Tax & Business Strategies Monthly Newsletter - May 2007

Tax Planning Strategies
How to Check on Your Tax Refund
Some Home Energy Credits Extended - Others Expire At the End of 2007
Life-Care Facilities Fee
Will You Get Nipped By the AMT in 2007?
Charitable Contribution Substantiation Rules Toughened for 2007

Business & Management Practices
Home Office Expenses of a Small Business Organized as a Corporation
Writing Off Your Start-Up Expenses
Unique Expense Issues

General Information
What to Do If You Receive an IRS Notice
Retirement Plan Options for 2007
Don’t Count on Those Low Capital Gain Rates Forever!
Six-Month Filing & Payment Extension For Those Affected By Virginia Tech Tragedy

Briefs
Tax Benefit for Older Taxpayers Set to Expire Soon
Why You Should Not Put Your Child on the Title

TAX PLANNING STRATEGIES

How to Check on Your Tax Refund

If your return has already been filed and you are concerned about your refund, you have several options for checking on the status of your refund.

One way is to use an interactive tool on the IRS website (IRS.gov) called “Where’s My Refund?” Simple online instructions guide taxpayers through a process that checks the status of their refund after they provide identifying information shown on their tax return. Once the information is processed, you could get several responses, including:

• Acknowledgement that your return was received and is in processing.
• The mailing date or direct deposit date of your refund.
• Notice that the IRS could not deliver your refund due to an incorrect address. To ensure delivery, you can change or correct your address online.

“Where’s My Refund?” is a very flexible tool. Whether you split your refund among several accounts, opt for direct deposit into one account, or ask the IRS to mail you a check, “Where’s My Refund?” gives you online access to your refund information. You can even use “Where’s My Refund?” if you filed taxes only to claim a refund of the telephone excise tax.

The “Where’s My Refund?” service meets stringent IRS security and privacy certifications. Taxpayers enter identifying information that includes their Social Security number and filing status and the exact amount of the refund shown on the return. This specific information verifies that the person is authorized to access that account and avoids an unsuccessful response.

“Where’s My Refund?” is accessible to visually-impaired taxpayers who use the Job Access with Speech screen reader used with a Braille display and is compatible with different JAWS modes.

Another option for checking the status of your refund is by calling the IRS TeleTax System at 800-829-4477 or the IRS Refund Hotline at 800-829-1954. When calling, you must provide the first Social Security number shown on the return, your filing status, and the amount of the refund. If the IRS processed your return, the system will tell you the date your refund will be sent. The TeleTax refund information is updated each weekend. If you do not get a date for your refund, wait until the next week before calling back.

back to top

Some Home Energy Credits Extended - Others Expire At the End of 2007

In addition, a 30% credit is allowed for fuel cell property, up to $500 for each half-kilowatt of capacity installed per year on the taxpayer’s principal residence.

Labor costs for onsite installation and for piping and wiring connections are qualifying costs for all three credits. However, the credits do not apply to equipment used to heat swimming pools or hot tubs.

One cautionary note: The credits do not apply against the Alternative Minimum Tax (AMT), which means a taxpayer could lose all or a portion of the tax benefit from the credits. However, Congress is currently debating whether or not to eliminate the AMT beginning in 2007.

back to top

Life-Care Facilities Fee

Some retirement homes and care facilities require the payment of an up-front life-care fee, sometimes referred to as a “founder’s fee.” The question arises whether or not that fee might be deductible as a medical expense.

Taxpayers can deduct, in the year paid, the portion of a life-care fee or “founder's fee” paid to a retirement home that is properly allocable to medical care if the payment is made in return for the home's promise to provide lifetime care, including medical care. The same applies to monthly fees paid under a life-care contract.

Generally, payments to a private institution for lifetime care, supervision, treatment, and training of a physically or mentally impaired child upon the parents' death or inability to provide care are deductible medical expenses if the payments are a condition for the institution's future acceptance of the child and aren't refundable as deductible medical expenses.

For elderly patients where only the medical care costs themselves were deductible, the IRS and the Tax Court have determined the portion of the life-care fee allocable to medical care as a fraction of the total fee paid to the facility is deductible regardless of the actual costs of the medical care provided. The fraction is determined on the basis of the facility's own experience or that of a comparable facility.

