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... Your Personal Tax Bill
Investment portfolio. Losses can be used to offset gains and reduce capital gains tax. Plus, another $3,000 in losses can be
used to offset ordinary income. But here's something new: If you (or family members) will be in the 10 or 15 percent tax bracket in 2008 and expect capital gains, consider waiting to sell investments until after the first of the year. That's when the long term capital gains tax for these taxpayers will drop to zero. The Kiddie Tax rules will also change and an opportunity to save in 2007 can be found in our previous article by clicking here.
Charitable contributions are a great way to lower your tax bill while supporting a cause close to your heart. You can make a contribution by credit card by year end, not pay the bill until 2008, and still get a 2007 tax break.
Thanks to the Pension Protection Act of 2006, taxpayers age 70 and 1/2 still have time to make cash donations directly from their traditional or Roth IRAs to tax-exempt charities. But hurry. Unless Congress acts to extend this provision, it will expire after the end of this year. Click here for details.
Alternative Minimum Tax (AMT). If you're subject to the AMT, you may be able to limit your exposure to additional tax. Your accountant can help plan.
Estimated tax payments. If you don't pay enough tax for the year, you might still avoid a penalty if you make estimated payments for 2007 equal to: 90 percent of this year's liability, or 100 percent of your 2006 tax liability (110 percent if your 2007 adjusted gross income exceeded $150,000).
Dependent children. If you have a child in college or grad school under age 24, you can still claim a dependency exemption as long as you provide more than half of his or her support. You may want to kick in extra dollars of support, such as a cash holiday gift, to preserve your exemption for another year.
College costs. Are you paying college tuition? If classes start in the first quarter of 2008, you can prepay the tuition in 2007 and take advantage of the Hope and Lifetime Learning credits on your current year tax return.
Take mandatory distributions. If you're required to take a withdrawal from your IRA, make sure to complete the transaction by December 31. Not doing so could result in a 50 percent penalty on the withdrawal you should have taken.
A qualified retirement plan. Extra contributions made to a plan can help build up your nest egg on a tax-deferred basis. And if you qualify, you can reduce your taxable income for the year, within limits.
Medical expenses. You can deduct unreimbursed medical expenses to the extent they exceed 7.5 percent of your adjusted gross income. If you expect to clear that threshold, you may want to pay for medical expenses, such as eye exams and dental cleanings, to maximize your deduction. If you participate in a Flexible Spending Account at work, use up funds by the end of the year (or by March 15, 2008 if your employer's plan has been amended to allow extra time).
Energy credits. Current tax law provides credits to individuals who have energy-efficient improvements made to their homes in 2007. Qualifying improvements include retro-fit windows and doors, skylights and insulation, up to a maximum credit of $500. In addition, for major improvements such as solar panels, there is a credit up to a maximum of $2,000. Act fast if you want to take advantage of this credit. Unless Congress extends it, the credit will expire after December 31, 2007. (Businesses can also qualify for energy tax breaks. Click here for information.) |
... Your Business Tax Bill
Buy ahead. Take a look at routine supplies that you know you'll need and buy extra in December. Even if your company doesn't pay the bill until 2008, as long as the expense is incurred before the end of the year, you can deduct it on your 2007 return.
Equipment. Computers and other equipment bought and placed into service by the last day of the year can generally qualify for a half-year's depreciation.
Or, you can elect to immediately write-off the cost of qualified assets up to $125,000 for 2007 with a "Section 179" deduction.
Certain large SUVs placed in service during 2007 receive a reduced Section 179 allowance of $25,000.
Repairs. Now is a good time for your business to make minor repairs that you've been putting off. The cost of repairs, as opposed to improvements, is fully deductible. Cash basis businesses get the write-off when paid, while accrual based businesses get it when incurred.
Rent or mortgage. Cash basis taxpayers should consider prepaying business rent or mortgage for January by December 31st. That provides 13 payments to write off this year.
Push income into next year, especially if you think you might be in a lower tax bracket for 2008.
If your business is cash-based, you don't pay tax on income until it is received. If that's the case, consider deferring some income to next year by waiting to send out invoices until the end of December, or by setting up installment plans that result in most of the revenue arriving in January or later.
Bad debts. If your business is accrual- based, you can deduct bad debts in the year those debts become worthless. But to do that, you have to be able to show that the accounts are uncollectible.
So act now to accelerate efforts to collect. Keep detailed records of collection calls, letters, and contacts.
Keogh retirement plans. If you're self- employed and interested in a Keogh plan, don't forget to set it up by December 31. You don't have to fund the account until the return due date, including any extensions. But to claim a 2007 contribution, you must open the account at a financial institution by year-end.
Domestic production tax break. For 2007 and 2008, this deduction amounts to
a maximum of six percent of the company's taxable income from "qualified domestic production activities."
More companies can qualify for this tax break than originally thought, so check with your tax adviser to see if your business is eligible. Click here for additional details.
S corporations. If you expect your S corporation to have a taxable loss this year, keep in mind that S corp shareholders can only deduct losses up to the amount of their basis in the stock they own. (Basis is equal to the amount of stockholder's investment, and loans they make to the business, with some adjustments).
If the loss you expect for 2007 exceeds your basis, you may be able to inject some cash into the company so that you'll have sufficient basis to deduct the entire loss on your 2007 return.
Bonuses. If your company is accrual-based, you can deduct bonuses for 2007 even if those amounts aren't paid until as late as March 15 of 2008.
Caution: This tax break doesn't apply to bonuses paid to majority shareholders of a C corporation, S corp. owners, or personal service corporation owners.
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