Year-End Tax Tips
2007

Charitable Contributions

Effective for contributions made on or after August 17, 2006 you cannot take a charitable contribution for donations of clothing or household items unless the item is in "good used condition or better." The law does not define "good condition" so you will need to be a little more discriminating with the items you are donating and you may want to take photos of large items to help verify their condition.

Starting in 2007, you will no longer be able to deduct the small amounts of cash given to Salvation Army bell ringers or cash in the church collection basket. In short, you will not be able to take deductions for any contributions not paid by check or acknowledged in writing by the charity. Any donation over $250.00 requires a receipt from the charity stating the charity's Tax Identification number and the value of any benefit you received for donation.

If you are involved in a charitable organization you may want to talk to the Board of Directors about how to provide receipts for small amounts of contributions you make.

Direct Disbursements from IRAs to Charities

In 2006 and 2007, if you are 70-1/2 or older, you can make a charitable contribution directly from your IRA. If you make regular annual contributions this is a great deal. There are big tax benefits to making your contributions directly from your IRA, primarily you will reduce your adjusted gross income which in turn reduces the potential taxable income. Keep in mind if you choose to take the income from your IRA and pay it to your charity directly, you don't get the charitable deduction as well.

Sales of Property

California just liberalized their rules for tax withholding on the sale of real estate. For most sales of property other than a principal residence, California requires tax withholding at the rate of 3-1/3% of the sales price. For sales occurring on or after January 1, 2007, the new law allows the seller the option of having withholding taken at the rate of 9.3% of the estimated tax gain. The taxes paid may not be the correct amount of California tax due. It is necessary to review all the facts related to the purchase of the property, improvements to the property, and the sales information.

Sales Tax Deduction

The sales tax deduction was only good for 2005 and 2006. However, Congress has voted to extend the deduction. So, don't forget to bring your invoice for a new car to your tax interview.

Bunching Deductions

Some people only have enough itemized deductions to benefit them if they bunch their deductions on an every-other-year basis. You have complete or limited control over several deductible payments including your state tax payments, property taxes, charitable contributions and medical expenses. As for medical expenses, you obviously have no choice when you get sick but you have considerable control over when you make your payments. Let's talk about whether bunching is an effective strategy for you and decide whether to accelerate deductions into 2007 or delay them until 2008.

Pensions and IRAs

The amounts you can contribute to pensions and IRAs are up dramatically in the last few years. In 2007 you can contribute $4,000 to an IRA and if you're 50 years or older by the end of the tax year you can kick in an additional $1,000. You can contribute up to $15,500 to your 401k and an extra $5,000 if you're at least 50. In 2008 the IRA contribution jumps to $5,000 and if over 50 another $1,000 can be contributed.

Medicare Surcharge

Beginning January 1, 2007 Medicare beneficiaries will be subject to a surcharge on their premiums. The amount of the surcharge is based on income reported on your tax return. Some planning now can not only reduce your taxes, it can also reduce or keep you out of the Medicare surcharge.

The "kiddie tax" now applies to more kids

In 2007, children under the age of 18 who earn more than $1,700 of investment income pay tax on their income at their parent's rate of tax. To make matters more complicated, California still uses the old rules. Beginning in 2008 between the ages of 19 to under 24 and full time students could have their investment income taxed at their parents rate if it is greater rate.

Gifting and 529 Plans

The estate tax is scheduled to return in full force in 2011. So far, the political consensus is just not there in Washington to repeal the tax. As such, estate planning is more important than ever.

Making lifetime gifts is one of the simplest ways to reduce an estate and one of the best ways to make gifts is to use "529 plans" to reduce an estate and financially prepare children and grandchildren for their college educations. Let's get together and discuss this great opportunity. Beginning in 2008 this method will reduce the potential increase in kiddie tax for full time students.

Higher Education Deduction and Credits

The previous above the line deduction for higher education tuition expires in 2008. Although the Hope and Lifetime learning credits still prevail.

Use Tax

Finally, California requires residents who purchase tangible personal property and don't pay sales tax are required to pay use tax on that purchase. Common examples include books, clothing, CDs purchased over the Internet. Be sure to keep track of these purchases and we can either add the use tax to your tax return, or I can give you a form to fill out yourself. Let me know if you need more information.

Document Retention

Information you use to pull your income tax data from that is provided to us as your tax preparer should be retained for 5 years. Your tax returns should be kept indefinitely.

Banks should be providing you with cancelled checks or copies of their front and back. Banking laws have changed in recent years giving flexibility as to the banks choice on providing check or check images if you do not specifically request them.

Call our office for an appointment at your earliest convenience. If we spend an hour now, we may be able to save you hundreds of dollars in tax in the coming year.