Generally, the IRS allows the facility to use one of two methods in determining the portion of the total fee that is deductible as a medical expense, either:

(a) All of the facility's direct medical expenses divided by its total expenses, or

(b) The portion of fees that the facility historically used to provide medical care divided by the entire fee.

The same allocation methods can be applied to the monthly service fees paid to a facility. The facility should provide the allocation of the fee for the medical deduction at the time the fee is paid.

back to top

Will You Get Nipped By the AMT in 2007?

The Alternative Minimum Tax (AMT) was originally created to counter tax shelters employed by high-income taxpayers. However, over the past few years, primarily due to inflation, the AMT has begun affecting middle class taxpayers, which was not the original intended purpose. The AMT has become a political hot potato, because to abolish or reform the AMT results in loss of tax revenues that must be made up elsewhere.

The AMT is a complicated computation, because it is made up of numerous additions and adjustments to income and deductions. The vast majority of these differences generally don’t affect the average taxpayer. However, there is a handful that impacts almost everyone and is creating the unintended problems. Here is a list of those differences:

• Medical – For taxpayers who itemize their deductions, medical expenses in excess of 7.5% of the taxpayer’s income (AGI) are deductible for the regular tax computation. For the AMT computation, only expenses in excess of 10% of income are deductible. This places an additional tax burden on those already burdened with higher medical expenses.

• Taxes – Taxpayers who itemize can deduct the taxes they pay for real property taxes, personal property taxes, and state income tax or sales tax. For AMT purposes, taxes are not deductible, resulting in a form of double taxation. This is one of the largest areas of adjustment for AMT, since just about everyone who itemizes either pays property taxes, state income tax or both.

• Home Mortgage Interest – The recent refinancing boom had many homeowners taking equity out of their homes for purposes other than home improvement, unwittingly creating the possibility of the AMT for themselves. Generally, for regular tax purposes, taxpayers can deduct interest from their home acquisition debt and up to $100,000 of the equity debt for their home or second home, including interest paid on the debt for purchases such as motor homes and boats that qualify as a home or second home. However, for AMT purposes, interest on the equity debt, including the debt for motor homes and boats, is not deductible.

• Miscellaneous Deductions – There are two classes of miscellaneous itemized deductions. The more frequently encountered class includes deductions related to employee business expenses, investment expenses, tax preparation costs, etc. For regular tax purposes, these deductions are only allowed to the extent they exceed 2% of a taxpayer’s income (AGI). For AMT purposes, these deductions are not allowed at all, creating a substantial difference for many taxpayers.

• Personal Nonrefundable Tax Credits – Generally, nonrefundable personal credits (except for the adoption credit, the child credit and the saver's credit) are normally not allowed against the AMT. For several years, through 2006, Congress has made special provisions allowing these credits to offset the AMT. However, beginning in 2007, without further Congressional action, these credits will no longer offset the AMT. These credits include the child and dependent care credit, the hope and lifetime learning credits, the elderly credit and the mortgage credit.

• AMT Exemptions – As part of the AMT computation, taxpayers are allowed an AMT exemption. This amount is a fixed amount based upon filing status. As part of Congress’s AMT crutching efforts, since 2001, the exemption amount has been periodically increased for inflation. However, barring Congressional action in 2007, the exemption amount will revert to the pre-2001 levels. Thus, for joint filers, the exemption is set to drop from $62,550 (the 2006 exemption) to $45,000 and from $42,500 to $33,750 for single taxpayers.

In a recent report by the Joint Congressional Committee on Taxation, and due primarily to the factors outlined above, it is estimated that the number of taxpayers affected by the AMT in 2007 will increase substantially. For example, they estimate the number of taxpayers, just in the $75,000 to $100,000 income (AGI) category who will be subject to AMT, will jump from 170,000 taxpayers to 5,700,000, and the additional tax attributed to the AMT for these taxpayers will jump from $290 million to $6.3 billon.

