What's New 2007 Blank Client Organizer 2007 Federal Tax Quick Reference Guide Tax Planning Ideas INDIVIDUALS   There are a number of changes this year to consider when preparing your income taxes and we have listed the most important ones here for you.   New Itemized Deduction (30 June 2007) The new law creates a new itemized deduction for mortgage insurance premiums. The premiums are deductible if paid on a mortgage to buy a home as long as the interest payments on the mortgage are deductible (i.e., the home is a principal residence or a second home). A deduction is allowed for premiums paid on mortgage insurance provided by the Veterans Administration, the Federal Housing Administration, or the Rural Housing Administration as well as for premiums paid on private mortgage insurance. The new deduction is available only for 2007 (unless Congress extends the provision) and does not apply to mortgage insurance contracts issued before January 1, 2007. The deduction is phased out for higher-income taxpayers. The amount deductible is reduced by 10% for each $1,000 of adjusted gross income (AGI) in excess of $100,000 (10% of each $500 of AGI above $50,000 for married filing separately). Thus, for example, the deduction is reduced by 50% if a taxpayer's AGI is $105,000 ($52,500 for separate filers) and is eliminated entirely if AGI hits $110,000 ($55,000 for separate filers).   Health Savings Accounts The new law makes a number of liberalizations in the tax rules for health savings accounts (HSAs). HSAs permit employees and employers to make tax deductible contributions to a tax-sheltered savings account if the employee is covered by a qualifying "high-deductible" health insurance policy. Contributions to the HSA can be withdrawn tax-free to pay for the employee's out-of-pocket medical expenses. Among the new law changes: In the past, the maximum annual contribution to an HSA could not exceed the lesser of (1) 100% of the annual deductible under the high deductible health plan, or (2) a fixed dollar amount (for 2007, $2,850 in the case of self-only coverage and $5,650 in the case of family coverage). The new law repeals the 100%-of-deductible limit starting in 2007. Formerly, the HSA contribution limit was prorated if coverage was less than 12 months. The new law allows a full year's contribution to an HSA for partial year's coverage, provided the high deductible plan coverage is in place in the last month of the year and the coverage lasts for at least 12 months. Distributions from an IRA for medical expenses are taxable income (to the extent not a distribution of basis). Distributions from an HSA to pay medical expenses are not. The new law permits taxpayers who cannot afford to fully fund an HSA with direct contributions to move IRA money to an HSA. The rollover can only be made once in the taxpayer's lifetime.   Energy-Saving Tax Incentives Under current law, individuals can claim a personal tax credit for the purchase of "residential energy efficient property". The credit is equal to the sum of 30% of qualified solar water heating property expenditures, up to a maximum credit of $2,000. 30% of qualified fuel cell property expenditures, up to a maximum credit of $500 for each 0.5 kilowatt of capacity. 30% of qualified photovoltaic property expenditures, up to a maximum credit of $2,000. Under prior law, this credit was due to expire at the end of 2007. The new law extends the credit through 2008. The new law also clarifies that all property, not just photovoltaic property, that uses solar energy to generate electricity for use in a residence is qualifying property. The new law provides a similar one-year extension for certain business energy credits, including The 30% business energy credit for the purchase of qualified fuel cell power plants for businesses. The 10% credit for the purchase of qualifying stationary microturbine power plants. The 30% credit for purchase of qualifying solar energy property. The credit available to eligible contractors who build qualified new energy-efficient homes. Finally, the new law gives a one-year extension to the special deduction for the cost of energy efficient commercial buildings that reduce annual energy and power consumption by prescribed amounts.   The "Kiddie" Tax Is Expanded For years, the "kiddie tax" applied only to young children under age 13. Then the age limited was increased to age 17. But starting in 2008, the kiddie tax will hit "kiddies" as old as age 23. For 2007, the kiddie tax applied to a child if three conditions are met: The child has not reached the age of 18 by the close of the tax year and either of the child's parents is alive at such time. The child's unearned income exceeds $1,700 (indexed annually for inflation). The child does not file a joint return. The kiddie tax applies regardless of whether the child may be claimed as a dependent by either or both parents. Under these rules, unearned income of a child in excess of $1,700 (for 2007) is taxed at the parents' tax rates if the parents' tax rates are higher than the child's rate. The remainder of a child's taxable income (i.e., earned income, plus unearned income up to $1,700), less the child's standard deduction is taxed at the child's rate, regardless of whether the kiddie tax applies to the child. New Law Changes: Starting in 2008, the kiddie tax is expanded to cover children who are 18 years old or who are full-time students over age 18 but under age 24 (which aligns kiddie tax coverage with the definition of a "qualifying child" for purposes of the dependency deduction). The expanded rule applies only to children whose earned income does not exceed one-half of the amount of their support. The kiddie tax was instituted to discourage parents from shifting investment income to their children and the new law changes makes income-shifting even more difficult. But keep in mind that the benefits to be gained by income shifting have also declined in recent years. The income shifted often takes the form of capital gain or dividends and this income is currently only lightly taxed to the parents in the first place.   