Bank on it

Tax laws change constantly; so must individual tax planning. The 2007 tax year is no exception. While fundamental accounting techniques should not be overlooked, attention to tax legislation - both tax laws passed since last year and tax laws that may be put to a vote in Congress before year end - is equally important for most taxpayers. With that in mind, here are the more important changes that can directly impact 2007 year-end tax planning.

The Small Business and Work Opportunity Tax Act of 2007 introduced a number of tax incentives for small business, but there are a few pitfalls for individuals. For 2007, a child under the age of 18 is subject to the “kiddie tax” (and thus pays tax at his or her parents’ highest marginal tax rate on unearned income in excess of $1,700). However, in 2008, the applicable age rises and the kiddie tax will apply to a child under the age of 19 and full-time students under age 24. In light of this development and depending upon the age of the children, parents might want to consider selling appreciated stock and other assets belonging to their children now, especially if they will be in the 19- to 24-year-old category next year.

A variety of popular tax credits are set to end at the close of 2007, unless Congress extends the credits. However, you shouldn’t wait to see what Congress does. Assess your tax situation as if Congress won’t extend the tax breaks that apply to you. If this landscape changes, then fine-tuning in December is always possible.

Tax breaks set to expire at the end of 2007 include:
- State and local sales tax deduction. Despite being one of the more popular tax breaks, the deduction for state and local sales taxes is not permanent and is set to expire at the end of 2007. The American Jobs Creations Act of 2004 gave taxpayers who itemize deductions the option of claiming either state and local income taxes or state and local general sales taxes. Therefore, if you have been contemplating the purchase of a big-ticket item, such as a car or boat, you should consider making it sooner rather than later because the deduction for state and local general sales taxes expires at the end of 2007. However, you first need to compute the potential state and local income tax deduction amounts and then compare it to your potential sales tax deduction.

- Mortgage insurance premiums. Premiums paid or accrued in 2007 for qualified mortgage insurance are deductible as qualified residence interest. The insurance must be carried on acquisition indebtedness for a qualified residence. A qualified residence is the principal residence and one other residence that is not treated as business property. The tax deduction applies only to mortgage insurance contracts closed in 2007 and is also subject to adjusted gross income limitations.

- Tuition and fees deduction. Taxpayers may deduct qualifying tuition and fees paid in 2007 that are required for the student’s enrollment or attendance at a post-secondary school. The tuition and fees deduction is an above-the-line write-off that, depending on adjusted gross income, can reduce taxable income by as much as $4,000. They are frequently more valuable to those in the higher brackets than taking a Hope or Lifetime learning education credit. As a result, it’s important to keep one eye on Congress and one on the possibility of paying next year’s tuition early as year end approaches.

- Classroom deduction. Full-time teachers, instructors, counselors and other educators can deduct up to $250 in out-of-pocket expenses for books, supplies, software and other qualifying materials that they provide. The deduction is set to expire at the end of 2007, unless Congress extends it.

- Qualified conservation contributions. Also set to expire Dec. 31, 2007, is the enhanced deduction for contributions of real property interests dedicated exclusively for conservation purposes. Easements in facades may also qualify. A 50 percent contribution base limit applies, rather than the 30 percent limit for capital gain property.

For additional information, consult an experienced financial professional.