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Leslie Bonacum
Neil Allen

Tax Planning for 2007, 2008 Must Deal with Uncertainty, CCH Says

(RIVERWOODS, ILL., October 12, 2007) – As the days in 2007 dwindle down to a precious few, taxpayers who want to minimize their tax burden for this year and next have a range of options, but also face a considerable amount of uncertainty, according to CCH, a Wolters Kluwer business and a leading provider of tax, audit and accounting information, software and services (

“There are many things the average person can do to lower this year’s taxes,” said Mark Luscombe, JD, CPA, CCH principal federal tax analyst. “But more than most years, many people will have to keep an eye on Washington to see how their returns will be affected. Congress has yet to act on the alternative minimum tax (AMT) exemption for 2007 and the fate of several popular tax benefits due to expire at the end of this year is still up in the air,” Luscombe added.

Know Your Bracket

Tax planning begins with such simple things as knowing your tax bracket – the percentage at which your top dollar of income will be taxed. Brackets currently range from 10 to 35 percent. The income levels at which the brackets begin and end are adjusted annually for inflation.

As a general rule, it’s better for anyone to pay a tax later than sooner, but in addition, people in higher brackets benefit from the annual indexing of the brackets and other items for inflation, so more of their income will be taxed at lower rates in 2008 than in 2007.

If you’re an employee and are usually paid a year-end bonus, you may be able to make arrangements with your employer to have the bonus paid in and credited to 2008 rather than 2007. If you run your own small business and bill your clients, you might be able to defer income simply by not billing until next year.

Retirees may have an opportunity to lessen their taxes by carefully planning how they take large distributions from IRAs – for example, a distribution to buy a retirement home or pay off credit-card debt.

“By splitting up a large distribution and taking part in December and part in January, you may avoid moving to a higher tax bracket in either year, and keep more of your Social Security benefits from being taxed as well,” Luscombe observed.

Better to Wait for 2008?

For some people, though, it may make sense to increase their 2007 income, even if it means a slightly higher tax bill for this year. That’s because in 2008, those in no higher than the 15-percent rate bracket can take advantage of a zero-percent rate on capital gains.

So, accelerating income into 2007 may allow them to qualify for the zero rate in 2008, based on lower 2008 ordinary income. Those who qualify will also want to consider postponing sales of long-term capital assets until 2008 if they’re within the 15-percent bracket, which is projected to top out at $65,100 for joint filers and $32,550 for single filers in 2008.

Making the Most of Deductions

You can exercise control over the timing of deductions, as well as income. If you have a property tax bill for 2007 that’s due in January, you can pay it in December to clinch a deduction on your 2007 return. Similar opportunities may exist with scheduling elective medical procedures or making a charitable contribution.

The question is whether accelerating deductions into the current year is always the best strategy. Sometimes it is and sometimes it isn’t.

“If your itemized deductions are close to the size of your standard deduction, you’re often better off ‘bunching’ deductions in alternate years. That can give you a significant amount of itemized deductions in odd years, while you take advantage of the standard deduction in even years,” Luscombe observed.

AMT Can Change Your Strategy

Another case in which it’s best to be careful with deductions is for people who may be subject to the AMT. In the topsy-turvy world of the AMT, some items that are deducted in figuring your regular tax are added back in to figure a tentative “alternative” minimum tax. If the alternative minimum tax is larger than your regular tax, you pay it instead.

“If your regular tax and alternative minimum tax are fairly close together, you’re probably better off not bunching deductions, but trying to smooth out the ones that can trigger AMT liability from year to year,” Luscombe suggested.

The problem is, the exemption used to calculate AMT liability is up in the air.

Legislative Uncertainty

In 2006, the AMT exemption amounts were $42,500 for single individuals and $62,550 for married couples filing jointly, but these amounts lapsed and are now set for 2007 to revert to just $33,750 for individuals and $45,000 for married couples filing jointly. Congress is expected to enact another round of temporary relief, but just when that will happen and whether the relief will be enough so that people not previously subject to the alternative tax will continue to escape its clutches is uncertain.