2007 may be the turning point for the AMT, and Congress will hopefully institute meaningful reform. If you have questions about how you might be affected by the AMT in 2007, please give this office a call.

back to top

Charitable Contribution Substantiation Rules Toughened for 2007

Beginning this year, cash contributions, regardless of the amount, must be substantiated with a bank record or a written communication from the donee showing the name of the charitable organization, date and amount of the contribution.

The recordkeeping requirements may not be satisfied by maintaining other written records. Prior to 2007, for cash contributions of $250 or less, taxpayers only needed to keep a contemporaneous written record as verification. This is no longer the case! Unless the charitable organization provides written communication, cash donations put into a “Christmas kettle,” church collection plate, pass-the-hat collections at youth sporting events, etc., will not be deductible. A donation by debit or credit card can be substantiated by bank records.

These new rules make it easy for the IRS to audit a taxpayer’s charitable contributions by correspondence. They need only request that you provide copies of the required substantiation by mail. If you are unable to provide it, they can make the appropriate tax, interest and penalty adjustments and send you a bill. Most likely, they will also make the charitable contribution audit an automatic companion item for other audit issues.

This comes on top of the new rules for non-cash donations effective after
August 17, 2006, where no deduction is allowed for a charitable contribution of clothing or household items unless the clothing or household item is in good used condition or better. Household items include furniture, furnishings, electronics, appliances, linens, and other similar items. Food, paintings, antiques, and other objects of art, jewelry and gems, and collections are excluded from the provision.

Generally, the verification rules for contributions of clothing and household items require that you obtain a receipt from the charity, including its name, date and location of the contribution and a reasonably detailed description of the property. In addition, you must also keep a record of each item contributed, indicating the name and address of the charity, date and location of the contribution, and a description of the property in detail that is reasonable under the circumstances. If the contribution is valued at $250 or more, the acknowledgement from the charity must indicate whether you received any goods or services in return for your contribution and the value of those services. Contributions of property valued at $500 or more must be substantiated by records that also indicate how the property was acquired, the approximate acquisition date, and your cost or basis in the property. For contributions totaling $5,000 or more, a qualified appraisal is generally required.

Please call if you have questions regarding how these new rules may affect your specific situation.


back to top

BUSINESS & MANAGEMENT PRACTICES

Home Office Expenses of a Small Business Organized as a Corporation

Many entrepreneurs and professionals have found it convenient and cost-effective to set up their office or practice in an area of their home. There is no commute time or overhead expenses, and they don’t have to worry about paying someone else office rent. Home-office deductions may be available to these taxpayers whether they are self-employed or employees. What if the taxpayer's business or practice located in the home is incorporated?

Business expenses, such as salary, depreciation or expense deductions for business equipment, supplies and the like, are deductible without regard to the home-office deduction rules and how the business is organized. The expenses that are at issue are the so-called direct and indirect expenses of a home office.

• Direct expenses are those that relate only to the home office, such as the cost of painting the room where the home office is located, or repairing the room's leaking ceiling.

• Indirect expenses are those that relate both to the personal portion of the home and the business-use portion, that is, the home office. Indirect expenses include items such as utilities, real estate taxes, home mortgage interest, rent, homeowners insurance and repairs benefiting the entire property.

Direct expenses and the business-use portion of indirect expenses relating to a home office within a residence are deductible only if a portion of the home is used regularly and exclusive as:

(1) A principal place of business, or

(2) As a place to meet or deal with customers or clients in the ordinary course of business. Caution: Taxpayers who are employees must meet an additional test - their use of the home office must be for the convenience of the employer.

If the qualification test is met, and gross income from the business use of a taxpayer's home equals or exceeds total business expenses (including depreciation), all expenses for the business use of the home can be deducted. If, however, the taxpayer's gross income from that use is less than the total business expenses, home office deductions are limited to the excess of the gross income derived from the business use of the home over the sum of:

(1) The deductions allocable to business use that are allowable whether or not the unit (or portion of the unit) was so used (e.g., mortgage interest, real estate taxes, and casualty and theft losses), and

(2) The deductions (such as for salaries or supplies) allocable to the business activity in which business use of the home occurs, but which aren't allocable to business use of the home.

