2007 Year-End Tax Planning Letter
We last sent a letter in July of this year explaining tax changes and related items we thought might affect you and there is still pertinent information contained therein that would supplement this letter. That letter can be accessed here.
Additional legislation is hoped for which would extend the sales tax deduction option along with the $4,000 above the line deduction for higher education expenses. This legislation, if passed, is supposed to provide relief from the AMT tax in general and more specifically prevent its being triggered by the use of the sales tax deduction. We will just have to 'stay tuned' to see if this legislation passes. If it does not pass, 2007 will be the last year that sales tax will be deductible. So, you may want to plan accordingly.
Other reminders and points of interest are as follows.
- Those individuals who have attained age 70- 1/2 may exclude up to $100,000 a year (for 2007) for otherwise taxable distributions from an IRA (or a Roth IRA) that are paid directly to a qualifying charitable organization by the IRA trustee. This will also count as part of your yearly required minimum distribution (RMD) amount.
- You should also withdraw required minimum distributions before year-end to avoid a penalty. Taxpayers must start taking annual required minimum distributions (RMDs) from their traditional IRAs by April 1 following the year in which they attain ager 70- 1/2. For each later year, RMDs must be taken by year-end; there is o grace period to April 1 as there is for the original distribution year. Failure to withdraw the annual RMD could expose the taxpayer to a penalty tax equal to 50% of the excess of the amount that should have been withdrawn over the amount that actually was withdrawn. The amount of each RMD is calculated separately for each IRA. However, the RMD amounts for the separate IRAs may be totaled and the aggregated RMD amount may be paid out from any one or more of the IRA accounts.
- Stock gains ad losses should also be considered. You can offset capital losses to the extent of any capital gains plus $3,000. With your financial advisor look at your portfolio and see if there are any winners or losers you need to sell or donate before year end.
- Personal exemptions at $3,400 for 2007 will go up for $100 for 2008. The standard deduction for a married couple filing jointly will go up for $200 for 2008 from the current deduction for 2007 of $10,700.
- The Social Security Wage base goes from $97,500 in 2007 to $102,000 in 2008.
- Hybrid vehicle tax credits from $250 to $3,500. If you are interested in purchasing such a vehicle your dealer will very likely know the details as to amount and availability on the particular vehicle of interest.
- The business use mileage rate increases to $0.505 per mile in 2008 from $0.485 in 2007.
- When thinking of the 'Kiddie Tax' referred to in the July letter, remember this is only for unearned income. Earned income is not subject to the Kiddie Tax. This includes amounts that you may pay to your children for services they provide to your business or practice (Computer services, cleaning, stuffing envelopes, shredding documents, etc.) - a good tax break here. (Child's lower tax rate as well as Roth and regular IRA opportunities).
- Speaking of people on the payroll. If you go on continuing education or other business trips, spouse travel is not deductible unless the spouse is on the payroll as an employee. This does not mean that you should just pay the spouse; it needs to be for services rendered to the business or practice. In addition to travel costs you may be able to make retirement contributions for the spouse. This will not apply, of course, to all businesses and spouses. But, when it does it is a nice benefit.
Some pointers and savings tips for estate tax savings are as follows.
- No estate tax in 2010. After 2010, the rates and rules of 2001 apply. Permanent repeal seems unlikely. Possible solutions might be a permanent $3.5 million Life Time Exclusion.
- In addition to your lifetime exclusion (currently $2 million), you can give annual gifts to anyone of up to $12,000. This can be very powerful when used each year, especially when you join with your spouse for a yearly gift to a single individual of $24,000.
- Consider setting up an Irrevocable Life Insurance Trust (ILIT). These trusts allow for the purchase of life insurance within the,. The premiums can be funded by you and at death the proceeds can be used to pay estate taxes. If done properly with independent trustees and other steps, the proceeds escape death tax entirely. A very good tool.
- Consider setting up Section 529 plans to fund the education costs of your grandchildren. You and your spouse can fund up to $120,000 in the initial year using five years worth of your annual gift tax exclusion. These can be a way to help offset some of the harmful effects of the Kiddie Tax mentioned above.
- In addition to the lifetime exemption amount and the annual $12,000 gifts, you can also pay for the tuition and medical costs of your children and grandchildren (others if you wish). These payments must be paid directly to the educational institution and be for tuition only. Payments for medical expenses must be paid directly to the provider and be for what are only traditional deductible medical expenses.
We recently gave a talk to the Chattanooga Area Dental Society. Various items were covered in addition to tax issues. If you would like to set up an appointment to cover items in this talk as well as to discuss any yearly tax strategies, please let us know and we will be happy to meet with or talk with you.
If you would like to schedule a planning meeting or have questions please contact us.
Sincerely,
Barto, Hoss & Company, P.C.