“House Ways and Means Committee Chairman Charles Rangel has indicated that he wants to craft legislation that will do away with the AMT, but that will not produce a net revenue loss,” Luscombe said. “That would mean raising a lot of revenue through higher taxes elsewhere or dramatically improving collections. The best bet is that the AMT will continue in something like its present form, with exemption amounts a bit higher than the ones in 2006, at least for the 2007 tax year.”

So while many taxpayers on the line between regular tax and AMT try to time deductible expenses so they avoid the alternative tax, they won’t know how much to shift around until Congress acts.

Another reason to “save” deductions for next year has to do with the “phaseout” on itemized deductions that applies to taxpayers above certain income levels. For 2006 and 2007, the effect of the phaseout was lessened by one-third, but in 2008 it will be lessened by two-thirds.

“This means less of their income will be taxed and their deductions will count for more,” Luscombe noted.

Unfortunately, those affected by the phaseout on itemized deductions are often also those affected by AMT.

“They may need some tea leaves as well as a calculator to figure out their best strategy,” Luscombe said.

Retiree, Health Plans Can Lower Next Year’s Taxes

The closing months of the year are often “open enrollment” periods for employee benefit plans that can reduce your taxes for next year, if not this one.

“Paying for health or dependent care expenses on a pre-tax basis and contributing to a 401(k) will directly lower your adjusted gross income for 2007,” Luscombe said. “A lower adjusted gross income, in turn, can qualify you for more deductions and credits that are ‘phased out’ as income rises, as well as lowering your taxes directly.”

Some companies now offer Health Savings Accounts – HSAs – in conjunction with high-deductible health insurance plans. These offer the opportunity to pay for deductibles and co-payments with pre-tax dollars and even to roll over unused HSA dollars to future years.

“There’s a definite chance to save on taxes with these plans, but there’s also a chance of incurring higher out-of-pocket costs than with traditional plans,” Luscombe said. “As with many other financial decisions, tax consequences are only one factor to be weighed.”

Tax Savings with IRAs and Keogh Plans

Taxpayers who aren’t covered by an employer’s retirement plan – or who are covered by a plan but whose income falls below certain levels – can cut their taxes by contributing to a traditional, deductible IRA or, if they are self-employed, to a Keogh plan.

In either case, they have until April 15, 2008 to actually deposit funds in their retirement account, but the Keogh has to be set up by December 31, 2007, for any contribution to be excluded from 2007 income. An IRA doesn’t have to be established until April 15, 2008 for contributions to count against the previous year’s taxes.

“You can use a refund to fund your IRA or Keogh, if you file far enough in advance to have the money in your hands by April 15, 2008,” Luscombe noted.

For seniors required to make withdrawals from their IRAs, the end of 2007 closes a window of opportunity for avoiding taxes on them – unless Congress extends a short-lived tax break. If a distribution of up to $100,000 is made directly to a charity, it can be excluded from income.

“If someone doesn’t need the amount that they are required to remove from their IRA, this is an opportunity to avoid a tax ‘hit’ while helping out a favorite cause,” Luscombe noted. Those who make such contributions should be aware, though, that they cannot also claim an itemized deduction for the same funds.

A Roth IRA Possibility

An option made possible by recent pension legislation is to fund a non-deductible IRA with an eye toward rolling it over into a Roth IRA in 2010. This does not reduce current taxes, but promises tax-free withdrawals from the Roth IRA in future years. In addition, Roth IRAs are not subject to minimum-distribution rules as other IRAs are.

“What’s important here is that high-income individuals are not allowed to establish Roth IRAs or convert from a traditional IRA to a Roth. But recent tax legislation opened the door to conversions in 2010,” Luscombe noted.

