Please feel free to read our client newsletter. It is provided to keep you up to date on the latest tax and accounting news.
This Mid Year Tax Update newsletter offers savings tips and strategies you can readily employ to save more of what you earn this year.
2007 Fraud Alert
The IRS is warning taxpayers to watch for fraudulent e-mails that appear to be from the IRS. Scam artists are attempting to use fake IRS emails to steal your identity and financial assets. Be assured, the IRS does not send out unsolicited e-mails. The IRS never asks for PIN numbers, passwords or personal information regarding your financial accounts.
2007 Tax News You Can Use
Lower Dividends and Capital Gains Tax
The 15% tax rate for qualified dividends and capital gains that was scheduled to increase in 2008 was extended to 2010. Similarly the 5% rate for those in the two lower tax brackets will stay at 5% for 2007 and go to 0% in 2008, 2009 and 2010. As planned, these lower rates are scheduled to increase to 20% or higher in 2011.
Planning Opportunity: Monitor the return on your capital investments between now and 2010 to take advantage of these lower rates before they increase. Gifting securities you think will demonstrate strong gains to your children, who may likely be in the two lower tax brackets, could yield capital gains at 0% tax if sold in 2008 through 2010. But be careful, as the kiddie tax may still apply.
Tax Free 529 Tuition Plans: The tax free distributions provision of 529 Tuition Savings Plans (scheduled to expire) was made into a permanent tax free benefit for those saving for college. Your contributions are taxed, but all earnings are tax free when used for qualified college expenses. Contributions of up to $12,000 per year are allowed and there are no income limits like other tax deferred savings plans have.
Planning Opportunity: 529s are state administered plans. All states have them, but some are run better than others and give investors more flexibility. Importantly, some states allow residents a deduction for the contributions. If you need to save for college expenses look into your state's 529 Plan and compare it to plans in other states to find your best investment.
2007 Charitable Cash Contributions - New Recordkeeping Rules
It is important to heed the new IRS recordkeeping requirements for cash contributions. You can no longer deduct a cash contribution, regardless of how small the amount may be, unless you keep an IRS-approved record of the contribution. Specifically, you'll need to keep a bank record such as a canceled check, a bank copy of a canceled check, or a bank statement containing the name of the charity, the date, and the amount, or you must have written documentation from the charity. The written documentation must include the name of the charity, date of the contribution, and the amount of the contribution.
Tip: So be cautious making charitable contributions with cash. Writing a check or using a credit card will automatically create a record for the proof you'll need. Being meticulous about saving the receipts and bank records will ensure you can claim the deductions you deserve for your generosity.
2007 Donating Your Retirement Funds
For 2007, if you are 70 1/2 or older, you are now allowed to distribute up to $100,000 of your IRA to a qualified charitable organization without paying ordinary income tax on the distribution (up to 35%). Older, well-to-do clients who are already planning to make a sizeable cash donation to a qualified charity in 2007 may wish to consider this alternative. To qualify, the funds must go directly from the IRA trustee to the eligible charity. Not all charities are eligible.
Caution: While you will not need to report this IRA fund distribution as income, you will not get a deduction for the charitable contribution. Given this, a direct donation from an IRA account requires some planning to ensure it is the correct option for you.
2007 The Marginal Tax Rate Bite
Understanding how the next dollar you earn impacts your taxes may help you save a lot of money.
Background. Our Federal tax system is progressive. Effectively, the tax rate gets larger (from 10% to 35%) the more income you earn. Accordingly, the tax you pay on income in December is often taxed at a higher rate than the money you earn in January. The term we use for the tax rate paid on the next dollar you earn is called your Marginal Tax Rate.
The Bite. If your income is at the top of a particular income tax bracket, technically the next dollar you earn will be taxed at the next higher tax rate-- say from 25% to 28%. Not a huge deal right? However, with all the tax credits and deductions available with their associated income phase out ranges, it often happens that adding just one additional dollar of income results in losing many dollars worth of tax breaks. The Child Tax Credit is a good example of this phenomenon because it phases out at $50 for every $1,000 earned over $75,000 if you are single and over $110,000 for married joint filers. In this case an extra dollar earned won't just be an additional 3 cents in taxes (taxed at the 28% vs. 25% rate) it could cost those who qualify for the child tax credit an additional $50 per child too. That $1 of additional income could have a Marginal Tax Rate in the stratosphere!
For reasons like this, it's a good idea in your annual tax planning to take a hard look at last year's return, forecast your income for 2007, and analyze your marginal tax rate in relation to available deductions and credits.
