Year End Tax Tips

Here are some tax tips to think about before year end. If you have any questions, please don't hesitate to contact us.


1. You can contribute to your IRA or Roth IRA for 2007 as long as you do it by April 15, 2008. If your income is too high to make a contribution to your IRA or Roth IRA, you can always contribute to a non-deductible IRA. Your contribution may be as much as $4,000 + an additional $1,000 if you're over 50 years of age. If you participate in a retirement plan at work, deductible IRAs are limited and phaseouts apply to Roth IRAs.

2. Saver’s Credit – if you contribute to your retirement plan at work (e.g. 401(k)) and your income is lower than the income thresholds (less than $25,000 to less than $50,000 depending upon your filing status), you qualify for the Saver’s Credit. Even if you don’t qualify for the credit, make sure you’re saving for retirement little by little each and every pay period.

3. The sales tax deduction is back through December 31, 2007. If you itemize your deductions, we'll deduct the larger of the two deductions (sales taxes or state income taxes). If you purchased a car or boat or RV, the amount you paid in sales taxes is added to the published IRS Table amount. This doesn't apply to sales tax paid on business items because those taxes are already deductible to you.

4. If you’re covered by Medicare and you’re considered high income, you can expect a Medicare Part B surcharge in 2007 and it can triple by 2009. The surcharge is based upon 2005 income. The surcharge begins at adjusted gross income of over $80,000 if you’re single and $160,000 if you’re married. If your income has decreased since 2005, you can dispute the surcharge.

5. 529 Plans have been made permanent. As you recall, 529 Plans allow you to contribute to a college account and if the funds are used for higher education, any amount you pull out is tax free.

6. The lower 15% tax rates on long-term capital gains (held over 1 year + 1 day) and qualified dividends have been extended through 2010.

7. Do you remember the Kiddie Tax where kids were taxed at their parent’s income tax rate if they were over 14. Congress changed the age to over 18.

8. The gift tax limit increased from $11,000 to $12,000.

9. As of August 17, 2006, non-cash charitable deductions require more details. You cannot simply say “3 bags of clothing.” A list of what you contributed is required. If you have not received my Deduct It! book, please let me know.

10. Beginning in 2007, cash charitable contributions require a receipt from the charity. This means that if you attend church on Sunday and put $10.00 in the collection plate, you cannot take a deduction without a receipt from your church. If you pay by check, your cancelled check is your receipt. This also applies to cash you contribute to the Salvation Army Kettle at your local market, so get a receipt! This is also new: the receipt from any charity should state that “no goods or services were provided in consideration of the gift.”

11. Charitable travel – you can still deduct local charitable mileage at 14 cents per mile, but you can no longer deduct charitable travel unless there is “no significant element of personal pleasure.” If you travel for a charity (a chorus, symphony, fraternal organization, etc.), you cannot deduct your expenses unless you can prove that all or most of that trip was directly related to the charitable work.

12. Use Tax: this is an area that is under more scrutiny. If you purchased something on the Internet and did not pay sales tax, you are required to pay sales tax to your state when you file your tax return. Let me know if this is the case with you.

13. Home equity interest – unless you substantially improve your home with the money from a home equity loan, the mortgage interest deduction may be limited. Don’t forget home equity debt is generally limited to $100,000 to be able to deduct the interest.

14. Office in Home – if you have an office in home, your office must be used exclusively for your business (very little personal use), and regularly for your business. Also, the 1st trip of the day from your qualified home office is not deductible. It is considered part of your commute. The trips after that 1st stop of the day are deductible business miles if the stop is business related.

15. Telephone expense: if you have a business that you operate in your home, you must have a separate business telephone line to deduct your telephone. If you have a personal phone from which you make business calls, you may deduct only the business long-distance amount as telephone expense.

16. There is a new Domestic Production Deduction for businesses that construct or manufacture. This would include contractors who build or do substantial renovation of a property. Remodels qualify. Repairs do not.

17. “Listed Property Deductions” – this is a category that includes cell phones, home computers, auto expenses, etc. The IRS looks at each expense separately and measures the time you use these items (personal versus business use) and the business purpose of each before you may deduct it. For example, I have a cell phone that is used a large percentage of time for business but also used for personal use so I cannot deduct 100%. Home computers are a problem, also. How much of the time do you spend on your computer that is personal use as opposed to business use?

18. Travel and Meal & Entertainment Expense: make sure you keep a log noting the name of the client, the purpose of the meeting, the cost, and how many people attended. Your American Express statement is not considered substantiation.

19. Business travel expense: keep a log of your business mileage. Without a mileage log, no deduction is allowed. Again, keep track of the name of the client and business purpose of the miles.

20. Forms 1099-MISC: if you paid more than $600 to a business or individual, you are required to issue Form 1099-MISC no later than January 31, 2008. If you do not issue the forms and you are audited, your deduction will not be allowed.

21. Section 179 increased to $108,000 in 2006. It’s $112,000 in 2007. California still allows only $25,000.