To Our Clients and Friends:
Now that April 17th is behind us, it is time to turn your attention to tax planning for 2007. Effective tax planning takes place throughout the year and summer is always a good time to review your tax planning options. In this newsletter we will cover some of the significant provisions included in the new tax law called the Small Business and Work Opportunity Tax Act of 2007. Additionally, we will cover several tax planning opportunities and information on the alternative minimum tax.
Capital Gains and Dividends
Here’s a little reminder about capital gain rates that were extended in May 2006 and some planning tips. The 5% and 15% capital gains tax rates for individuals have been extended two years, through tax years beginning before January 1, 2011. The 5% rate applies to our clients and their children in the 10% and 15% tax brackets, (those whose taxable income is less than $63,700, married filing jointly, for 2007) while the 15% capital gain rate applies to all other higher income tax brackets. For tax years beginning 2008, the 5% rate on capital gains will be lowered to zero for the persons in lower income tax brackets. These rates also apply to dividends received by an individual from domestic corporations and qualified foreign corporations through 2010.
However, after December 31, 2010, the maximum rate of tax on the adjusted net capital gain of an individual will be 20%. Also, dividends received by an individual will be taxed at ordinary income tax rates.
Plan now.
ü Since long-term capital gain rates return to 20% after 2010, be aware that today’s
installment sale may be taxed at a higher federal tax rate than at the current 15%.
ü You may wish to begin looking at “harvesting” some of the potential capital gains
you have yet to recognize in the coming years.
Charitable Contributions
Beginning in 2007, deductions for monetary contributions will only be allowed if you have a canceled check or receipt from the charity showing the name of the charity, the date and amount of the contribution.
Charitable contributions of clothing or household items must now be in “good condition” and this should be indicated on the receipt.
And, keep in mind, effective January 4, 2004, non-cash gifts of similar items to one or more donees that have a cumulative value of more than $5,000 requires an appraisal. Please note that prior law required each item being donated had to exceed $5,000 before an appraisal was required. The following are the requirements for non-cash gifts with cumulative value over $5,000:
ü You must obtain a written appraisal before the due date of the return (including
extensions.) The appraisal cannot be obtained more than 60 days before the gift.
The appraisal must be from a “qualified appraiser".
ü Part B of form 8283 must be completed and attached to the tax return.
ü The appraiser must sign form 8283.
ü The donee organization must sign the form 8283.
Health Savings Account (HSA)
HSAs can be a great way to fund your current, as well as, your long-term health expenditures. These plans are available to you if you have qualified high deductible health insurance plans. Starting in 2007, the IRS allows pre-tax contributions $2,850 for self-coverage or $5,650 for family coverage. In addition to the above-mentioned contributions, the IRS allows catch- up contributions of $800 for 2007 to individuals that attain age 55 by the end of the year. Earnings within the plan are non-taxable and distributions for qualified medical expenses are not included in income. If you already have an HSA established, it is most beneficial to fully fund it each year. Effective for taxable years after December 31, 2006, the new law allows a full year’s contribution to an HSA for partial year’s coverage, provided you maintain the high deductible plan for at least 12 months.
Kiddie Tax Planning
In 2006, children under the age of 18, up from age 14 in 2005, with investment income greater than $1,700 are taxed at the parents’ marginal tax rate. In 2007, the same guidelines apply, with the following exception. The exemption from the kiddie tax is still $1,700 and it has been expanded to apply to children under the age of 18 and full-time students under age 24-if their earned income doesn’t exceed one-half of the amount of their support. This makes it more difficult to lower your family’s tax burden by shifting income-producing assets to your children.
If you have college age children consider the following planning ideas.
ü Delay collections of all passive income until the child turns 24.
ü Invest in growth stock rather than dividends paying stock including use of “tax
efficient mutual funds” which will help you delay income to your college-age child.
ü Invest in tax-exempt bonds.
ü Invest in US savings bonds.
ü Move custodial funds (CUTMA balances) into a 529 plan for your child.
(Some websites that offer information regarding these plans are:
Alternative Minimum Tax (AMT)
Over the past several years the number of our clients subject to the alternative minimum tax has increased dramatically. Many of you may not understand what the alternative minimum tax is or how is it calculated. This can be especially frustrating when you have to pay the additional tax without knowing what caused it.