A qualifying self-employed taxpayer claims home office expenses on Form 8829 (Expenses for Business Use of Your Home) and on Schedule C. A qualifying employee enters home office expenses on Form 2106 or Form 2106EZ and claims them as miscellaneous itemized deductions subject to the 2%-of-AGI floor. Note: Miscellaneous itemized deductions are not allowed against the Alternative Minimum Tax (AMT). Thus, if a taxpayer is subject to the AMT, they could lose part or all of the home office deduction benefit.

Problems of the closely held corporation

If the business operated out of a taxpayer's home is organized as a corporation, direct and indirect expenses of the home office are the entity's expenses, not the owner-employee's.

From a tax standpoint, there are three ways to handle these expenses:

• Payment of rent - The corporation can pay its shareholder-employee rent to offset home office expenses and supply him with a return. The rent will be deductible by the corporation, assuming it's a reasonable amount for the space and services actually provided, and will be taxable to the shareholder-employee. However, the shareholder-employee/homeowner won't be able to claim offsetting deductions. The rules allowing deductions for the business use of a dwelling unit do not apply to any expense attributable to the rental of all or part of a taxpayer's dwelling unit to his employer during any period in which he uses the rented portion to perform services as an employee of the employer. For purposes of this rule, an independent contractor is treated as an employee, and the party for whom the independent contractor is performing services is treated as an employer. Where such a lease arrangement exists, the only deductions that are allowable are those that could be claimed in the absence of any business use, e.g., mortgage interest, real estate taxes and casualty losses.

• Unreimbursed employee expenses - The shareholder-employee can satisfy the convenience of the employer test if he is working in the only location of the business. Assuming that he meets the other home-office requirements, the shareholder-employee can claim home office deductions as if he were a qualifying employee of an unrelated corporation, namely treat them as unreimbursed employee expenses on Schedule A. To ward off a possible attack on the grounds that the shareholder-employee is paying expenses he could have sought reimbursement for, there should be a written agreement to the effect that the shareholder-employee is required to pay for expenses. Although this approach appears to be clean, neat and simple, there are a number of unattractive consequences:

o The shareholder-employee can only deduct home office expenses to the extent the total of his miscellaneous deductions exceeds 2% of his AGI—this rule may bar home-office deductions altogether.

o Claiming home office deductions may increase the taxpayer's chances of being audited.

o As mentioned earlier, the deduction is not allowed against the AMT, which could reduce or eliminate the deduction if the individual is subject to the AMT.

o Depreciation deductions claimed for the business-use portion of the home reduces the owner's basis in it, and any home sale gain representing depreciation adjustments attributable to post-May 6, '97 periods isn't eligible for the $250,000/$500,000 home sale exclusion.

• Reimbursed employee expenses - The shareholder-employee can treat his home office expenses as if he were a regular employee, and then, by written pre-arrangement with the corporation, have it reimburse him for these costs after he substantiates them in full (amount, time, place, and business purpose of each expense). Results: Assuming the shareholder-employee could have claimed the expenses as business deductions, the reimbursement for the expenses is fully deductible by the corporation and is a tax-free accountable-plan reimbursement to the employee. The shareholder-employee avoids having to claim attention-generating home-office deductions, and doesn't have to struggle with depreciation deductions and basis adjustments. However, the shareholder employee can't deduct the business-related portion of his mortgage interest and property tax if the corporation gives him a tax-free accountable-plan reimbursement for these items. Otherwise, he would be getting a double tax benefit - a deduction and tax-free reimbursement - from the same expense.

A home office will be treated as a principal place of business if a portion of the home is used for the administrative or management activities of any trade or business of the taxpayer, but only if there is no other fixed location where the taxpayer conducts substantial administrative or management activities of that trade or business. Deductions will be allowed for a home office meeting this test only if the other applicable requirements are satisfied—i.e., the home office must be used exclusively and regularly and, in the case of an employee, that exclusive use must be for the convenience of the employer.

back to top

Writing Off Your Start-Up Expenses

Business owners, especially those operating small businesses, may be helped by a tax law allowing them to deduct up to $5,000 of the start-up expenses in the first year of the business’ operation. This is in lieu of amortizing the expenses over 180 months (15 years).

