Some tax breaks are fading away as the year ends.
CONTRA COSTA TIMES
WALNUT CREEK, Calif. — Think of the nation’s tax system as a financial smorgasbord. Tax year 2007 is no exception.
Some items will stay on the menu, and others will go away.
Although some tax breaks are making their final appearance this year, there are certain year-end tips that can be part of a general tax-planning strategy.
For example, homeowners who make itemized deductions on their tax returns might want to make a January mortgage payment by the end of 2007. That would allow them to deduct the interest paid that month on their 2007 tax return.
Another strategy is to make the maximum contribution amount allowed during the year to a traditional 401(k) or other retirement account that is funded with pre-tax dollars. Contributions to IRA accounts can be made until the April 15 federal income tax filing deadline.
Taxpayers also can clean out their closets and garages to find items that might qualify for a tax deduction.
One of the tax breaks that will go away after tax year 2007 is geared to people with hefty traditional IRA accounts. First rolled out in 2006, it lets taxpayers who are 70 1/2 years and older exclude as much as $100,000 of taxable income by transferring the funds directly to a charity. Distributions from IRA accounts are required to be taken once the account holder reaches age 70 1/2.
The tax break is meant to apply to high-net worth individuals, said Debbie Pursey, an investment adviser in the Walnut Creek office of Financial Network Investment Corp.
“Some people have an estate tax problem and they need to remove money from their estate,” she said.
Such strategies, of course, apply in situations where the IRA account holder has other financial assets to live on.
“Say you needed $100,000 to live on for a year and you also wanted to have $100,000 go to charity. What you want to do, is take the $100,000 to live on out of a savings or investment [account]” that would provide a better tax treatment than distributions taken from an IRA account.
Another tax break making a final appearance in 2007 is a lifetime credit worth as much as $500 for making energy improvements in the home. The credit was first available in 2006.
“So if you have not used it in 2006, you can use it [all] in 2007,” said Donna LeValley-Cocovinis, a contributing editor of “J.K. Lasser’s Your Income Tax 2008,” an 816-page guide for preparing 2007 tax returns.
“It’s a tax credit you can use to put improvements in your home that don’t require you to have a handyman,” she said.
Taxpayers with a yearly adjusted gross income of $100,000 or less can deduct their mortgage insurance premiums from their 2007 federal income tax returns for homes purchased or refinanced this year. Taxpayers with yearly incomes of $100,000 to $109,000 are eligible for a reduced tax break.
The mortgage insurance deduction does not apply to loans taken out in 2006 or earlier. Legislation is pending to extend the mortgage insurance tax break until 2014.
If you bought a hybrid car in 2007, you may be eligible for a tax credit, according to LeValley-Cocovinis.
The credit amount varies by the hybrid model and how much of a credit each manufacturer has remaining, she said.
The hybrid credit — which can be worth as much as $3,400 for a qualified vehicle — expires on Dec. 31, 2010.
The credit amount for buying qualified hybrids starts to phase out after the quarter in which the manufacturer sells 60,000 hybrids.
“You have to be the owner to get the credit. You can’t lease,” said LeValley-Cocovinis. “If you lease, the leasing company gets it.”
A tax credit that benefits low-income taxpayers who fund retirement plans is now permanent. The credit applies to individuals whose yearly adjusted gross income is up to $26,000 (up to $39,000 for heads of households) and married couples filing jointly with incomes up to $52,000. Those who qualify can receive a tax credit worth as much as $1,000 (as much as $2,000 if filing jointly) for making eligible contributions to an IRA, 401(k) or other qualified retirement accounts.
Starting in 2007, financial donations made to charities, regardless of the amount, will face stricter reporting requirements.
“If someone goes to church every week and puts $50 in the collection plate and has been putting in cash, that is no longer deductible unless they can substantiate that they made those contributions,” said Elizabeth Sevilla, senior tax director in the San Francisco office of BDO Seidman, LLP.
“What I recommend to people who make a donation or a gift to a charity ... is to use a credit card. At the end of the year, if you write a check, it may not clear” before Dec. 31, said LeValley-Cocovinis.