2007 Rule Changes
Keep These in Mind While You Gather Records
Some of the Rules you knew for 2006 are different for' 2007.
Congress Is Not Done!
They talk of a last-minute tax law. Congress is pushing for relief for homeowners who faced a foreclosure in 2007 they'd like to ensure that any loans forgiven in the process do not lead to taxable income. The Alternative Minimum Tax is set to snag more than 22 million taxpayers. Congress is not likely to re-write the entire system, but will likely provide some last-minute relief.
New For 2007
Receipts For All Charity.
You now need a receipt, cancelled check, or bank statement for any charitable contribution. This is a matter of law. IRS auditors will give no leeway.
Kiddie Tax - Age 18!
Will your youngster have $1.700 or more of Investment income (that's interest, dividends, or capital gains) for 2007'? If so, and if not age 18 or older by Year-end, they can be taxed at your higher tax brackets. Do not allow these youngsters to file a tax return until your own return is ready to file. We need to compare tax brackets.
Age 24 in 2008!
Next year the rule will hit children still in school through age 23. Strategy - if you planned to have the youngster pay for college by selling appreciated stock in 2008, try to sell it in 2007! For 2007, your age 18 or older child has very low capital gain rates. In 2008, the child will be taxed at your rates - almost certainly higher.
Expiring This Year
Unless Congress extends them, these provisions lapse atter 2007.
Home Energy Credits.
Last chance for these valuable credits. Up to $500 tax savings is given J<')r installing new insulation, windows, doors, and skylights. They must meet certain efficiency standards. 10%. Of the cost of the items acts like withholding, and is available for refund. There are credits for certain furnaces, heat pumps, and air conditioners. Manufacturers list the information on new products.
More liberal credits for solar water heating or energy generation are available through 2008.
Sales Tax Deduction.
2007 is the last time you can deduct general sales tax. Two key points - you must itemize your deductions, and you may deduct the larger of sales taxes or state income tax.
You can add sales tax paid on a vehicle, boat, or airplane. If a new car is in your plans, the extra sales tax deduction may be helpful. If you wait until 2008, the sales tax is not deductible.
Teachers - Classroom Supplies.
2007 is the last year for this break. The first $250 spent is deductible even if you cannot itemize.
Tuition and fees for college classes can earn a tax break. Special credits are available, but phase out for higher incomes.
A deduction up to $4,000 of costs is available to even higher incomes, but is set to expire after 2007.
Hybrid Credits Running Out Of Gas.
Buy a new hybrid auto and get a tax credit up to $3,400. The credits will not last forever. Credits for each manufacturer drop when sales reach 60,000 hybrids. So far, only Toyota has passed the mark. (Toyota also makes Lexus vehicles.) Credits for Toyota hybrids got full value through September 30, 2006. From October 2006 through March 2007, credits on Toyota hybrids were 50% of the maximum. For April through September of this year they were cut to 25% of the maximum. For purchases on or after October 1, 2007, Toyota vehicles no longer qualify. No other manufacturer has yet been limited by its sales.
Note: If your tax is too low to . make use of the credit, it will be lost. You might also lose the credit if you pay Alternative Minimum Tax.
If you paid a large Alternative Minimum Tax (AMT) in 2003 or earlier, you might be in store for big refunds. This is a complex area, and I will not attempt a full explanation. Those who paid large AMT may have qualified for credits to reclaim the tax in the future. New law makes it easier to collect the credits. If I prepared the returns I'll have the necessary records. If you are a newer client who paid a large AMT prior to 2004 I'll need to see your returns from 2004, 2005, and 2006, These returns are necessary to tell whether you qualify for this special credit.
These won't affect most people, but are important to a few of you:
- Mortgage Insurance. Buyers of new homes in 2007 can deduct the premiums for mortgage insurance as if they were interest. Applies only if total income is below $110,000.
- Public Safety Officers have more liberal rules for early retirement without penalty, and for paying health insurance premiums.
- Roth IRA - You may contribute to a Roth if income is below $156,000 for couples, $99,000 for single filers. Above these levels your maximum allowed contribution is phased out.
- Health Savings Accounts have higher contribution limits -$2,850 for self-only plans, $5,650 for family plans.
- Non-Cash Contributions. We must use a "good or better condition" rule. IRS offers no helpful guidance, but when the audits begin you can expect lots of questions. I recommend you write complete descriptions, and keep a couple of snapshots.
Last year we had a tax law passed on December 16. Who knows - it could happen again. Watch your local paper and news broadcasts. What is at stake here is your hard-earned money. I'd like to 'see you keep every dollar you are legally entitled to keep.
Do You Need To Send l099s?
You may need to send Form 1099 to someone. There are two cases: Business/Rental. You must report payments to others for services.
"Nominee" amounts. If you are named as receiving income, but part of the income belongs to another, you are a nominee.
You must issue Form 1099 to the other party by January 31. Copies are due: at IRS by February 28. There are penalties for not sending them!
If you paid $600 or more to anyone during 2007 you may need to issue a form. Applies to "business" expense only - payment for personal expenses need not be reported. Nor do you need to report payments to a corporation.
Was any part of the payment for services? If so, you must report the total amount on Form 1099. Rents you pay to a manager (but not to the landlord) are excepted. Same if you pay for merchandise alone. Check your records for repairs, painters, consultants, builders and the like.
Get name, address, and Tax 1.D. Number. Call or use Form W-9.
If someone gives his/her name, get a Social Security Number (looks like 555-55-5555). If a business name is used, get an Employer J.D. Number (looks like 55-5555555).
A property manager who runs your rental sends Form 1099 to you reporting the rents. Ask if the 1099's for service people were sent. The law here is not clear, so play it safe. Ask if they issued a 1099 to themselves for what you paid them. If not, you must do it!
Limits are lower. If you pay $10 or more to another, you may need to send the form. You file the same type of 1099 as you received, but you are filing as a "middle man".
Getting the Forms.
I can help, or you can get forms from IRS and do them yourself. If you need my help, please call early! My tax season is hectic, and the January 31 deadline comes up quickly. If you need forms from IRS you can reach them at 1-800-829-3676, or download forms at www.irs.gov. You'll need Form 1099 and Form 1096.
Don't Miss Mileage Deductions
Extra driving for your job, business or rental can add valuable deductions to your return. For 2007 we may claim 48.5¢ for each deductible mile. The tax tables are in $50 increments. At this rate every 103 miles you deduct lowers you taxes by another step. Every time you find another 103 miles, you reduce your tax!
Business and rental property management is easiest. Virtually any driving can be counted. Consider shopping for materials or supplies, dealing with tenants or clients, collecting rents, trips for banking, shipping, or office supplies.
In your job we have tougher miles. First, you must be able to itemize your deductions rather than claiming the Standard Deduction. Secondly, your work-related deductions are counted only to the extent they exceed 2%) of your total income. Once you pass this "floor" the deductions add up quickly. Finally, you may not claim your driving to or from work - this is a non-deductible commute. Look for non-reimbursed driving for meetings, training, shopping for tools or supplies, visits to customers, trips to other sites during the workday.
In addition to the mileage we can claim any costs for parking or tolls.
IRS insists you keep a record of deductible driving. Although we sometimes can use a reconstruction, it is best to have actual records. This can be simple. A small notepad kept in the car is ideal for jotting the date, purpose of the trip, and mileage.
Try it. Most clients are surprised at how quickly the figures mount up. You'll be paid for your efforts.
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