Generally, start-up expenses include all expenses incurred to investigate the formation or acquisition of a business or to engage in a for-profit activity in anticipation of that activity becoming an active business.

To be eligible for the election, an expense also must be one that would be deductible if it were incurred after the business actually began. An example of a start-up expense is the cost of analyzing the potential market for a new product.

As with most tax benefits, there is always a catch! Congress put a cap on the amount of the start-up expenses that can be claimed as a deduction under this special election. If the expenses are $50,000 or less, you can elect to deduct up to $5,000 in the first year, plus you can amortize the balance over 180 months. If the expenses are more than $50,000, then the $5,000 first-year write-off is reduced dollar-for-dollar for every dollar start-up expenses exceed $50,000. For example, if start-up costs were $54,000, the first-year write-off would be limited to $1,000 ($5,000 – ($54,000 - $50,000)).

The election to deduct start-up costs is made by claiming the deduction on the return for the year in which the active trade or business begins, and the return must be filed by the extended due date.

Qualifying Start-Up Costs – A qualifying start-up cost is one that would be deductible if it were paid or incurred to operate an existing active business in the same field as the new business, and the cost is paid or incurred before the day the active trade or business begins. Not includible are taxes, interest or research and experimental costs.

Examples of qualified start-up costs include:

• Surveys/analyses of potential markets, labor supply, products, transportation facilities, etc.;
• Wages paid to employees and their instructors while they are being trained;
• Advertisements related to opening the business;
• Fees and salaries paid to consultants or others for professional services; and
• Travel and other related costs to secure prospective customers, distributors and suppliers.

For the purchase of an active trade or business, only investigative costs incurred while conducting a general search for or a preliminary investigation of the business (i.e., costs that help the taxpayer decide whether to purchase a new business and which one to purchase) are qualified start-up costs. Costs incurred attempting to buy a specific business are capital expenses that aren’t treated as start-up costs.

For more information regarding start-up expenses, or if you would like an appointment to plan the formation of a new business, please call this office.

back to top

Unique Expense Issues

A1 – Marketing that is intended to portray your business positively can be deducted. Such marketing creates a long-term potential for business and falls within the ordinary and normal requirements of the tax code. Examples of such marketing include sponsoring local youth sports teams, distributing samples of your business product, and costs associated with prizes offered by your business in a contest. As long as your marketing expenses can be reasonably related to the promotion of your business, they can be deducted.

Q2 – If an individual gets traffic citations and parking tickets while traveling on business, can those costs be deducted as a business expense?

A2 – The tax code specifically precludes a deduction for fines or penalties paid to a government, including local, state, or federal, and whether or not it is a foreign or domestic government entity. Even though many of these costs are incurred during business trips, they are not considered deductible.



Q3 – Can the cost of subscriptions for business magazines and publications be deducted?

A3 - Yes, the cost of subscribing to certain trade publications related to your business is deductible. However, be careful when taking the deduction. If a check is written out for a three-year subscription today, you are allowed to deduct one-third of the cost this year, one-third the next year, and the final third the year after that.

If you have questions regarding the deductibility of specific items, please call for additional information.

back to top

GENERAL INFORMATION

What to Do If You Receive an IRS Notice

It’s a moment many taxpayers dread. A letter arrives from the IRS and it’s not a refund check. Don’t panic; many of these letters can be dealt with simply and painlessly.

Each year, the IRS sends millions of letters and notices to taxpayers to request payment of taxes, notify them of a change to their account or to request additional information. The notice you receive normally covers a very specific issue about your account or tax return. Each letter and notice offers specific instructions on what you are asked to do to satisfy the inquiry.

• What you should do – Is immediately mail or fax the correspondence to this office, so it can be reviewed and timely responded to.

• What you should not do – Is to set it aside until later. Notices that are not responded to in a timely manner will cause additional notices to be issued. Each additional notice brings with it added complications and makes it more difficult to resolve the problem.

