Monday, October 15, 2007



It’s the time of year, just as the final deadline for filing the 2006 tax return arrives, when our thoughts should turn to 2007 returns. It is time for year-end tax planning.

As I have said many times before, while the average taxpayer will avoid thinking about income taxes until the approach of the April deadline forces him to do so, once the ball drops on One Times Square at midnight on December 31st and the New Year is rung in, there is very little that can be done to cut your tax bill.

However, during the last two months of the year you can do a great deal to reduce your tax liability.

Here’s what to do. Sit down with paper and pencil and list your anticipated income for 2007 and all your allowable deductions to date. What you want to do is, using your 2006 return as a guide, prepare a projected 2007 tax return. Once this is done you can decide what steps to take to make sure you pay the absolute least amount of federal, state and local income tax for 2007 and 2008.

You can download a PRELIMINARY TAX RETURN WORKSHEET from the FORMS AND WORKSHEETS Page on my website. Tax information for 2007 (i.e. standard deduction and personal exemption amounts, tax rates, etc.) are available on the WHAT’S NEW FOR 2007 Page. I will be adding a WHAT’S NEW FOR 2008 Page by the end of October.

Before I get into year-end tips I must do the usual “disclaimers”.

· There are no written in stone year-end tax planning rules that apply to all taxpayers in all cases. As with any other transaction, year-end strategies must be evaluated in the context of the special facts and circumstances of your individual situation.

· Always keep in mind the state tax consequences of your federal tax actions.

· You should review your year-end situation with your tax professional.

· And remember – your first criteria for evaluating any financial transaction you are considering should always be economic. Taxes are second.

Now, here are some basic year-end tax planning tips -

1) Traditional year-end planning calls for postponing the receipt of taxable income until 2008 and accelerating allowable deductions to be claimed in 2007, the idea is to reduce your 2007 taxable income to a minimum. This strategy will generally apply if you expect to be in the same tax bracket for both 2007 and 2008, or it you will be in a lower bracket in 2008.

If, however, you anticipate a substantial increase in taxable income in 2008, which will push you into a higher bracket, you should do the reverse and accelerate the receipt of taxable income to 2007 and postpone deductible expenses until 2008. Income received in 2007 will be taxed at a lower rate, and deductions claimed in 2008 will yield a greater tax savings.

Not sure what your 2008 income will be. Follow the rule of “when in doubt – defer” - go the traditional route and postpone income and accelerate expenses.

As of this writing, except for the annual COLA adjustments, the tax rates and brackets for 2008 will be basically the same as those for 2007 – so this is not a consideration. While the Democrats continually talk about raising taxes at the upper levels, I doubt that there will be any change in the rates or brackets until 2009.

2) It does not pay to itemize unless the total of your allowable deductions exceeds the standard deduction that applies to your filing status, plus any additions for age or blindness. If you decide to accelerate allowable deductions to claim them in 2007, you can accelerate all you want, but it will be wasted unless your total “itemizable” deductions exceed your applicable standard deduction. For 2007 the standard deduction amounts are:
· $ 5,350 for Single
· $10,700 for Married Filing Joint and Qualifying Widow(er)
· $ 7,850 for Head of Household
· $ 5,350 for Married Filing Separate
The additional Standard Deduction amounts for age 65 or older and/or blind are:
· $1,300 for Single and Head of Household
· $1,050 for Married (Joint and Separate) and Qualifying Widow(er)
Let us assume you usually do not have enough deductions to itemize. However, after preparing your projected 2007 return you discover that, because of some special circumstance, you will be able to itemize this year. During the last two months of the year you should incur, and pay for, as many deductible expenses as possible.

If, on the other hand, your projected return indicates that you do not have anywhere near enough deductions to be able to itemize, postpone making any deductible payments until 2008. Making these payments in 2007 would not produce any tax savings, while it is possible that by deferring them until next year you may be able to itemize in 2008.

3) The timing of deductions is especially important when it comes to medical expenses and miscellaneous job-related and investment expenses. You are allowed to deduct medical expenses only to the extent that they exceed 7½% of your Adjusted Gross Income (AGI), and most miscellaneous deductions are only deductible to the extent that the total exceeds 2% of AGI.

If you anticipate a 2007 AGI of $70,000.00 you must exclude the first $5,250.00 of medical expenses – the first $5,250.00 is not deductible. If your medical expenses to date are close to or more than $5,250.00 and you will be able to itemize, pay any outstanding medical bills and schedule, and pay for, check-ups, doctor visits and needed dental work in November and December. If medical payments to date are substantially less than $5,250.00, put off paying any more medical bills until 2008. The same concept applies for miscellaneous deductions.

If you expect to be able to itemize, and you are making quarterly state estimated tax payments, make the 4th quarter payment in December, instead of waiting until the January 16, 2008 due date, so you will be able to deduct the payment on your 2007 Schedule A.

4) If you do not have the cash available to pay for deductible items that you have scheduled as part of your year-end tax plan, you can use a credit card to pay for the item and still get a 2007 deduction. Allowable expenses charged to a credit card (VISA, Master Card, American Express, Discover) are deductible in the year charged, and not in the year that you actually pay for the charge.

5) When preparing your projected return you should review the performance of your investment portfolio for the year. Add up all your realized gains and losses from actual sales for the first 10 months of the year, with separate net totals for short-term (held one year or less) and long-term (held more than one year) activity. Gains and losses from the sale of inherited property are always considered long-term. Include in the long-term calculation any “capital gain distributions” from mutual funds.

Now do a similar calculation for unrealized “paper” gains and losses on the investments you still hold. You may want to sell something before the end of the year at a loss to wipe out year-to-date gains, or at a profit to take advantage of year-to-date losses in excess of $3,000.00.

Tax law changes scheduled to take effect in 2008 regarding the capital gains tax rate for lower-income investors and the “Kiddie Tax” rules create some special tax planning opportunities. I will discuss these opportunities in a future installment of this series of posts on Year End Tax Planning.

The year-end tips discussed above all deal with the “regular” income tax. However, while these strategies may reduce your “regular” income tax for 2007, these actions may backfire and end up costing you if you fall victim to the dreaded Alternative Minimum Tax (AMT)! I will discuss year-end planning and the AMT in Part II. I will also discuss tax breaks expiring in 2007 and opportunities to take advantage of future tax breaks in upcoming installments.

to be continued . . . . . . . . . . . . .


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