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Tax Tips

IRA Benefits:

  1. Save for your retirement (with help from the IRS).
  2. Very profitable investment: Get an instant return equivalent to the tax savings (average about 1/3). If you qualify for an IRA you should take advantage of this very lucrative deduction.

Ask your tax advisor about the qualifications for deducting an IRA. (Also consider the new Education IRA).

Tax Credits and Income Adjustments for 2007 (available even if you can't itemize your deductions)

  1. Child Tax Credit up to $1000 for each qualifying child under age 17. Additional (partially refundable) Child Tax Credit for 3 or more children
  2. Child Care Credit up to $600 for one child or qualifying dependent and $960 for two
  3. Education Tax Credits
    1. Hope Scholarship Credit (up to $1,500 per student for first two years of tuition & fees)
    2. Lifetime Learning Credit $2,000 maximum credit per taxpayer(20% of $10,000 tuition & fees)
    3. Education Interest Deduction up to $2,500 for 2007
  4. Earned Income Tax Credit up to $4,536 for low income taxpayers ($412 maximum if no children).
  5. Office-In-Home - if work location not provided by employer, or for side business
  6. IRA - Traditional retirement IRA

Self-employed Deductions often overlooked:

  1. Health Insurance Premiums: 100%
  2. 100% Equipment Write-off of full cost up to $108,000 instead of depreciation (IRS Code Sec. 179)
  3. Office-In-Home - easier to qualify
  4. Retirement Plan: Should put the maximum allowed into a SEP, Keogh or SIMPLE retirement plan.

Itemized Deductions often overlooked:

  1. Mortgage Points paid by buyer as Interest (rules differ for new mortgages, refinancing and equity lines)
  2. Seller Paid Points
  3. Non-Cash Contributions (clothing, household goods, used cars, appreciated property, etc.)
  4. Personal Property Tax
  5. Employee mileage (between work locations)
  6. Career-related Education Expense

Income

  1. Dividend income - 5% or 15% capital gains rate will apply to most types of dividend income. Effective 2003 to 2008. Stock must have been held for at least 60 days out of 120 days before dividend is declared. (no day trading)

Senior Taxpayer Tips:

  1. Lump-sum Retirement Distributions can still be taxed using 10-year averaging for those born before 1936.
  2. Gifts of up to $12,000 per year can be given tax-free to children and grandchildren to reduce inheritance tax.
  3. Take at least a minimum IRA distribution by age 70-1/2 to avoid a penalty.
  4. Long-term Care Insurance is a deductible medical expense (up to $2,830 for age 61 and over; $3,530 for age 71 and over).

What if you owe the IRS and can't pay?

  1. Pay by credit card: IRS now accepts MasterCard, American Express, NOVUS/Discover and VISA. You can charge your balance due by calling a special toll-free number available from your tax preparer.
  2. Request Installment Payments: If you owe less than $25,000, attach Form 9465 to your tax return. There is a $43 fee to set-up the installment agreement and you will pay interest at the current applicable federal rate (AFR) and may be charged a monthly late payment charge of .05% of the balance due.
  3. Offer In Compromise may be requested in cases of extreme financial hardship where large tax liabilities are owed. You should engage a tax professional (e.g., an Enrolled Agent) to represent you in this complex process.

Note: Filing on time, even with no payment, will prevent a late filing fee, but will not prevent late payment fees.

Interesting Income Tax Facts:

  1. Tax Freedom Day (when the average American has paid all taxes for the year) occurred on April 30 in 2007 (120 days). Tax Freedom Day when I was born in 1944 was March 30 (88 days).
  2. Maximum Federal Income Tax Rates rose from 7% at the inception of the income tax in 1913 to a high of 94% in 1944 and from 1993 through 2000 was 39.6%