Most notices are computer-generated after comparing the income items reported on your return with those reported by the payers. For example, your employer sends you a W-2 every year and also sends a copy to the government so that your wages are on the IRS computer. Your bank sends the 1099INT to the IRS showing how much interest you earned. Your brokerage firm reports your dividends and gross proceeds of sale from security transactions with 1099DIV and 1099B forms. If you are self-employed, those who pay you $600 or more during the year are required to send you a 1099-MISC. If you are retired and collect a pension or are drawing on your own IRA, a 1099R will be sent to you. Lenders report how much interest you paid on your home loan during the year. If you are lucky enough to hit it big in Vegas, you will receive a 1099G for your winnings. The list goes on and on, and if what you reported on your return doesn’t match what is on the IRS computer, you will receive a computer-generated notice.

One big problem that has developed over the years is the IRS’s willingness to allow payers to use substitute forms that are unrecognizable as income-reporting documents. Many of the brokerage firms are now providing their substitutes in letter-size documents, printed front and back on multiple sheets, that almost takes a financial expert to understand. This results in frequent errors.

There are times when you may receive an income item and it appears to be taxable to the IRS when in fact it is not. Here are some frequently encountered situations:

• Sold a security with no profit – Whenever you sell a security, the brokerage house will report the gross proceeds of sale to the IRS. In other words, the IRS has on their computer what you sold it for. They have no clue what you paid for it, which means you must report the sales on Schedule D on your tax return. If you fail to report it, the IRS treats the entire sales price as a profit. Let’s say you sold 200 shares of stock, which originally cost you $5,050, for $5,000. You actually have a loss of $50. Unless you report the transaction and show that you paid $5,050 for the shares, the IRS is going to assume you had a $5,000 profit. This frequently occurs when taxpayers overlook a transaction or simply omit it because there was no profit. If this is what caused the notice, you will need to respond to the IRS to explain the mistake and provide verification of the stocks’ original cost.

• Rollovers – Another frequent error is when you rollover an IRA, 401(k), etc., from one plan to another or one trustee to another. If you don’t show on the tax return that the distribution was rolled over, the IRS assumes the entire amount to be taxable. If these funds are transferred between trustees, a 1009R is not supposed to be issued, but sometimes they still are. It is better to make sure. On the other hand, if you take possession of the funds and then redeposit them into another IRA, a 1099R will be issued and the rollover must be accounted for on the return. If this is what caused the notice, you will need to provide a verification of the rollover to the IRS with your response.

• Shared accounts – Generally, banks and other financial institutions only have the capability of having one taxpayer ID on an account as the primary owner, even though it may be a joint account with others. These financial institutions will issue the 1099 on other reporting documents under the social security number of the primary owner, and the total will be reported to the IRS under that social security number. This also will affect married or separated taxpayers who do not file jointly. When responding to the IRS notice, you will need to provide the names, addresses and social security numbers of the other owners and a statement to the fact that they each reported their appropriate share.

The foregoing are just a few of the more common examples of computer mismatches that can cause computer-generated notices. Even though the IRS feels the notices are readily understandable, experience has shown that taxpayers can become confused and that the experienced eye of a tax professional is usually required to decipher the notices. Thus, we recommend that you allow this office to review them first before taking action.

Word of Caution – The IRS routinely provides state tax agencies with the results of the correspondence audits. Generally, the results of the correspondence audit will need to be dealt with on the state level through an amended state return or you can wait to receive the state notice. However, if you wait for the state notice, additional interest and penalties may possibly accrue for the state return.

back to top

Retirement Plan Options for 2007

Now that 2006 is behind us, it might be appropriate to consider how to maximize retirement and other special-purpose plan contributions for 2007. These plans not only build the retirement nest egg, but may also deliver tax deductions for your tax return. Let's take a look at some of the ways a taxpayer can benefit.

• Traditional IRA - The maximum contribution to an IRA for 2007 is $4,000 ($5,000 if over 49 years old). If the taxpayer is covered by another retirement plan, a deduction for the contribution may not be allowed, or the permitted deduction may be less than the maximum, depending on the income. For single taxpayers, the deductible amount begins to phase out when the taxpayer’s income (AGI) exceeds $52,000 ($83,000 for married couples filing jointly), and is totally phased out when the income (AGI) exceeds $62,000 ($103,000 for joint filing couples). When the deduction is limited, a nondeductible contribution can be made.

