Archive for the ‘2007 Year-end Planning’ Category

LAST DAY OF THE YEAR CHECKLIST

Monday, December 31st, 2007 by Joe Kristan

There’s no extension for this deadline. The tax year ends at midnight tonight, and with it ends most of the best opportunities to reduce your 2007 taxes. If you are so inclined, here are a few things you can do yet today:
Sell loser stocks to offset capital gains, plus $3,000.
– Make a charitable donation by check or credit card.
– Make an annual exclusion personal gift, if the funds or assets transfer today. A check written today that doesn’t clear until next year is considered a 2008 gift.
– If you are a cash-basis taxpayer, any deductible expense in a check mailed today or charged to a credit card today is deductible this year.
– If you are an accrual method taxpayer, be sure to make checks today for any related-party expenses that you want to deduct this year.
– Today’s the last day to establish a qualified retirement or profit-sharing plan if you want a 2007 deduction.
– If you have an S corporation with current losses, a capital contribution or loan by you to the corporation today may allow you to deduct your loss this year.
– If you’re in love, or are falling out of love, remember – your filing status at the end of the year is your filing status for the whole year.
See you in 2008!
This is the final installment of our 2007 year-end planning series.

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EXTREME YEAR-END TAX PLANNING

Sunday, December 30th, 2007 by Joe Kristan

The Tax Update’s 16-year old son is the bass player for a little jazz combo. They had their first wedding gig last night, which makes my romantic mind ponder whether the happy couple could have paid the band with their tax savings had they put off the wedding for a week. It matters – your marital status on the last day of the year is your status for the entire year, for tax purposes.
Congress attacked the marriage penalty with much fanfare a few years ago, but as with most things politicians talk a lot about, it was more talk than action (it’s the stuff they don’t talk about that really causes trouble). They did get rid of the marriage penalty for the 15% tax bracket, but at higher income levels, getting married still carries a tax penalty. If our happy couple were both upwardly mobile professionals with taxable incomes of $74,200 in 2007, getting married in 2007 would cost them $597 – and that goes a long way towards paying the band.
In addition to the penalty built into the rates (and, some misanthropes would say, into the institution), there are some other tax penalties to marriage. These include a quicker phase-out of itemized deductions and a reduced ability to deduct capital losses.
So if tomorrow is the day you and yours plan to yoke your fates together, best wishes – especially if you try to convince her to wait a week to save on your taxes.
And if you are the person who found the Tax Update with the Google search, “how much tax savings for a new baby before year end,” now that’s extreme tax planning. But go for it! A baby born today or tomorrow gets you the same 2007 $3,400 dependent exemption and $1,000 child credit as one born last March. Or you can at least get started on next year’s tax planning.
Now, ladies and gentlemen, get ready to ring out 2007 with The Saturn V:

This is the penultimate installment of our 2007 year-end tax planning series.

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CHARGE!

Saturday, December 29th, 2007 by Joe Kristan

Yesterday’s post explained how “the check is in the mail” rule works for getting deductions this year. But who uses checks anymore? All those new economy whippersnappers use credit or debit cards or online transfer services like Paypal to pay their bills. When does a cash-basis taxpayer — and that means almost all humans — get deductions for those transactions?
For expenses charged to a credit card, the expense is deductible the day the expense is charged to the card — not the later date when you pay the credit card company.
If you use a debit card or Paypal, the deduction likewise should occur for tax purposes at the time of the initial transaction. A debit card immediately transfers funds from your bank account, while Paypal either debits your bank account or charges your credit card, giving you the deduction either way.
There are two more installments in our series of 2007 year-end tax planning posts, assuming 2007 isn’t extended. Collect them all!

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YEAR-END DEDUCTIONS: IS THE CHECK IN THE MAIL?

Friday, December 28th, 2007 by Joe Kristan

Yesterday we talked about how “the check is in the mail” doesn’t cut it for estate and gift tax purposes.
cmr.jpgFortunately, a looser standard applies for income tax purposes. If a cash-basis taxpayer wants to claim a deduction for income tax purposes, it’s normally good enough to have the check in the mail by December 31 this year to claim your deduction.
There are exceptions, of course. Having the check in the mail obviously doesn’t create a deduction for something that’s not deductible to begin with. Also, it doesn’t override the related-party rules, so a check to an expense due a related party either has to be included in that party’s income in the year the check is written, or the deduction has to be deferred until the income is reportable.
But for the most part, having the check in the mail gets you the deduction. If the deduction is a big one, it’s wise to send the check using certified mail, return receipt requested, to prove that you mailed the check. It’s worth the extra postage to avoid trying to explain to the IRS why a charity didn’t bother to cash that big check until March.
There will be three more installments in our 2007 year-end tax planning series. Don’t miss any!

