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TAX ALERT
TAX PLANNING IDEAS

To Clients and Friends of the Firm:

Although the year is only about half over, we have already seen one major new tax law (the fourth one in a 13-month period), and almost certainly we will see more before year-end. Despite confusion created by these repetitive law changes, the current federal income tax environment is actually quite favorable.  Now is the time to take advantage of the tax breaks that Congress has provided before they are taken away.  This letter presents planning ideas that may apply to you, your family members, or to your business.

Make Standard Deduction Worth More by Bunching Deductible Expenditures

This year the standard deduction for married joint filers is $10,700, $5,350 for single filers and $7,850 for head of household filers.  If your 2007 itemized deductions are likely to be just under or over this amount, it may pay to adopt the strategy of bunching together expenditures for itemized deductions every other year, while claiming the standard deduction in the intervening years. Examples of items that often work well for this strategy include the interest on your January home mortgage payment, charitable contributions, property taxes, and state income tax payments.

For example, say you are a joint filer whose only itemized deductions are $4,000 of annual property taxes and $7,000 of annual home mortgage interest. If you prepay your 2008 property taxes by December 31, you could claim $15,000 of itemized deductions on your 2007 return ($4,000 of property taxes for this year, plus another $4,000 for the 2008 bill, plus $7,000 of mortgage interest). In 2008, you would only have the $7,000 of mortgage interest, but you can claim the standard deduction which will probably be around $11,000 after an inflation adjustment. This strategy allows you to cut your taxable income by a meaningful amount over the two-year period. You can then repeat this process in 2009 and 2010.

Kiddie Tax Alert: Will Your Child Be 18 or Older at Year-end?

When the dreaded Kiddie Tax applies to your child’s unearned income (typically from investments), it gets taxed at your higher marginal rate rather than at your child’s lower marginal rate. For 2007, the Kiddie Tax won’t affect a child who is age 18 or older as of year-end. Next year, however, the Kiddie Tax can apply to the unearned income of a child who will be age 18 and a student who will be age 19–23 as of 12/31/08 if the student’s earned income (such as, wages) for the year does not exceed half of his or her support.

As you can see, your child could be exempt from the Kiddie Tax this year (because he or she will be 18 or older at year-end), but not next year (because he or she will be a student age 19–23 without sufficient earned income). In this scenario, consider having your child trigger some taxable gains and income this year. They will be taxed at your child’s lower rate. Next year, that might not be true due to the new Kiddie Tax age rules. Keep in mind that, for this year, the Kiddie Tax only hits unearned income in excess of $1,700. The threshold for next year will probably be higher due to an inflation adjustment.

Take Advantage of Favorable New Provisions

Several taxpayer friendly changes became effective this year. They include the following:

• Bigger Section 179 Deduction. For a tax year beginning in 2007, your business may be able to take advantage of the recently increased Section 179 deduction. The maximum deduction is now $125,000 increased from $112,000. If you are thinking about purchasing equipment, furniture, or other tangible property for use in your business, now may be the perfect time to do so.
• Liberalized Health Savings Account (HSA) Rules. If you are covered by a qualifying high-deductible health plan in 2007, you can make a deductible contribution to an HSA. You can then make federal-income-tax-free withdrawals from your HSA to reimburse yourself for qualifying out-of-pocket medical expenses. A law passed late last year generally allows bigger deductible HSA contributions for 2007. In addition, you may qualify to roll over amounts from your employer’s health care flexible spending account (FSA) plan or health reimbursement arrangement (HRA). You may even be able to roll over some money from your IRA.

Take Advantage of Expiring Tax Breaks before They Become History

As the tax law currently reads, many valuable tax breaks are scheduled to expire at the end of this year. While not a certainty, it may be that some or even most of them will be extended by future legislation. The prudent course is to take action before year-end and take advantage of these breaks that are meaningful to you or your business. Here is a list of some of the expiring provisions:

• Itemized Deduction for State and Local Sales Taxes. The optional deduction for state and local sales and use taxes in lieu of deducting state income taxes. If you live in a state with low or no state income tax you may want to make some big-ticket purchases (such as a new car or boat) before year-end to increase your sales tax deduction.  However, you should keep in mind that this deduction is added back for alternative minimum tax purposes.
• Charitable Donations from IRAs. If you’ve reached age 70½, a law change from last year allows you to arrange to distribute up to $100,000 of otherwise taxable IRA money to specified tax-exempt charities. These so-called qualified charitable distributions (QCDs) are federal-income-tax-free to you, but you do not get to claim any itemized deductions on your Form 1040. However, the tax-free treatment equates to a 100% writeoff, and you don’t have to itemize your deductions.
• Credit for Nonbusiness Energy Expenditures. The up-to-$500 tax credit for nonbusiness energy efficiency improvements such as qualifying exterior windows and doors, insulation, and heat pumps is set to expire at the end of 2007. The credit amount is modest, but it could make it worth your while to make some energy-saving changes to your principal residence. Qualified improvements must be installed by 12/31/07.

Watch for These Unfavorable Changes

You might not have noticed that several anti-taxpayer changes also became effective either this year or in the middle of last year. They include the following:

• All Cash Donations to Charity Must Be Documented (No Exceptions). You are no longer allowed any writeoffs for contributions of cash, checks, or other monetary gifts unless you retain either a bank record that supports the donation (such as a cancelled check or credit card receipt) or a written statement from the charity that meets tax law requirements. For cash donations of $250 or more, a bank record is not enough. You must obtain from the charity a statement that includes certain required information.
• Stricter Rules for Donated Used Clothing and Household Items. You are no longer allowed to claim deductions for charitable donations of used clothing and household items that are not in good condition or better. The term household items mean furniture and furnishings, electronics, appliances, linens, and the like. Be sure to keep a list and photo (to help establish the item’s condition) of donated items.

Conclusion

As we said at the beginning, this letter is intended to give you just a few 2007 tax planning ideas. If you want more details or would like to schedule a tax planning strategy meeting please call us at 212-303-1800 or e-mail us at info@rssmcpa.com.

Sincerely,
Rosen Seymour Shapss Martin & Company LLP

Isidor Hefter, Tax Partner
Alan M. Willinger, Tax Partner
Steven J. Eller, Tax Partner

For information contact:

Alisa Morris
Director of Marketing
(212) 303-1880
amorris@rssmcpa.com