• Spousal IRA – This is a traditional IRA most often used by a non-working or low-income earning spouse. The annual contribution limits are the same but for the spouse of a taxpayer who is covered by another pension plan, a higher income (AGI) is allowed before the phase out of the deductible amount begins. Thus, the deductible amount starts to phase out when the taxpayer’s income (AGI) exceeds $156,000, and is totally phased out when the income (AGI) exceeds $166,000.

• Roth IRA - This is a nondeductible retirement account, but the earnings accumulate without being taxed and also are tax-free upon withdrawal, provided that holding period and age requirements are met. Roth IRAs are a good alternative for many taxpayers who aren’t eligible to deduct contributions to a traditional IRA. The maximum deductible contribution for the 2007 tax year is $4,000 ($5,000 if the taxpayer is over 49 years old). However, the amount that can be contributed begins to phase out when the taxpayer’s income (AGI) exceeds $99,000 ($156,000 for married couples filing jointly), and is totally phased out when the income (AGI) exceeds $114,000 ($166,000 for joint-filing couples).

Caution: The $4,000 and $5,000 IRA contribution limits apply to a combination of both the traditional and Roth IRA contributions.

Note: Self-employed taxpayers can also contribute to traditional or Roth IRAs. However, if the self-employed individual also has a self-employment plan, then the deductible AGI limits for the IRAs would apply.

• Traditional to Roth Conversions – Single taxpayers can still convert their traditional IRAs to Roth IRAs if their income (AGI) is less than $100,000, not counting the income from the converted IRA. In doing so, taxpayers must pay the tax on any untaxed portion of the IRA converted. However, the nondeductible portion of traditional IRA contributions can be converted tax-free.

• 2010 Conversion Strategy – Beginning in 2010, the $100,000 income (AGI) limit on converting traditional IRAs to Roth IRAs is removed. You may wish to make designated nondeductible IRA contributions in the years leading up to 2010 and then convert those IRAs into Roth IRAs in 2010, with only tax payable on the earnings between now and then.

• 401(k) Deferred Income – For 2007, an employee can generally defer up to $15,500 ($20,500 age 50 and over) into their employer’s qualified 401(k) plan. The amount may be limited to a lower amount for employees who are in their company’s top wage group. In addition, if the plan permits, the contribution can be designated as an after-tax Roth 401(k) contribution.

• Government and Non-Profit Employee Plans – Government Sec. 457 and Non-profit 403(b) plans generally allow an employee to tax-defer up to $15,500 ($20,500 age 50 and over) annually.

• SEP-IRA (Simplified Employee Pension) - SEP-IRAs are tax-deferred plans for sole proprietorships and small businesses. They are probably the easiest way for the owners to build retirement dollars, requiring virtually no paperwork. Maximum contributions depend on your net earnings from your business. For 2007, contributions are the lesser of 25 percent of compensation or $45,000.

• Solo 401(k) Plans - A growing number of self-employed individuals with no employees are forsaking the SEP-IRA for a newer type of retirement plan called the Solo 401(k) or Self-Employed 401(k), mostly for its higher contribution levels. For 2007, the maximum contribution to a Solo 401(k) is the sum of: a) up to 25% of compensation, and b) salary deferral up to $15,000. The total of A and B can't exceed $45,000 or 100% of compensation.

• Health Savings Accounts (HSA) - An HSA is a tax-exempt trust or custodial account established exclusively for the purpose of paying qualified medical expenses of the account beneficiary. An HSA is designed to assist individuals that have high-deductible health plans (HDHP). A taxpayer is only eligible to establish an HSA if he or she has an HDHP. The maximum 2007 contribution for eligible individuals with self-only coverage under an HDHP is $2,850. For an eligible individual with family coverage under an HDHP, the maximum contribution is $5,650. Prior to 2007, the annual contribution to an HSA had a further limitation based on the plan’s deductible amount. A law change in 2006 removed this limit. Amounts contributed to an HSA belong to individuals and are completely portable. Every year, the money not spent on medical expenses stays in the account and gains interest tax-free, just like an IRA. Unused amounts remain available for later years.

