Unfortunately, Congress has still not alleviated AMT. Therefore, taxpayers should continue to be aware of AMT. A decision to accelerate an expense or to defer an item of income to reduce taxable income for regular tax purposes may not always save taxes because it may subject the taxpayer to AMT.
Some of the items that typically give rise to AMT are:
- State and local taxes;
- Home equity loans and other mortgage interest not incurred in buying, building or improving your principal residence;
- Incentive stock options – these may generate AMT income even when sold at a loss;
- Private activity bonds;
- Oil and gas intangible drilling costs;
- Unreimbursed employee business expenses;
- Large net capital gains.
Until the end of this year the “kiddie tax,” which acts to tax children at their parent’s highest income tax rate if the child is under a certain age and has unearned income in excess of $1,700, applies to children ‘under age 18’. Effective 01/01/08 the children’s age increases to ‘under age 19’, or ‘under age 24’ for full-time students. Pursuant to the “kiddie tax,” the net “unearned income” (i.e. interest, dividends and capital gains) of a dependent “child” in excess of a certain threshold amount, adjusted annually for inflation, is taxed at the parents’ marginal tax rate.
Consider having children older than 18 and younger than 24 sell appreciated stock before the end of 2007 at the 5% long-term capital gains tax rate rather than waiting until 2008 when they may be subject to their parent’s higher rates.
In 2008, the exemption from the “kiddie tax” will be $1,800. In addition, a parent will have the option to elect to include a child’s income on the parent’s tax return for 2008 if such child’s income is more than $900 and less than $9,000 (up from $850 and $8,500 in 2007).
Joint Ventures for Married Couples
Married couples filing a joint return that operate an unincorporated business as a joint venture can elect not to be treated as a partnership for federal tax purposes, for tax years beginning after December 31, 2006.
Pursuant to this provision, each spouse could determine his or her share of the income and deductions of the business and file a separate Schedule C.
In such a situation, the married couple must be the only individuals in the joint venture and each must materially participate in the business venture.
Qualified dividend income continues to receive the same favorable tax rates that apply to long-term capital gains.
Consider converting investment income taxable at regular rates into qualified dividend income to achieve tax savings.
Sales and Use Taxes as an Itemized Deduction Instead of State Income Taxes
For 2007, individual taxpayers can elect to claim an itemized deduction for state and local sales & use taxes rather than state income taxes to possibly reduce AMT.
Charitable Contributions
The timing of charitable contributions can have an important impact on year-end tax planning.
In 2007, individual taxpayers aged 70½ may consider making up to a $100,000 charitable contribution from their IRA without recognizing taxable income on the distribution and are able to count this towards their minimum distribution requirement. Keep in mind this transaction must pass from the IRA trustee directly to the charity. Moreover, the charitable recipient is generally limited to public charities.
Just like last year, tax credits are available this year for qualifying energy-efficient home improvements made to a residence. These credits will not be available for improvements made, or property placed in service, after 2007. The credit is limited to a lifetime maximum of $500.
2007 Year-end Tax Planning for Businesses and Family Offices
This is a good time to evaluate and establish employee benefit plans. Some benefits such as qualified transportation fringe benefits, employer-provided adoption assistance, and employer payment of employee's educational expenses are available as part of compensation but are not subject to federal taxation.
As always, there are some basic items that every taxpayer should consider when reviewing their year-end tax situation.
The following is a quick rundown of some of these basic points:
- Review your withholding and/or estimated tax payments to ensure 90% of current year or 110% of prior year taxes are paid to avoid underpayment penalties.
- To avoid estimated tax penalties, check estimated tax and withholding amounts to ensure enough is being withheld, and increase withholding, if necessary, prior to year end.
- Bunch itemized deductions that have a “floor” to make the most of them. For instance, bunch as many medical expenses or miscellaneous itemized deductions as possible into one year. The following “miscellaneous itemized deductions” should be bunched, whenever possible, to maximize refunds:
- Unreimbursed employee business expenses, dues to professional associations, subscriptions to professional literature, employer-required physicals, uniforms and protective clothing, and tax advice and preparation;
- Investment-related expenses, such as wages or rent paid as part of monitoring investments; computers or other equipment used to monitor investments (subject to limitations if not used 100% for investments); custodial or investment fees; and a safe deposit box rental, if used to store investments, tax returns, or financial records.
- Defer employee bonuses until 2008, but remember that in the AMT setting you may actually want to accelerate income into 2007. Discuss this with your tax advisor.
- Make gifts exempt from estate, gift and generation-skipping tax using the $12,000 ($24,000 if married) yearly exclusion per donee.
- Utilize the installment method in business and real estate transactions to defer tax.
- Use vacation home either more or less for better tax results depending on whether you want it treated as a personal residence or passive activity.
- Consider using U.S. savings bonds or establishing a section 529 plan to pay college costs. § Be sure to take into account the phase-out of personal exemptions and standard deductions for higher-income taxpayers. For example: v Personal exemptions will begin to be phased out for joint filers with adjusted gross income over $234,600 ($156,400 for single filers) and completely phased out at adjusted gross income over $357,100 ($278,900 for single filers), v Allowable itemized deductions will begin to be phased-out if adjusted gross income is over $156,400 (for all filing types except married filing separate filers).
Qualified Transportation Fringe Benefits
For 2007, an employee can exclude up to $215 a month (up to $220 in 2008) for qualified parking expenses, and up to $110 a month (up to $115 in 2008) of the combined value of transit passes and transportation in a commuter highway vehicle.
The total amount excludable per child will be limited to $11,390 in 2007 (up to $11,650 in 2008).
If you own an interest in a partnership or S corporation, consider your basis in the entity prior to deducting the loss on your individual income tax return.
The Section 179 deduction for capital purchases has increased from $112,000 to $125,000 for assets placed in service after December 31, 2006.
In 2007, the deduction begins to “phase-out” when purchases exceed $500,000.
In 2008, the amount that may be expensed pursuant to Section 179 will be $128,000. As always, this deduction is limited to net taxable income.
Deduction for Qualified Production Activities Income
Taxpayers can claim a deduction, subject to limits, for a specified percentage (6% in 2007 and 2008) of the lesser of:
- The taxpayer’s “qualified production activities income” for the tax year (i.e. net income from U.S. manufacturing, production or extraction activities, U.S. film production, U.S. construction activities, and U.S. engineering and architectural services), or
- The taxpayer’s taxable income for that tax year before taking this deduction into account.
A business with a loss this year may be able to use that loss to generate cash in the form of a quick net operating loss carryback refund.
This type of refund may be of particular value to a financially troubled business requiring cash flow for operations.