Originally, AMT was created so that high-income individuals and corporations could not avoid paying income taxes through using certain deductions, exemptions, losses, and credits. Due to recent tax law changes which reduced the traditional tax computation and brackets, AMT is being incurred by more and more of our clients. The calculation of AMT is basically a separate computation of taxable income and tax.
The calculation of the alternative minimum tax starts with your regular taxable income as shown on your income tax return. Twenty-six specific adjustments are added to or subtracted from regular taxable income to calculate your alternative minimum taxable income. An alternative minimum tax is calculated based on alternative minimum taxable income. If your alternative minimum tax is lower than your regular tax, you will not pay AMT. If your alternative minimum tax is higher than your regular tax, you will pay alternative minimum tax.
Tax planning for the alternative minimum tax can be achieved through knowing some of the more commonly occurring adjustments to regular taxable income. The following are some of the most common AMT adjustments:
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Medical and dental deductions from Schedule A (not allowed for AMT purposes)
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Any and all taxes (state, property, etc.) paid from Schedule A (not allowed for AMT)
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Tax refunds received (subtracted from taxable income)
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Difference between regular depreciation and the lesser amount allowed in a separate AMT depreciation computation (added or subtracted)
Knowing these adjustments aids in AMT tax planning. There are many planning techniques that can be used to try and avoid AMT. For example, if you expect to have a large medical deduction for the current year, consider paying your fourth quarter state estimate the following year. Conversely, if you received a large state refund the previous year, it will reduce or eliminate the effect of paying your fourth quarter state estimate in the current year. As the previous list is not all-inclusive, please do not hesitate to contact us if you have any questions regarding AMT planning.
Other Tax Planning Tidbits
Ø Section 179 expensing deduction has been increased to $125,000 and the phase-out threshold amount is increased to $500,000 for 2007. The phase-out threshold is the maximum amount of purchases allowed before the Section 179 deduction is phased-out dollar for dollar.
Ø Fully fund your retirement plan. The IRA contribution limit is $4,000 for 2007, while the 401(k), 403(b), SEP, and Sec. 457 contribution limit is $15,500. Also, don’t forget to make catch-up contributions if you are 50 or older by the end of the year.
Ø The annual gift tax exclusion amount increases to $12,000 per donor per donee in 2007. This means that you can give up to $12,000 to any other person tax-free. If the gift is split with your spouse, together you can give up to $24,000. This is a great way to pass on wealth without paying gift tax and avoiding future estate taxes.
Ø As mentioned above, consider contributing to the Colorado Scholar’s Choice 529 plan to fund college tuition for your children or grandchildren. These contributions can be deducted on your Colorado return. Distributions used for qualified education expenses are not taxed. Used in conjunction with the gift tax exclusion, a contribution on behalf of your children or grandchildren can be made without paying gift tax and can be deducted on your Colorado return.
529 Plan Websites
www.collegeinvest.org
CLIENTS BEWARE
The IRS has issued warnings of suspicious e-mails of phishing schemes. Phishing is the act of sending an e-mail to a user falsely claiming to be an established legitimate enterprise in an attempt to scam the user into surrendering private information that will be used for identity theft. If you receive an e-mail claiming to be from the IRS asking to “confirm” or “validate” your account information, please do not respond. Do not open any attachments to the questionable e-mail, which may contain malicious codes that will infect your computer. Please be advised that the IRS does not initiate contact with taxpayers via e-mails. Also, the IRS does not request detailed personal information through e-mail or ask taxpayers for their PIN numbers, passwords or similar secret access information for their credit card, bank or other financial accounts.
Soukup, Bush & Associates News
We have had two exciting events occur this year:
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In February we were accepted as a member of CPA Associates International, Inc., an international association of accounting firms. This association has members from 147 independent CPA firms, with 42 members in the United States, as well as 105 international members in 73 other countries around the world. As a member of CPA Associates International, we will retain our autonomy and yet be able to provide our clients with a rare blend of local knowledge and national and global access.
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In June, we were honored with the “Business of the Month” award from the Fort Collins Chamber of Commerce.