As you can see, the options are numerous and varied. Please note, however, that information for each plan above has been abbreviated. For specific details on how they may apply to your situation, or if you wish to explore your options for 2007 retirement savings, please call for an appointment.

back to top

Don’t Count on Those Low Capital Gain Rates Forever!

If you have substantial gains in your stock holdings that have been held for more than one year, you may wish to consider strategically selling those holdings over the next few years, in order to take advantage of the lower long-term capital gains rates that are currently scheduled to go away after 2010.

Generally, if you are in the 25% tax bracket or above, the capital gains rates will be 15% through 2010. So whenever you sell holdings from your portfolio, the tax would be the same through 2010. However, after 2010 and without Congressional action, the long-term capital gains rate will revert to 20%. If you are in the 15% or lower tax bracket and to the extent you remain in the 15% tax bracket after adding the capital gains income, the long-term capital gains rate is 5% through this year. Then, for 2008 through 2010, that rate drops to zero. Thus, if your other income combined with your long-term capital gains for the years 2008, 2009 and 2010 puts you in the 15% or lower tax bracket in each of those years, your tax on the long-term capital gains for those years could be zero.

It might be appropriate for you to develop a sales strategy to take advantage of these lower rates. If this office can be of assistance in that regard, please call for an appointment.

back to top

Six-Month Filing & Payment Extension For Those Affected By Virginia Tech Tragedy

The IRS has granted a six-month tax filing and payment extension to those affected by the shootings on Monday, April 16, 2007, at Virginia Tech, in Blacksburg, Va. The relief applies to the:

• Victims,
• Their Families,
• Emergency Responders,
• University Students, and
• University Employees.

Those granted the relief have until October 15, 2007 to file and make payments associated with their 2006 individual tax returns due April 17. No filing and payment penalties will be due for those qualifying for the extension as long as returns are filed and payments are made by October 15, 2007.

Taxpayers that want to claim the six-month relief must call the IRS at 1-866-562-5227 and identify themselves as affected by the shootings before they file and/or make their payment.

back to top

BRIEFS

Tax Benefit for Older Taxpayers Set to Expire Soon

There is a substantial tax benefit available to older taxpayers allowing them to make a charitable contribution directly from their IRA account. However, unless extended by Congress, this benefit will expire at the end of 2007 and requires planning early in the year to maximize the benefits.

Taxpayers 70-½ years of age or older may make direct transfers of up to $100,000 from their IRA to a qualified charity with the following results:

(1) The distribution is excluded from income,

(2) The distribution counts towards the taxpayer’s Required Minimum Distribution for the year, and

(3) The distribution does NOT count as a charitable contribution. The distribution must come from a Traditional or Roth IRA, but cannot be from a SEP-IRA.

On the surface, this may not appear to provide tax benefits. However, by excluding the distribution, a taxpayer lowers his income (AGI) for other tax breaks pegged at AGI levels, such as medical expenses, passive losses, taxable Social Security, etc. Non-itemizers essentially receive the benefit of a charitable contribution to offset the IRA distribution. If you think this tax provision may affect you and would like to explore the possibilities with some tax planning, please call this office.

back to top

Why You Should Not Put Your Child on the Title

It is not uncommon for individuals who are getting along in years to put the children on the title of their home. This is actually not a good idea. Here is what happens when you do that:

(1) You are in effect gifting a portion of the home to your child at that time and, if the value of the gift portion is greater than the annual gift tax exclusion ($12,000 for 2007), you would need to file a gift tax return.

(2) Although you most likely will not owe any gift tax, your child’s basis in the property will be what your basis is at the time of the gift and subsequent taxable gain is measured from that basis.

(3) Your child will not benefit from any potential step-up in basis to the home’s fair market value (FMV) at the time of your death on the portion transferred to the child.

(4) The portion owned by the child probably will not qualify for the homeowner’s gain exclusion.

(5) Your lifetime gift tax exclusion will be reduced by the FMV of the gift.

In addition, it may complicate other issues if there are multiple beneficiaries who you intended to share in your estate equally. It is generally better to simply allow the child to inherit the home and other property, including business assets upon your death.

back to top