Tip: If income shifting is still desirable for clients, they may want to consider investments that defer taxable income beyond the kiddie-tax age limits. For example, a child's investment in land or growth stock will not trigger a kiddie tax as long as investment is not sold until the child is over age 18/23.   Pay Your Kids More Money In 2007 In 2007 minors can earn up to $5,350 tax free. If you hire your kids age 7-18 to work in our home-based business, the wages you pay them is tax deductible, and the money they earn from you - up to $5,350 is tax free to them (and not subject to the Kiddie Tax)... and you don't have to withhold any payroll tax on employees who are minors. (5 January 2007)   IRS Announces 2007 Standard Mileage Rates On 1 November 2006, the IRS announced the mileage rates for the 2007 tax year used to calculate business, charitable and medical deductible mileage. Beginning 1 January 2007 the standard mileage rates for the use of car will be: 48.5 cents per mile for business miles driven 20 cents per mile driven for medical or moving purposes 14 cents per mile driven in service to a charitable organization This compares to a business rate of 44.5 cents per mile for 2006 and 18 cents per mile for medical deductions. They cited that the primary reason for the higher rates were higher prices for vehicles and fuel during the year ending in October. The mileage rate for charitable miles is set by statute, and has not changed for the last several years. (11 November 2006) Mazda Vehicles Certified As Qualified Hybrid Vehicles The credit amount for the certified 2008 model year hybrid vehicles are: Mazda Tribute 2WD Hybrid — $3,000 Mazda Tribute 4WD Hybrid — $2,200 Taxpayers may claim the full amount of the allowable credit up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th vehicle. For the second and third calendar quarters after the quarter in which the 60,000th vehicle is sold, taxpayers may claim 50 percent of the credit. For the fourth and fifth calendar quarters, taxpayers may claim 25 percent of the credit. No credit is allowed after the fifth quarter.   Gross Reporting of Legal Awards — Must report 100% of awards with legal fee on Schedule A, Misc.  Unfortunately this creates additional tax due to AMT.  o        Unlawful Discrimination cases get an above-the-line deduction. o        Personal injury awards are excludable income (does not apply to punitive damages)   Sales Tax Deduction instead of State Income Tax Leasing of a vehicle qualifies Home building qualifies if it is separately stated and paid by the consumer.   Vehicle Contributions exceeding $500 Must have written acknowledgement If vehicle sold by charity, generally limited to gross sales amount, unless there is material improvement, or significant intervening use, or vehicle sold to needy at below market price. Now have Form 1098-C for reporting these   Be Aware! Passive Losses — IRS is paying closer attention to these.    Clean Fuel Deduction - $2,000 above-the-line subtraction for Hybrid vehicles, etc…  Will be replaced in 2006 by a tax credit.   MBA Tuition — IRS going after this to disallow deduction based on the fact that it qualifies the taxpayer for a new trade or business.   Golf club dues are not deductible even for golf professionals.   Business mileage rate increased from 44.5 cents to 48.5 cents for 2006.  Medical mileage increased from 18 cents to 20 cents.   Dependent — New statutory definition. For more information on this, please proceed to our connecting link to the IRS under the Tools tab above.   Roth 401k will be available in 2006 — with no income limits on elective deferrals. Remember our analysis from Roth IRAs a few years back - most taxpayers will be better off with a Roth if given enough time — generally 15 to 18 years.   Residential Energy Credits available in 2006 and 2007 $500 lifetime credit for energy improvements 30% credit for photovoltaic (solar) energy up to $2,000 per year.   Automatic 6 Month Individual Extension for 2006 tax returns.     CORPORATIONS   IRS doing compliance audit of 5,000 S corps from 2003 and 2004 tax years beginning in late 2005.   Section 179 higher limits extended through 2007.  Currently $112,000 for 2005 tax year. o        Section 179 on Vehicles. ·         Now 14,000 pounds is threshold and limit is $25,000. ·         Pickup trucks over 6,000 pounds may still be eligible for the $112,000 deduction if they have a cargo area with at least 6 ft of interior length.   Qualified Leasehold Improvements get 15 year recovery period Interior portion of building More than 3 years after building was first placed in service Enlarging building and structural changes don’t qualify. Can’t be related parties   15 Year recovery period for Qualified Restaurant Property.   Start-Up and Organization Costs 15 Year amortization period. Can expense up to $5,000 of each per year. Must still make election or IRS will treat as permanent capital expenditures (no deduction!)   Contractors — New credit in 2006 and 2007 for constructing energy efficient homes. $2,000 per dwelling unit.   Health Savings Account contributions by Partnerships and S Corps — Reportable as wages to more than 2% owners, but not subject to FICA tax.   Here's the most common business expenses that are fully deductible against your business income: Accounting fees Advertising Bank charges Commissions and sales expenses Consultation expenses Continuing professional education Contract labor Credit and collection fees Delivery charges Dues and subscriptions Employee benefit programs Equipment rentals Factory expenses Insurance Interest paid Internet subscriptions, domain names, and hosting Laundry Legal fees Licenses Maintenance and repairs Office expenses and supplies Pension and profit-sharing plans Postage Print and copy Professional development and training Professional fees Promotion Rent Salaries, wages, and other compensation Security Small tools and equipment Software Supplies Taxes Telephone Trade discounts Travel Utilities