Financial Phonics (R) December 2007
Standard Mileage Rates
Employee / Business
$0.485 – 2007
$0.505 – 2008
Medical / Moving
$0.20 – 2007
$0.19 – 2008
Charity/volunteer $0.14
Even if you are still working in the year in which you turn age 70 and a half, you must start taking the Required Minimum Distribution every year from your IRA accounts. This includes SEP-IRA’s and SIMPLE-IRA’s and inherited ROTH IRA‘s.
The penalty for failing to take the RMD is a 50% tax on what you should have withdrawn. Given the stiff penalty, this is not something to ignore.
In many instances, your IRA trustee or your investment broker will alert you, but this does not always happen. It is still your own responsibility to comply with the law.
To calculate the RMD for 2007, you will need the value of all of your IRA account balances at 12/31/2006, your age at 12/31/07, and one of three different life expectancy tables. Call or email us if you have questions about how to calculate the RMD; we don‘t want you to have to pay the 50% tax!
For 2007 only, you can still receive up to a $500 total lifetime tax credit on your individual tax return for the purchase of qualifying energy efficient appliances or property improvements. This includes replacing windows, doors, adding insulation, replacing a furnace, hot water heater or air conditioner. Check to make sure that any improvements meet the standards established by the 2000 International Energy Conservation Code or the Energy Star Program.
The credit is equal to 10% of your expenditure, up to these maximums: $300 credit on water heaters, central air or heat pumps, $200 credit on windows, $150 credit on a furnace, and $500 credit maximum on metal roofs, insulation or exterior doors. Let us know what you’ve improved on your personal residence this year, how much it cost and we’ll check to see if the credit applies. This credit expires 12/31/07, so if you were going to do it soon, make the improvement now!
For 2007, Congress has increased the Section 179 Deduction to $125,000 on the Federal tax return, but Wisconsin is staying with the $25,000 maximum. In 2008, Wisconsin will allow only farmers to use $108,000.
This deduction allows businesses, including self-employed individuals, to immediately deduct the cost of equipment put into business use, rather than writing off the cost over the life of the equipment in usually three to seven years.
For 2007, the capital gains tax rate is 5% for those in the 15% tax bracket or lower, and 15% for those in the 25% bracket or higher.
For 2008, the capital gains tax rate drops down to 0%, yes, ZERO TAX, for those in the 15% tax bracket or lower.
If you are in the 15% tax bracket, 2008 is definitely the year to take your capital gains. And 2007 would then be the year you would take your capital losses, but no more than $3,000 because you don’t want those losses over $3,000 carried forward to 2008 where you’d lose the benefit of the Zero tax.
At the same time this Zero tax becomes effective, Congress threw in a new trap, widening the application of the kiddie tax. In 2008 and later, students aged 18 to 24 are taxed at their parents rates when they sell investments and have capital gains. This means high school and college students won’t have access to the Zero tax on gains!
If you are a child aged 18 to 23 in 2007, getting ready to cash in your investments to pay for college, you MUST SELL ALL IN 2007 if you have gains to be realized. Put the proceeds back into an account to be ready to cash out when you need it in the next four years.
The gains that accumulate over the next couple of years won’t be as much as you’ve probably had to date through 2007.
As this newsletter is being printed, Congress is out to lunch on what it will do about the AMT (Alternative Minimum Tax). This is the tax that gets added onto your regular income tax when you have too many tax preferences. In Wisconsin, our high state income and property taxes are considered a tax preference, as are exemptions for children. So if you are married, both parents working, and you have children, and you live in a high property tax area like Madison, you get hit with this extra tax.
Everyone expects Congress to do something about this outrageous tax on families with children, but it may not happen for a few more months, and it may be retroactive to January 1, 2007. This will really make tax season interesting. We may not be able to finish tax returns for those hit by AMT until Congress makes its decision on who gets to pay and how much. The AMT is scheduled to start at $45,000 of taxable income on a married, filing jointly tax return, or $33,750 single.
In the meantime, here’s a few things you can do to minimize your potential for being hit by the AMT:
1) Take capital losses in 2007;
2) Invest in US Savings Bonds to defer interest income to a future year;
3) Increase charitable deductions – receipt needed for ALL charity now;
4) Pay January 2008 mortgage interest before December 31, 2007;
5) Pay real estate taxes when due, (pay at least $2,500 per year to take the Wisconsin homeowners credit.)
6) Have your employer reimburse your employee business expenses versus taking as an itemized deduction.
For one year only, 2007, you are able to deduct your mortgage insurance premium with your mortgage interest, as an itemized deduction. This is only for the purchase of a home in 2007 or for the refinancing in 2007 where mortgage insurance is required. If you qualify, you should receive a form 1098-INT with an amount in Box 4 for mortgage insurance paid.
The information provided in this newsletter is intended to inform and not advise. Opinions expressed reflect the authors’ knowledge and judgments about the law and markets as they exist on this date and are subject to change. No one should ever apply or interpret the information without obtaining the advice of a trained expert who knows the person’s facts and circumstances. Individual facts and circumstances may change how the law or rules would be applied or our judgment about the appropriate action to be taken.
Some very good informative information.