Time to plan how to minimize tax bill

Published 12:00 am Sunday, October 21, 2007

The end of 2007 is happening upon us faster than we think. With the year drawing to a close, now is an ideal time to review your tax situation and evaluate strategies that may help minimize your tax bill.

Year-end tax planning tips typically fall into two general groups: (1) the traditional strategies that have proven themselves useful year after year, and (2) new opportunities that have arisen from recent changes to the tax laws.

One of the most fundamental year-end planning techniques involves accelerating deductible expenses in 2007 and deferring income, if economically feasible, into 2008. By delaying taxable income you defer taxes. Delaying taxable income may also prevent you from losing lucrative tax breaks that can be reduced or eliminated altogether as your income level rises and propels you into a higher tax bracket.

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Essential end of the year tax planning requires determining whether you will take the standard deduction or whether you will itemize your deductions. Consider “bunching” deductible expenses into one or the other year depending upon whether the standard deduction may be taken in one year or whether the adjusted gross income limits for medical or miscellaneous itemized deductions may be more easily met.

The end of year is an ideal time to examine your investments (winners and losers over the course of the year) to take the steps necessary to minimize your capital gains income and maximize the benefit of any capital losses. Long-term capital losses can be used to fully offset long-term capital gains. Losses taken in excess of gains can also be used to offset up to $3,000 in ordinary income.

Year-end planning for 2007 also involves maximizing annual contributions to your retirement plan accounts, since one year’s limit cannot be added to the next year’s if not taken in time. While contributions to IRAs may be applied retroactively if made before the filing deadline, contributions to qualified plans must be made before the end of the calendar year.

Tax law changes constantly, and therefore so must individual tax planning. Tax year 2007 is no exception. The Small Business and Work Opportunity Tax Act of 2007 introduced a number of tax incentives for small business, but included a few pitfalls for individuals. For 2007, a child under the age of 18 is subject to the “kiddie tax”. But 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. 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. 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. 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.

Full-time teachers, instructors, counselors, and other educators can deduct up to $250 worth of books, supplies, software, and other qualifying materials that they provide out of pocket expenses.

Also set to expire in 2008 is the enhanced deduction for contributions of real property interests dedicated exclusively for conservation purposes.

With the complexity of the tax law, understanding what tax planning provisions to incorporate into your year-end tax planning strategy can be a daunting task.

Benny Jeansonne is a partner with the firm of Silas Simmons, LLP, Certified Public Accountants in Natchez, Mississippi.