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WHEN IS A GIFT COMPLETED?

Thursday, December 27th, 2007 by Joe Kristan

So far in our 2007 year-end tax planning series, we’ve talked about things you have to do for year end. We haven’t really talked that much about exactly how you get some things done.
20071227-1.jpgOne area where getting something done by year-end is critical is the gift tax area. If you fail to use your $12,000 per-donor, per-donee annual exclusion for 2007, it is lost forever. That means you have to make sure you complete your annual exclusion gifts before the clock strikes 12:00 January 1.
The check has to clear to complete the gift. If you write a check for a $12,000 gift on December 31, 2007, but the recipient doesn’t cash it until January 2008, it is a 2008 gift. The IRS says a check isn’t a completed gift until it is cashed.
So if you want to give somebody a check as your year-end gift, you’ll want to give them a cashier’s check before year-end. The tax law calls that a completed gift because there you can’t stop payment on a cashier’s check.

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WHEN DO I HAVE TO PAY AN EXPENSE TO DEDUCT IT?

Wednesday, December 26th, 2007 by Joe Kristan

The headline of this post is one of the more common search phrases used to reach the Tax Update from search engines. The answer? As with so many things in the tax law, it depends.
In general, if you are a cash-basis taxpayer, you have to pay your business expenses by the last day of the year to deduct them. If you are an accrual-basis taxpayer, you have to clear the “all-events test” — that is, all events to determine the liability must have taken place by year-end, and the liability must be determinable with reasonable accuracy.
But that it would be so simple. For example, even cash-basis taxpayers may deduct deduct contributions made after year-end to qualified retirement plans that are set up by year-end, as long as the contributions are made by the due date of the tax return.
20071226-1.JPGMost of the time, though, the tax law looks to limit your ability to deduct expenses paid after year-end. For example, even accrual-basis taxpayers can’t deduct expenses accrued to “related” cash-basis taxpayers (read the extended entry by clicking “read more” to see who these relatives might be). Such expenses are deductible to the accrual basis taxpayer only when the related cash-basis taxpayer has to record the income. Even when unrelated parties are involved, the expense is deductible only if “economic performance” has occured. That exception to the “all-events” test itself has an exception, the “recurring item exception.”
Compensation is normally deductible for accrual-method payors if the expense is actually paid within 2 1/2 months of year-end. When the recipient is a related party, though, the expense is deductible only in the year paid.
Finally, even expenses paid before year-end normally are non-deductible if they purchase a benefit that goes out beyond one year. If, for example, you prepay your tax fees for five years (an idea that I would always encourage for my own selfish reasons), you would only get to deduct the amount for the next 12 months. The remaining prepayment would be capitalized and deducted in the year to which it applies.
So for your year-end planning, this means:
– You have to pay related cash-basis taxpayers by year-end to get the deduction this year.
– You have to have your qualified plan set up by year-end to deduct contributions for this year, but you have until the return due-date to make the contributions.
Don’t overdo prepayments (except perhaps to your friendly tax preparer). If you prepay beyond one year, such prepayments aren’t currently deductible.

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A TAX TIP FOR CHRISTMAS

Tuesday, December 25th, 2007 by Joe Kristan

We promised a tax planning post each day through December 31, and we keep even ill-considered promises at the Tax Update.*
In the spirit of the season, we’ll just note today that if a charitable contribution is billed to your credit card in 2007, it is deductible in 2007 – even if you don’t pay the bill until 2008.
If you are in a giving mood, here are links to some worthy charities that will take online credit-card donations:
Salvation Army
Heifer Project
Soldiers Angels (assists armed forces members and their families)
USO
Iowa Donor Network (Iowa’s organ donation facilitator)
Hospice of Central Iowa
Merry Christmas!
*In case you think we’re crazy, we’re keeping this promise through the miracle of “scheduled postings.”

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PAY EXTRA TAX THIS YEAR? ARE YOU CRAZY?

