You can use acceleration or deferral techniques to maximize your overall tax savings between 2006 and 2007, take advantage of 2006 only tax laws before they expire, and prepare for new 2007 tax breaks.
Several ways in which you can shift income or expenses into 2006 or 2007 to save the most overall in taxes are:
- Accelerate/postpone transactions that produce income or yield deductible expenses;
- Match long and short-term capital gains with capital losses to decrease capitals gains tax and maximize the $3,000 limit on capital losses that can offset other income;
- Bunch deductible expenses into one or the other year if the standard deduction may be taken in one of the years, and/or to meet the adjusted gross income limits for medical (7.5%) or miscellaneous itemized deductions (2%);
- Maximize retirement plan accounts annual contributions, since annual limits cannot be carried forward;
- Businesses can take advantage of the full expensing deduction of $108,000 in 2006 and $112,000 in 2007; and
- S corporation shareholders can make certain their stock basis is high enough to entitle them to any available loss deductions.
2006 does have its share of opportunities and pitfalls:
- The “kiddie tax” taxes income of a child under 18 (up from age 14) at a parent’s tax rate retroactively from January 1, 2006;
- The hybrid vehicle credit available to purchasers is reduced once a manufacturer sells more than 60,000 units (already the case for Toyota hybrids starting October 1, 2006);
- The residential energy credits of $500 for residential energy improvements, $2,000 for solar equipment, and $500 for fuel cells per half kilowatt capacity, are only available in 2006 and 2007;
- Strict limitations will be placed on the quality of clothing and household items entitled to a charitable deduction beginning August 17, 2006;
- New (and generally unfavorable) limitations on the housing allowance for those working abroad are retroactive to January 1, 2006; and
- Direct, tax-free charitable contributions from IRAs for those 70 1/2 and older are available for 2006 and 2007 only.
And of course, 2007 will also have its share of opportunities and pitfalls, as well:
- Cash donations of ANY size must be substantiated by paperwork, including either a cancelled check or a written note from the charity indicating amount, date and charity name;
- Businesses have a more generous, but stricter, domestic production activities deduction with the deduction cap increasing from 3% to 6%, and a restriction of the W-2 wage limitation to manufacturing activities only;
- Fixed individual retirement account contribution limitations will be adjusted for inflation, including Roth IRA income limits of $156,000 (up from $150,000) for married filing jointly, and $99,000 (up from $95,000) for most others; and
- The Saver’s Credit for lower income taxpayers will be adjusted for inflation, with joint filers getting a 50% credit with income up to $31,000 (20% up to $34,000 and 10% up to $52,000).
- Beginning in 2010, there will be no maximum income level to restrict conversion of regular IRAs into Roth IRAs. Taxpayers who are presently over the current limit can make annual contributions to a nondeductible IRA that can be converted into a Roth IRA in 2010 when the income cap is lifted.
Furthermore, Congress has passed two major tax bills, the Tax Increase Protection and Reconciliation Act and the Pension Protection Act, which include:
- An estate and gift tax repeal or raising the exemption to $5 million;
- Retroactive extension of the state and local sales tax itemized deduction option to January 1, 2006;
- Retroactive extension of the abovethe-line higher education tuition deduction and the teacher’s classroom expense deduction to January 1, 2006;
- Extension and/or modification of a host of tax breaks for business, including the Work Opportunity and Welfareto-Work tax credits, Archer Medical Savings Accounts; the research tax credit; and
- Further closing of the SUV purchase loophole that has continued to allow up to a $25,000 expensing deduction inthe first year of business use.
Congress has also passed a few legislative “patches” to keep the alternative minimum tax (AMT, designed to ensure that wealthy taxpayers were not able to escape taxation by exploiting deductions) from hitting too many people, but the AMT has not been indexe for inflation so it will affect a growing number of taxpayers every year. You can plan to avoid AMT by reviewing items that trigger AMT, such as:
- State and local taxes;
- Home equity loans and other mortgage interest not incurred in buying, building or improving your principal residence;
- Incentive stock options which can generate AMT income even when sold at a loss;
- Private activity bonds; and
- Other itemized deductions.
- Give our office a call
The two most important pieces of tax advice to keep for any year are to keep good records and ask questions.