Your Year-End Tax Planning Guide

In 2007, you might have invested some of your hard earned money in such snazzy technologically innovative devices as the new Apple iPhone or the latest BlackBerry Curve. While such gadgets can improve your productivity in other areas, for trying to lower your income tax liability, there's no substitute for investing a little time and attention between now and December 31. There are planning steps that, if taken, can materially affect your 2007 tax liability.

To start, all you need is a copy of your 2006 tax return and an inventory of your personal, business and investment life for 2007 to date. Good tax planning needs a little organization, mostly involving financial records. Look at your 2006 tax return and think for a few moments about any year-end planning you might have done last year. Did you move any income or deductions from 2006 into 2007? Did you make any business purchases in late 2006 that continue to give tax benefits in 2007? Any of these types of transactions need to be noted and incorporated into your 2007 tax planning.

Little by way of major tax legislation has been enacted this year. Of some note is the Iraq supplemental spending measure, which was signed into law on May 25, 2007. This law includes an increase in the minimum wage and a tax title called the Small Business and Work Opportunity Tax Act of 2007 (the "2007 Small Business Act"). Although much of this legislation is quite technical and has little impact on year-end tax planning, there are a few general business incentives and revenue raisers that may be beneficial, such as the enhanced and extended Internal Revenue Code Section 179 expensing and the broadening of the "kiddie tax." More on these two changes below.

TAKE STOCK NOW: FILL OUT A 2007 TAX RETURN TODAY
The most efficient and informative first step in your year-end tax planning is to take stock of where you stand vis-à-vis 2007 taxes. How does 2007 look? How do you expect 2008 to look? Call your tax professional (or, if the new iPhone and Curve have sparked your interest in all things technologically challenging, pull out some 2007 tax preparation software) and do a draft 2007 tax return based on the year to date and reasonable estimates through the end of the year. See how the resulting tax liability compares to what you expected.

In doing your draft 2007 return, pay particular attention to the alternative minimum tax (AMT) and how close you are to being (or not being) an AMT taxpayer. Much year-end tax planning involves trying to steer clear of that stealth tax. The federal income tax rate cuts enacted in 2003, when taken together with counterbalancing state and local income tax rate increases, make it increasingly likely that you will be subject to AMT. That's because the AMT doesn't allow you to deduct state and local taxes. Remember, residents of New Jersey earning more than $500,000 are subject to income tax rates up to a maximum of 8.97%, and New York's top rates are now 6.85% for the state and 3.648% for the city. These high state and local rates will complicate AMT planning.

Also, pay attention to your projected adjusted gross income (AGI); there are tax benefits that phase out over a specified range of AGI. For example, eligible individuals may claim a $1,000 credit for each qualifying child if their modified AGI does not exceed $75,000 ($110,000 for joint returns and $55,000 for married individualsfiling separate returns). The amount allowable as a credit is reduced by $50 for each $1,000 (or fraction thereof) by which the modified AGI exceeds $75,000 ($110,000 for joint returns and $55,000 for married individuals filing separate returns). While the income limits may mean that many middle- and upper-middle-class readers may not qualify for these credits, it helps to be aware of them in the various "what if" scenarios.

Because taxes affect your personal, business and investment life in different ways, year-end tax planning needs to focus separately on personal, business and investment matters.

PERSONAL PLANNING
The 2007 Small Business Act, as well as the Energy Tax Act of 2005 and the Tax Relief and Health Care Act of 2006, provides several noteworthy items that may impact your year-end tax planning. In particular, the 2007 Small Business Act broadens the so-called kiddie tax. Prior to the recent legislation, the kiddie tax rules generally taxed the unearned income (i.e., investment income) of children under age 18 that exceeded a prescribed amount ($1,700 for 2007) at the parents' tax rate. The 2007 legislation expands the reach of the kiddie tax to children that have turned 18 and to children over age 19 but under 24 who are full-time students if their earned income (e.g., wages, salaries, professional fees, etc.) does not exceed half of the amount of their support. Although these expanded kiddie tax rules generally do not apply until the 2008 tax year, you may want to reconsider or postpone any planned transfers of income-generating stocks, bonds and other investment assets to any child under 24.