Top Ten Tax Issues of 2007 - WSFA.com Montgomery Alabama news.

Top Ten Tax Issues of 2007

Top Ten Tax Issues for 2008 (For Tax Year 2007)

Story Ideas from the Alabama Society of CPAs

 

 

  1. The AMT (Alternative Minimum Tax) is continually reaching more and more taxpayers in high state income tax states. This tax, which began in the 1960s to get a handful of millionaires to pay income tax when they weren't paying any, is now reaching families with total income as low as $80,000. State income taxes or optional sales taxes, real estate taxes and exemptions for children are the most common items that are not deductible in computing the AMT. Tax planning is important for those individuals affected by the AMT.
  2. With real estate values rising rapidly the last few years, IRS Code Section 1031 is becoming popular again. This code section has been around in some form since 1921. When a client wants to dispose of a property in which there would be a substantial capital gains tax due, he or she can exchange it for a "like kind" property and defer the gain into the new property, paying no tax today. Any cash received is called "boot" and tax must be paid on that portion. For example, this is great for someone who is relocating and owns rental real estate and wants to have rental real estate at the new location.
  3. Individuals who are older than 59½ can begin withdrawing from IRAs and pensions without penalty. Many taxpayers choose to wait until they are required to draw from these funds at age 70½ years. Beginning withdrawals prior to 70½ could tax these funds at the low 10, 15 or 25 percent tax rates rather than waiting until later with larger sums required to be withdrawn and taxed at higher rates. The tax tip: withdraw funds before 70½ if those funds will be taxed at the lower current federal tax rates. We don't know what the future tax code will look like but it is likely that income tax rates will not move lower in the future.
  4. Consider municipal bond interest with after tax investments when a taxpayer is in a high personal income tax situation. A 4 percent yield on a tax-free instrument is equivalent to a 6.15 percent taxable yield in the highest federal income tax bracket of 35%. The municipal bond investment is often safer than the equivalent yielding taxable bond. This gives you a better after tax yield in states that have higher personal income tax rates.
  1. Consider 401(k) tax benefits. A 401(k) represents a way to reduce your taxable income because contributions come out of your pay before taxes are withheld; many plans include a matching contribution from your employer; and the money you save benefits from tax-deferred growth, which allows your money to compound more quickly than it would if it were taxed yearly. Maximum contributions rose to $15,500 in 2007 and workers 50 and older can make additional "catch-up" contributions totaling $5,000. (Less than 1/3 of employees able to participate in 401(k)s take advantage - a big issue considering the average savings rate for Americans dipped below zero for the first time since the Depression era.)
  2. Beware of the "Death Tax." The federal estate tax exemption - the amount you may leave to heirs free of federal tax - is rising gradually from $2 million in 2006 through 2008 to $3.5 million in 2009. Meanwhile, the top estate tax rate is coming down. The estate tax is scheduled to phase out completely by 2010, but only for a year. Unless Congress passes new laws between now and then, the tax will be reinstated in 2011 and you will only be allowed to leave heirs $1 million tax-free at a time.
  3. The IRS announced the number of tax return audits is increasing. In 2005, increased audits led to a 10 percent growth in "enforcement revenues," to $47.3 billion. What steps can you can take to avoid being audited?
  4. Are you itemizing your tax deductions for 2007? The difference between owing taxes and looking forward to a refund check often comes down to one word - deductions. You can always claim the standard deduction - $5,350 for single filers and $10,700 for married couples filing jointly - and it is often the best bet for people with simple tax situations. However, depending on your mortgage interest, charitable gifts, state taxes and medical expenses, your actual deductions could be several times the standard deduction, in which case you're missing out if you don't itemize.
  1. Where are the most tax-friendly states in the country? Where does Alabama rank? Every year, the Tax Foundation measures the total tax bill for each state, creating a list of the most-and least-tax friendly states in the country. The rankings are based on income tax, sales tax, property tax and tax breaks for per capita income that residents pay in income, property, sales and other personal taxes levied at the state and local levels. It also factors in the portion of business taxes passed along to state residents through higher prices, lower wages or lower profits. The Tax Foundation is a nonpartisan, nonprofit policy research group that advocates, among other things, tax simplification. http://www.taxfoundation.org/publications/show/336.html.
  2. Ways to spend your tax refund. It's tax time again, and that's good news for those expecting refunds. Once the checks start arriving, many people will wonder how to best spend the money. CPAs are recommending that consumers consider paying off credit card debt, plan for retirement, invest in college savings...Look at 360 Financial Literacy (http://www.360financialliteracy.org/Life+Stages) for ideas to get your household in order...

Other tax story ideas include energy credits available, disaster recovery tax applications, education tax credits, earned income tax credit, tax issues for military families, tax implications of divorce and sales tax for online purchases.

Source: Alabama Society of Certified Public Accountants.

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