Monday, December 24th, 2007 by Joe Kristan

Tax advisors spend a lot of time looking for ways to punt income into the hereafter. It almost feels like heresy to suggest accelerating income. Yet in some narrow circumstances paying extra tax this year can save you money.
One example we see occasionally arises from the way the AMT exemption phases out. For 2007, the AMT exemption is $66,250 on joint returns, but it is reduced by 25 cents for each dollar adjusted gross income exceeds $150,000. This creates a hidden extra bracket for the AMT. While the stated top rate for AMT is 28%, the phase-out makes the real top rate 35% until the entire exemption is phased out (at AGI of $415,000 for joint filers). The phase-out also cause an extra hidden bracket on long-term capital gains, which are otherwise taxable at 15%.
If you have an item of taxable income that you can choose to take in either 2007 or 2008 (lucky you!), you might be better off taking the income this year and paying the tax sooner. It works if:
– Your 2007 income is already above the AMT exemption phase-out amount
– You will be subject to AMT in 2008, and
– Your 2008 income will be in the phase-out range.
A simplified example of an Iowa married couple illustrates this. The couple has $500,000 of 2007 income and will have $200,000 of 2008 income. They have another $100,000 of capital gain income they can choose to take in either year. They have two children, and their only itemized deduction is state income taxes.
If they take the $100,000 in 2007, their combined tax over the two years is reduced by over $6,000; if it is taxed in 2008, it is taxed in the hidden AMT phase-out bracket, while if it is taxed in 2007, it is only taxed at a the normal capital gain rate. The totals:
20071224-1.JPG
Be careful! If you are going to accelerate your income, and your taxes, you’d better be pretty confident you know what your income will for both 2007 and 2008. Talk to your tax advisor before you start throwing your income around among your tax years.
This is another in our daily series of 2007 year-end tax planning posts. Look for a new post daily through December 31.

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YEAR-END: MID-QUARTER?

Sunday, December 23rd, 2007 by Joe Kristan

One of the more obscure tax traps at year-end is the “mid-quarter convention.” Normally the tax law computes depreciation on fixed assets as if they were placed in service in the middle of the year – the so-called “half-year convention.”
When a company places more than 40% of its new assets in service in the last three months of the year, different rules apply. When that happens, depreciation for each asset starts at the midpoint of the quarter in which it is placed in service. This can have an unhappy effect on your deductions.

Example: Snow Co. has placed in service two assets during the year: a machine costing $600,000 that went into service July 31, and another machine costing $399,000 that was up and running October 15. Both assets have five-year tax depreciation lives. The depreciation for these two assets for the year would be $199,800, computed for 1/2 year under the tax law’s 200% declining balance depreciation method.
But then Snow decides to go online and buy a $1,001 computer, which is placed in service December 29. Suddenly more than 40% of the new assets for the year have been placed in service in the last three months of the year, and the mid-quarter convention applies. The depreciation for the $600,000 machine is computed starting in the middle of the third quarter and comes out to $90,000. The depreciation for the other $400,001 is computed for 1/8 of a year, as the assets are deemed to go into service at the midpoint of the fourth quarter; that deduction comes out to $20,000.05.
So, by adding a $1,001 asset at year-end, Snow Co. has reduced its depreciation deduction from $199,800 to $110,000. And five cents.

So if you are in a hurry to get assets in service before year-end, slow down and make sure that you don’t end up reducing your depreciation by going into the mid-quarter convention.
Stop by daily through December 31 for another year-end tax planning post. Collect them all!

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CSI – NO, NOT THE TV SHOW

Saturday, December 22nd, 2007 by Joe Kristan

20071222-1.gifIf you are an Iowan with college costs in your future, or even in your present, the College Savings Iowa Section 529 plan might be a good place to make a year-end tax planning move.
Section 529 plans allow you to put away money in an IRA-like account where the earnings are tax-free, and permanently tax exempt if used for college costs. There is no federal deduction for Section 529 contributions, but you can 2007 deduct contributions to College Savings Iowa on your Iowa 1040, up to $2,595 per donor, per donee. That means a married couple with two children can deduct up to $10,380 in CSI contributions. For a top-bracket Iowan, this works like a 6+% subsidy for making the investment.
You can contribute more than $2,595, but only that much is deductible.
If you have students in college already, you can contribute to the plan and use it to pay the tuition – in effect giving you a deduction for part of the annual tuition.
College Savings Iowa uses low-cost Vanguard “Life Cycle” funds, which helps keep your college savings from being eaten up by broker and mutual fund fees. CSI also has individual portfolios, if you want to try to outsmart the market.
To get your Iowa deduction, make sure you postmark your 2007 contribution by 12/31. You can enroll in CSI online here.
Remember, Section 529 plan gifts count towards the $12,000 annual gift tax exclusion, so keep that in mind if you want to maximize your use of annual gift tax exclustions.
This is another installment in our daily series of year-end planning posts.

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