Make this a Less "Taxing" Year!

By Nancy Zambell, Contributing Editor

April 15 is just around the corner, and if you're like most folks, your brain is probably in a frenzy trying to think up new deductions to ward off the IRS pocket-pickers.

Hopefully, we can help you with that. We've been doing a little digging and have come up with a handful of changes to the tax laws that you may not know about, but which may help you minimize your tax bite.

 Kiddie-tax rules are not so kid-friendly

In 2006 and 2007, Congress increased the age limit at which dependent children's investment income over a certain limit is now taxed at their parents' rate rather than the child's lower rate. And for 2008, the age limit is now 19 (24 for dependent, full-time students).

But for the 2007 tax year, it applies only to children under the age of 18. This is how it works: the first $850 of your child's investment income is a gimme, tax-free. The next $850 is taxed at the child's rate. Once they reach an investment income of more than $1,700, that extra income is taxed at the parents' higher rate if the child is 17 or younger. But if they turn 18 during the year, their investment income over $1,700 limit is taxed at their own rate.

AMT gets patched once again

To keep millions of unsuspecting taxpayers from complaining about the alternative minimum tax (and maybe booting them out of office), Congress added another patch to this outdated law. First, they expanded exemptions for 2007 as follows:

• $66,250 for married individuals filing jointly and surviving spouses (up  
   from $62,550 for 2006)
• $44,350 for unmarried individuals (up from $42,500).
• $33,125 for married individuals filing separately (up from $31,275).

Next, you are now allowed to use a selection of personal nonrefundable tax credits, (including, but not limited to: dependent child credit, Hope Scholarship and Lifetime Learning education credits, credits for energy-efficient improvements and equipment for your home) to reduce your 2007 individual AMT and your normal tax payments.

(For more information on the AMT, please see our Jan. 8, 2008 issue of Financially Fit, as well as the IRS website: http://www.irs.gov/formspubs/article/0,,id=109876,00.html#amt_2007

A little mortgage relief

The Mortgage Forgiveness Debt Relief Act of 2007 provides a big break for homeowners who refinance and have part or all of their mortgage debt forgiven by their lender. The act allows a three-year window in which homeowners will not have to pay the taxes that would normally be assessed on the forgiven portion of the debt. Here is a site for additional information:

http://www.whitehouse.gov/news/releases/2007/12/20071220-6.html

Save at the IRS and the pumps — but hurry!

Since 2005, the federal government has been giving hybrid vehicle buyers some very nice tax credits. A few years back, I bought a Toyota Highlander hybrid and received a whopping $2,600 in tax credits. Added to the fuel efficiency, I figure that car saved me a couple thousand dollars per year beyond the similar non-hybrid edition (and, yes, that took into account the premium I had to pay to buy the hybrid!).

Unfortunately, these credits are phased out after the manufacturer sells the first 60,000 qualifying hybrids; Toyota and Lexus no longer offer them on vehicles purchased after Sept. 30, 2007.

Honda is also phasing its out this year, but you can still get one-half the credit (or $1,050) on Honda Civics purchased before June 30, 2008, and then one-quarter for purchases through the end of the year.

Tax credits for other hybrid manufacturers such as Ford or GM are slated to be reduced after the second quarter of 2008, at the earliest. And — unless extended by Congress — all hybrid tax credits will be gone after 2010.

Additionally, qualified alternative-fuel vehicles that run on compressed or liquefied natural gas, liquefied petroleum gas, hydrogen, or a liquid that is at least 85% methanol, offer up to $4,000 in tax credits. These will also cease after 2010, though.

Don't forget about state sales tax deductions

This deduction is most useful for folks like me who live in states (like my Tennessee) that don't have income taxes. We love having no income tax, but my local sales tax is a whopping 9.75%! The IRS issues tables listing the deductions, but they can be expanded by adding the taxes you have paid on large purchases such as cars and boats.

Here's their calculator:

http://www.irs.gov/individuals/article/0,,id=152421,00.html

Did you inherit an IRA?

If so, and the estate was subject to the federal estate tax, you can claim an income-tax deduction on Schedule A, for the amount of estate tax paid on the IRA balance. See http://www.irs.gov/publications/p559/ix01.html, for more information. Note: This can be complex, so it's best to seek advice from a qualified professional.

Make sure your reinvested dividends are added to your cost basis

This is a nugget often overlooked by mutual fund investors whose dividends are automatically reinvested, but adding your dividends to your cost basis will reduce your taxable capital gain, or increase your tax-savings loss when shares are redeemed.

Rebate checks are almost in the mail!

Beginning next month, some 130 million Americans will be getting a gift from Uncle Sam, in the form of tax rebates. Here are the basic details:

• Individual taxpayers: up to $600.
• Couples filing a joint return: up to $1,200.
• Parents: an additional $300 per eligible child.

Rebates will phase out higher-income taxpayers, beginning with individuals with adjusted gross income more than $75,000 and couples with incomes that exceed $150,000, ending at $87,000 and $174,000, respectively.

And lastly, don't forget one of the best tax savings available: your 401(k) and IRA plans.

This year, for a traditional or Roth IRA, the maximum contribution is $4,000 ($5,000 if age 50 or older). For a 401(k) plan, it's $15,500 ($20,500 if age 50 or older).

I have devoted several issues of Financially Fit to retirement plans, the last one on Feb. 26, 2008, in which I covered contributions, deductions and income eligibility. If you are not taking advantage of these fabulous savings and investing vehicles, that should be your first priority for 2008.

Each year, the tax code just keeps getting bigger, and — for the individual taxpayer — it can be very difficult to determine which deductions, credits, etc., apply to you. We hope this information is helpful to you, and recommend that you consult your tax professional to make sure you are receiving all the help you deserve in minimizing this big bite out of your income.

 This concludes this week's issue of Financially Fit.  We encourage you to visit our website to review past issues of Financially Fit: http://www.brokeradviser.com/newsletter.cfm

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