YEAR-END TAX SAVING TIPS
| Effective for Miles Driven | Business Use | Charitable Use | Medical or Moving |
| 01/01/07-12/31/07 | 48.5 cents per mile | 14 cents per mile |
20 cents per mile |
School Teacher Deduction
Extended through 2007, elementary and secondary school teachers and certain other school professionals can deduct up to $250 of out-of-pocket costs incurred to purchase books, supplies and other classroom equipment. School teacher deduction, as with college tuition, is an above-the-line deduction and can also be applied to computer equipment and other supplementary material used in the classroom.
Above-The-Line College Tuition Deduction
The tax deduction for qualified higher education expenses was extended through 2007. This allows you to deduct college education expenses such as tuition and other qualified expenses paid directly to the school. There is a maximum amount that you can write-off based on your level of income. The maximum is $2,000 for those with adjusted gross income (AGl) levels greater than $130,000. The deduction increases to $4,000 for adjusted gross income (AGI) levels less than $130,000. Above-the-line means it may be deducted whether you itemize or not; therefore, it is available to all taxpayers.
Remember: Up to $2,500 of higher education loan interest is also deductible as an above-the-line expense. Taken together, these two higher-education deductions can yield substantial tax reduction.
Medical Savings Accounts
Contributions to Archer Medical Savings Accounts are extended through 2007. New contributions may be made after 2007 only by individuals who previously used Archer Medical Savings Accounts.
Individuals may make tax-deductible contributions to a medical savings account to pay for health care expenses, and distributions are tax-free if used only to pay for medical expenses.
Don't Forget, Use Up Your Flexible Spending Deductions
Cafeteria plans (also known as flexible benefit plans or flexible benefit arrangements) allow employees to pay for health benefits and other qualified benefits with pre- tax dollars. The employee decides how much to be set aside from his salary before the beginning of the. Keep in mind that you can be reimbursed for over-the-counter drugs, such as aspirin and antacids.
Be sure to check with your employer to determine whether your plan allows you the new 2½ month grace period to spend your unused amounts and, if not, ask that the plan be changed.
Deduction for Manufacturing and Certain Production Activities
Beginning in 2005, many business taxpayers became eligible to claim a new deduction equal to a percentage of the income earned from manufacturing (and certain other production activity) undertaken in the U.S. Because the deduction percentage was only 3% for tax years beginning in 2005 and 2006, many taxpayers did not bother to do the accounting needed to support the deduction. In 2007, however, the percentage climbs to 6% and those who are not yet doing the accounting should reconsider that decision . The deduction percentage grows again in 2010 to 9%.
Many activities performed in the U.S. that might not normally be considered manufacturing are included either fully or in part. For instance, "production activity" can include items like the rental of products made in the U.S., construction, movies, architectural and engineering services and rental paid for certain production-related storage space. Excluded from "production activity" are items like gross receipts from the sale of food or beverages prepared by the taxpayer at a retail establishment and the transmission or distribution of, but not the production of, electricity, natural gas, or potable water.
Marriage, Divorce and Other Changes Affect Year-End Tax Planning
Your marital status for the entire year is determined as of December 31st. A taxpayer who gets married (or divorced) on that date is treated as if he or she were married (or single) all year long. Single taxpayers who have dependent children living with them generally qualify for the "Head of Household" filing status, which is far more favorable than the "Single" filing status. Even taxpayers who are still married on December 31st may qualify for Head of Household, but only if the spouses lived apart the last six months of the year. Otherwise, their only choices are "Married Filing Jointly" or "Married Filing Separately."
Widows and widowers may qualify for a special filing status known as "Qualifying Widow(er)". Taxpayers who lost a spouse within the last two years and have dependent children living with them get to use tax brackets and a standard deduction identical to married taxpayers filing joint returns.
Maximize Your Retirement Plans Contributions
Many employers will match a certain percentage of an employee's contribution. If you are eligible to participate in a plan at work, but you haven't taken the time to check it out, make a New Year's resolution to begin putting a portion of your paycheck away for your future. The tax benefits can be substantial. For example, if you are in the 30% tax bracket (federal and state income taxes combined) then every $1,000 of earnings contributed to your plan saves you $300 in tax. Of course, the money you contribute is taxable when you take it out at retirement. You may be subject to an early withdrawal penalty of 10% if you withdraw funds prior to age 59½.
The maximum IRA deduction for 2007 is $4,000 for those under 50 and $5,000 for those 50 and older.
Establish a Keogh Plan or a SEP Plan Self-employed taxpayers can save taxes by contributing to a Keogh plan if it's established before the end of 2007. The taxpayer has until the due date of his or her return, including extensions, to actually make the contribution to the plan. If you miss the year-end deadline for a Keogh, you will still have until the extended due date of your 2007 return to establish and make a deductible contribution to a Simplified Employee Pension (SEP) plan.
Volunteer Out-of-Pocket Costs Are Deductible If you incur costs associated with being a volunteer for a qualified nonprofit organization, some or all of the costs may be deductible as an itemized deduction. To be deductible, un-reimbursed expenses must be incurred while in the service of a qualified nonprofit. In other words, costs associated with driving to worship service are not deductible, but costs associated with driving to a charity as a board member are. Here are a few other examples:
- Travel and hotel costs incurred while you attend a church convention as a delegate would be deductible.
- If you delivered meals to shut-ins for the local Meals On Wheels charity, you could deduct actual vehicle costs or the applicable charitable mileage reimbursement rate.
- Uniform costs for scout leaders worn when performing scouting duties are deductible. (Only clothing not suitable for everyday wear is deductible.)
More Tax-Saving Steps
Personal or Small Business
- Arrange with your employer to defer bonuses.
- Step up involvement in business activities to meet material participation requirements under passive loss rules.
- Settle insurance or damage claims if this will maximize your casualty loss deduction.
- Dispose of passive investment to free up suspended losses.
- Pay contested state taxes to deduct them and continue contesting them next year.
- Realize losses on stock while substantially preserving your investment position.
- Convert investment income taxable at regular rates into qualifying dividend income.
- Increase basis in partnership or S Corporation to make possible a loss deduction.
- Adjust year-end divorce or marriage plans so as to avoid extra taxes that may arise due to a change in filing status or the marriage penalty.
- Put equipment in service before year-end to get six months' worth of depreciation deductions unless the mid-quarter convention would be triggered.
- Increase withholding to avoid estimated tax penalty.
- Make expenditures qualifying for $125,000 business property expensing option (Section 179 depreciation).
- Apply bunching strategy to "miscellaneous" itemized deductions, medical expenses and other itemized deductions to increase deductible amounts.
- Consider deferring a debt cancellation event.
- Set up a self-employed retirement plan.
- Take steps to avoid or minimize income tax on Social Security benefits.
- Extend subscriptions to professional journals, pay union or professional dues, enroll in (and pay tuition for) job-related courses, etc., to bunch into miscellaneous itemized deductions subject to the 2%-of-AGI floor.
- Use a credit card to prepay deductible expenses.
- Increase the amount you set aside for next year in your employer's health flexible spending account if you set aside too little for this year.
Did you have a significant income change; change your name or address; marry, divorce or live apart from your spouse; have or adopt a child; lose a spouse or a child; start or sell a business; purchase or sell business equipment or rental property; create a living trust; or receive any correspondence from the IRS?
Call today for a tax planning appointment. The sooner we meet, the more time we will have for tax-saving action.
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