Get handle on tax return with 2007 year-end tips

The end of the year is approaching, and so is the time for reviewing your tax situation. It’s your last chance to figure out where you stand and possibly take action to minimize your tax bill. Here are some tips to help you manage the results on your 2007 return.

Deferring income: If you delay receiving income into 2008, you defer the tax on that income another year. It’s not just a matter of simply delaying receipt of funds, however. Tax rules may require you to recognize certain types of income when you have earned the right to receive it.

Accelerating deductions: Consider “bunching” deductible medical or miscellaneous itemized deductions into one year or the other; doing so may give you a lower overall tax bill due to adjusted gross income thresholds.

Portfolio timing: Review your investments and take steps to minimize capital gains and maximize the benefit of capital losses. Losses in excess of gains can offset up to $3,000 in ordinary income. There is a zero percent net capital gain rate effective for tax years 2008 through 2010, for individuals in the 10 or 15 percent tax brackets.

Gift giving: Take advantage of the 2007 annual gift-giving limits to reduce your income and estate taxes. For 2007 and 2008, you can transfer $12,000 per person, per year, without paying gift tax on the amounts transferred. Gifting removes the earnings on those gifts from your taxable income bracket to the donee’s, and reduces estate taxes down the road.

“Kiddie tax” update: For 2007, a child under age 18 is subject to “kiddie tax” (pays tax at his or her parents’ highest marginal rate on unearned income over $1,700). In 2008, the applicable age rises, and the kiddie tax will apply to a child under age 19 and full-time students under age 24. Parents should consider selling stock and other assets belonging to their children now if they will be in the 19- to 24-year-old category next year.

Expiring tax breaks: Some popular deductions are set to expire at the end of 2007, unless Congress extends them.

State sales tax deduction: If you have been contemplating a big purchase, such as a car or boat, you should consider making it sooner rather than later.

Tuition and fees deduction: This is an “above the line” write-off that can reduce taxable income by as much as $4,000.

Alternative Minimum Tax (AMT): Planning techniques that work for regular tax may backfire if you unexpectedly fall into AMT. Because of expiring tax law changes, AMT exemptions have decreased in 2007. Income and deductions that may tip you into AMT include large capital gains, incentive stock options, state taxes paid and miscellaneous itemized deductions.

There are many more planning techniques that can be used depending on your individual circumstances. Evaluating your own situation can be a daunting task, so don’t hesitate to call on your friendly CPA for help.

Mary Decker is a CPA, Certified Financial Planner and a principal of Hascal, Sjoholm &Co., a full-service CPA firm in Everett. She specializes in tax and estate planning. She can be reached online at www.hascal.com or at 425-252-3173.