The conversion option would be attractive to people who are currently barred from setting up a Roth IRA and who do not have any funds in a traditional, deductible IRA.

“If you have a traditional IRA, you can’t set up a non-deductible IRA and then be taxed as if you had converted only the non-deductible IRA to a Roth IRA,” Luscombe said. “Whatever amount was converted would be treated as coming proportionally from both IRAs, triggering taxes on the funds deemed to come from the traditional IRA.”

Clock is Ticking

As the year winds down, time is expiring for several deductions and credits. Absent new legislation, this is the last year for which you can take an itemized deduction for state and local sales tax. This year also sees the last of the q ualified tuition deduction, an “above the line” deduction valuable even if you can’t itemize. The ability of educators to take an above the line deduction for school supplies expires at year-end, also.

Save Energy, Trim Taxes, But Act Now

As a result of recent energy legislation, you can save energy and trim this year’s tax bill, too. A number of energy-saving improvements to your home can earn you up to $500 in tax credits – and up to a $2,000 credit for major solar systems such as photovoltaics or a solar-powered hot water system. Credits are also available when you purchase a hybrid vehicle.

“You don’t have to itemize to take advantage of a tax credit, since a credit directly reduces your tax bill,” Luscombe observed.

Just which purchases qualify for how much credit is complicated, though. In most cases, taxpayers must rely on manufacturers to certify that their products meet the energy-saving standards that qualify them for the credit. Time is a factor in determining the credits, as well. The credits for many types of home energy-saving improvements expire at the end of 2007. A hybrid car qualifies for a full credit only until the manufacturer has sold 60,000 qualifying vehicles – then the credit phases out.

Last Chance for “Kiddie Tax” Break

The Small Business and Work Opportunity Tax Act of 2007 raised the applicable age for the “kiddie tax” on which unearned income above a minimum amount is taxed at the parent’s rate. Before 2007 ends, only those who have not turned 18 by year’s end are subject to the kiddie tax. For 2008 and after, the age rises to 19, but full-time students who remain dependents are subject to the kiddie tax until age 23.

“For those 19-to-23-year olds not subject to the kiddie tax this year but are subject to it again in 2008, it makes sense to sell appreciated assets now, and be taxed at their own rate, especially since the capital gains rate may go up after they reach 24,” Luscombe noted.

Enjoy Your Tax Savings

As you take steps to lower your tax bill, you should take one more step – to make sure that those savings go straight into your pocket, rather than sitting in the IRS’s coffers until you apply for a refund, Luscombe says.

“If you know your tax bill will be lower for any reason, you should take steps to enjoy your lower taxes now or in the future by increasing your take-home pay or your savings. You can invest the money, contribute to one of the many tax-advantaged retirement vehicles available or buy things you need without racking up credit card debt,” Luscombe advises.

“By adjusting your withholding on Form W-4, you can start receiving your 2007 refund this year, and your 2008 refund in January,” Luscombe said.

About CCH, a Wolters Kluwer business

CCH, a Wolters Kluwer business ( is a leading provider of tax, audit and accounting information, software and services. It has served tax, accounting and business professionals and their clients since 1913. Among its market-leading products are The ProSystem fx® Office, CCH® Tax Research NetWork™, Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill.

Wolters Kluwer is a leading global information services and publishing company. The company provides products and services for professionals in the health, tax, accounting, corporate, financial services, and legal and regulatory sectors. Wolters Kluwer had 2006 annual revenues of €3.4 billion, employs approximately 18,450 people worldwide, and maintains operations across Europe, North America, and Asia Pacific. Wolters Kluwer is headquartered in Amsterdam, the Netherlands. Its shares are quoted on Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices. For more information, visit

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EDITOR’S NOTE: For members of the press, a complimentary copy of CCH's Tax Planning Strategies 2007-2008 is available by contacting Neil Allen at 847-267-2179 or or Leslie Bonacum at 847-267-7153 or


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