior underpayments.

-Maximizing your charitable contribution deductions . . .
Use appreciated securities to make donations to charity

-Taking maximum benefit of retirement plans . . .
-Contribute to an IRA.Contribute to a Roth IRA.Regular IRA’s can be converted to Roth IRA’s

-Education related tax benefits . . .
The deduction for education interest of up to $2,500 is available even to non-itemized taxpayers. The interest is only deductible if the loan was used to pay higher education expenses for you, a spouse, or your dependent at the time you incurred the debt. However, the deduction is phased out for single taxpayers with modified AGI between $50,000 and $65,000 or between $100,000 and $130,000 for a married filing joint return.
You can deposit up to $2,000 per year into an Education Savings Account for a child up to the age of 18. Although you cannot take a tax deduction for the contribution, the investment earnings that build up tax free over time and are not taxed at withdrawal so long as the money is used to pay the qualified education expenses of the child. Keep in mind, however, there are income phase-out ranges to be considered before making contributions.
Section 529 plans offered by states are another good idea to consider. While the contributions you make into the plan are not deductible on your tax return for federal purposes, they are for PA purposes. When distributions are used for the student's education expenses they are tax free.
The Hope Scholarship Credit is available to you, your spouse or your dependent for tuition and related expenses for the first two years of post-secondary education at an eligible institution if the student carries at least a half-time credit load. The maximum credit is $1,650 per student.
The Lifetime Learning Credit is available for undergraduate, graduate and professional degree courses. Unlike the Hope Scholarship Credit, there is no minimum half-time enrollment requirement. The maximum credit available is up to 20% of the first $10,000 of qualified education expenses or $2,000, regardless of the number of students in the household.
Both of these education credits have phase-out ranges and there are other factors to consider so we strongly encourage you to consult with us for further information.
A Higher Education Expense Deduction of up to $4,000 may instead be available if the Hope Scholarship Credit or the Lifetime Learning Credit is not claimed. This deduction is available for tuition and related expenses and can be claimed even if you do not itemize. However, the amount of the deduction depends upon the modified adjusted income level on the return and also varies depending on whether a single or joint return is filed.

-On transferring income to lower tax bracket family members . . .
Transfer assets to family members with lower tax brackets

-Home office deductions for self-employed . . .
More self-employed individuals working out of their home will find it easier to qualify for a home office deduction. Those who regularly use their home for management or administrative tasks and have no other location where these functions are performed may now qualify for the home office deduction. If you qualify, you may be able to take a deduction for expenses such as utilities, maintenance and depreciation. Also, if you are a Schedule C filer, the partial allocation of mortgage interest and real estate taxes to home office expenses will also lower the self employment taxes on the business net income. To qualify, you must use the designated area of your home exclusively and regularly as: (1) your principal place of business (2) As a place of business where you meet with patients, clients or customers in the normal course of business. If you are an employee rather than a business owner, you must be able to demonstrate that the reason for the home office use was due to the convenience of the employer - not solely for your convenience.

-Your business . . .
If you operate your own business certain new business equipment purchases up to $125,000 can be written off as an expense for 2007 under IRS code sec. 179. Therefore, if you had planned to make capital asset purchases anyway, you may want to accelerate the purchase into 2007. However, the maximum expense deduction is reduced dollar for dollar by the cost amount of qualified property placed in service during the year in excess of $430,000. Other requirements and restrictions apply as well depending on the business entity type. Hire your children in a family business, be sure the treat them the same as any other employee, and deduct their salary on the business return. In addition to a standard deduction, a child with earned income get a $4,000 IRA deduction meaning the child can earn up to $9,000 tax free. Also, children under the age of 18 who are hired by a parent's unincorporated business do not need to pay FICA taxes.

-Other items that may effect you . . .
If your AGI is close to one of the phaseout ranges discussed in any of the above topics, consider selling investments that show a capital loss and are unlikely to recover soon so that you can lower the AGI amount. If you have children under age 18 with interest and dividends, file a separate return for the children rather than elect to report the children’s income on your return. This will also serve to reduce your AGI.
Alternative Minimum Tax is affecting more taxpayers. The AMT rates are 26% and 28%. You could possibly fall into a situation of owing AMT tax in addition to your regular tax if any of the following situation apply: (1) You receive tax-exempt interest from private activity bonds issued after 8/7/86 (2) You exercise incentive stock options (3) Are claiming a high number of dependent exemptions (4) Are claiming a large itemized deduction for job or other miscellaneous expenses on Schedule A (5) Are claiming a large itemized deduction for state and local tax payments.
And finally . . .
It is tough when a client brings you information after year end and says "what can we do that will effect my taxes?" The time for implementing tax planning strategies is before the end of the year. The above tax topics are just a sample of some of the tax planning strategies you can implement. Be warned that there are always many exceptions, phase-outs, limits etc to consider in the above suggestions.