The 2007 filing season officially came to a close on April 17. Now is a good time to invite clients to sit down and review their 2006 federal income tax returns. There are many lessons to be learned from these returns, such as various steps clients could be taking to better position themselves for the 2008 filing season. Practitioners can use this Client Letter to invite clients to enter into a dialogue about tax planning and set a tax strategy in motion.
Dear Client:
The just-ended tax filing season probably taught you a thing or two about what you might have done differently in 2006. In hindsight, everything is 20/20. At the time however, things often are not so clear.
The good news is that you can take some proactive steps between now and the start of next year's filing season. We're ready to lend you a hand. Let's take a look at some key areas of your tax planning.
Retirement Planning
The world of retirement planning is hugely complex and is getting even more so. Last year's big new pension law, the Pension Protection Act of 2006 (PPA), made many changes to the nation's pension laws, which directly impact how you save for retirement.
One of the biggest changes was to make permanent some temporary rules enacted in 2001. These changes are very favorable.
One of the easiest ways to reduce your taxable income is to maximize your contributions to eligible retirement plans. Are you contributing the most you can?
The PPA increased the benefit and contribution limits for elective deferrals to 401(k) and some other plans to $15,000 in 2006 and after, with
annual cost-of-living adjustments. If you work for a state or local government and have a 457 plan, the PPA also enhanced elective contributions you can make to the plan. Individuals age 50 and older can make "catch-up" contributions of up to $5,000 for 401(k) s and some other plans. Your employer may also offer what is called a Roth 401(k). This is a special type of 401(k) that could be very valuable to some taxpayers, depending on their incomes and where they are in their careers.
Under the PPA, you can contribute up to $4,000 to an IRA in 2007. After 2008, this amount is indexed for inflation in $500 increments. Individuals who are age 50 and older can make an additional $1,000 contribution to an IRA (for a maximum total of $5,000 in 2007), thanks again to the catch-up rule. A spousal IRA and an IRA for a child who has a weekend or summer job are other great tools to help reduce your tax bill. We will be happy to sit down with you and thoroughly review your retirement planning strategy.
Educational Expenses
Saving for college is another long-term project. Fortunately, the tax laws offer you some big incentives. One of the most taxpayer-friendly incentives are "529" plans (named after Section 529 in the Internal Revenue Code). Every state and many colleges and universities offer these plans. Some 529s are pre-paid tuition plans. Others are savings account plans. Either way, you will likely get some valuable tax benefits. However, you have to read the fine print of these plans very carefully. You do not want high fees or poor returns to take away from the tax benefits.
You also do not want to forget the Hope and Lifetime Learning tax
credits. Like so many tax breaks, the rules are complex, but, if you qualify, you may be eligible for generous tax breaks. You also might be able to take advantage of the higher education tuition deduction, but only if your income is below a certain threshold.
Estate Planning
Many people do not think of the tax breaks that go along with estate planning. Just like retirement planning, estate planning is very complicated, and it is different for different people. An estate plan that may work great for your friends or neighbors may not be ideal for you. Do not get duped into a "one size fits all" estate plan.
One tax-related estate planning tool is very simple: make a gift. Gift-making is often overlooked when designing an estate plan. You can make tax-free gifts of up to $12,000 each year to each person. For married couples, the tax-free amount is doubled to $24,000. Gift-making is especially valuable if you have children or other beneficiaries who really could use part of your estate today. A gift leaves a lasting legacy.
Giving to Charity
Giving to charity has traditionally been a popular tax break. As you have likely heard, the rules for deducting your gifts to charity are stricter than ever before. We first saw this a few years ago when the IRS issued tough new rules on how much you can deduct when you donate a car or truck to charity.
Last year, also as part of the PPA, Congress said enough is enough when it comes to over-valued donations of used clothing and household items. Generally, your clothing and household items must be in good-or‑
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Tax Pointer
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better condition to be deducted. This year, tough new rules for contributions of cash kick-in. In most cases, you need a receipt or bank record to prove your donation. If you have not been saving your receipts, give the charities a call. They may be able to give you duplicates. These changes are very important. Do not hesitate to call us if you have any questions.
Changes Every Year
The tax laws change every year. A deduction you took last year might not be available this year. You cannot keep up with all the changes. Fortunately, we're here to do that for you. Some tax breaks that were available in the past are not available for 2007. These include the additional exemption for housing individuals displaced by Hurricane Katrina, tax-favored
treatment of qualified hurricane distributions from eligible retirement plans and the qualified electric vehicle credit, among others.
In 2007, you also might be able to take advantage of a new deduction for the cost of premiums for home mortgage insurance. Teachers can claim a deduction for out-of-pocket classroom expenses. There are also some tax incentives for energy-efficiency improvements to your home.
AMT
If all that was not enough, you also have to take into account the alternative minimum tax (AMT). In 2006, the AMT exemption amounts were $42,500 for single individuals and $62,550 for married couples filing jointly. For 2007, the exemption amounts are much less. They are $33,750 for single individuals and $45,000 for married couples filing jointly. Congress may extend the higher 2006 amounts into
2007. We will let you know as soon as Congress acts.
In other AMT-related news, certain credits are no longer allowed against AMT. These include the credit for child and dependent care expenses, the credit for the elderly or disabled and some residential energy credits, among others.
Estimated Tax
You may have learned this filing season that you should be paying estimated tax. This is not as complicated as many people think, if you do it right. That's where we can help.
Your Tax Strategy
As we have said before, do not hesitate to give us a call. We will be happy to sit down and go over your 2006 return line-by-line. There is a lot we can do now to get ready for the 2008 filing season.
Sincerely yours, s
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