Tax Training Tips for 2005

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Recent Tax Law Changes

• Retirement Plans
• Charitable Giving
• Kiddie Tax

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Retirement Provisions Made Permanent

• Makes permanent higher IRA contribution limits
• Continued catch up IRA contributions
• Savers credit becomes permanent

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Charitable Giving

• Charitable contributions directly from IRA
  (expires after 2007)
• Documentation required for monetary donations
• Donated items must be in good condition

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529 Plan Benefits Made Permanent

• Qualified tax-free withdrawals from 529 Plans are
  permanent
• Provision was set to expire at the end of 2010

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Changing Kiddie Tax Rules

• Kiddie Tax in effect until age 18 in 2007
• Makes income shifting to children less
  advantageous
• In 2008, the Kiddie Tax will expand to age 19
  and most full-time students under age 24.

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IRA ConversionsNow and in the Future

• Convert traditional IRAs to Roth IRAs now and in
  2010
• Qualified retirement plans to Roth IRAs starting
  in 2010
• Tax liability can be spread over two years

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Tax Breaks for Energy Efficiency

• A credit is available for the purchase of hybrid
  or alternative fuel vehicle
• Energy efficient home improvements may earn 500
  credit
• Purchase of qualified solar panels or water
  heaters may garner a credit of up to 2,000

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Temporarily Extended Tax Breaks

• Option to deduct sales tax instead of state and
  local taxes
• Higher education tuition deduction
• Out-of-pocket classroom expense deduction

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Filing Basics

• Status
• Tax Rates
• Standard Deduction
• Itemizing Deductions
• Personal Exemption
• Timing Strategies

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Filing Status

• Married filing jointly
• Married filing separately
• Single
• Head of Household
• Qualifying widow(er)

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2007 Tax Rates

• 10
• 15
• 25
• 28
• 33
• 35

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Standard Deduction
Filing Standard Status Deduction Single
5,350 Married filing jointly 10,700 Married
filing separately 5,350 Head of Household
7,850 Qualifying widow(er) 10,700
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Standard Deduction

• Taxpayers 65 and older and/or blind get an
• additional standard deduction
• Married - 1,050
• Single or Head of Household - 1,300

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Itemizing Deductions

• An alternative to the standard deduction
• Use when total deductions exceed
• standard deduction
• Phase-out rules apply
• -- Single/joint/head of household -- 156,400
• -- Married filing separately -- 78,200

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Personal Exemption
Filing Status Phase-out Phase-out starts e
nds Joint return 234,600
357,100 Head of Household 195,500
318,000 Single 156,400
278,900 Married filing 117,300
178,550 separately
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Timing Strategies

• Control tax bill by
• Deferring income, such as bonuses
• Accelerating deductions, such as
• qualified charitable contributions
• Bunching deductions that are based on
• a percentage of AGI

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Tax Strategies for Life

• Family
• Education
• Home
• Investments
• Retirement

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Family Strategies

• Child Credit
• Adoption Credit
• Dependent Care Credit
• Earned Income Credit
• Shifting Income

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Child Credit

• Child must be under 17 at year end
• Child must be claimed as a dependent
• 1,000 credit per child
• Reduces tax bill dollar-for-dollar
• Phase-out for higher income families
• Child must be a citizen or resident of the United
  States.

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Adoption Credit

• Credit of up to 11,390 per eligible child
• Exemption for first 11,390
• reimbursed by employer
• Parents adopting special needs
• child get full credit, regardless of actual
• expenses

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Dependent Care Credit

• Child must be under 13 and a dependent
• Tax credit from 20 to 35
• of qualifying expenses
• Use up to 3,000 of expenses
• (6,000 for two or more dependents)
• to calculate credit
• Not restricted to children

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Earned Income Credit
Family Size Maximum Credit Two or more
4,716 children One child 2,853 No
children 428
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Shifting Income

• Consider gifts to children up to 12,000
  without being subject to gift tax
• Hire your children
• - First 5,350 earned by each child is tax free
• - Earned income is not subject to kiddie tax

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Education Strategies

• Tax Credits
• Student Loan Deduction
• Higher Education Tuition Deduction

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Tax Credits

• Hope Credit worth up to 1,650 per
  student, per year
• Applies to first two years of college only
• Phase-out begins
• Single -- 47,000
• Joint -- 94,000

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Tax Credits

• Lifetime Learning Credit of up to
• 2,000 per year
• Applies to undergraduate, graduate
• and professional courses
• Phase-out applies

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Student Loan Deduction

• Deduct up to 2,500
• No need to itemize
• No limit on repayment period length
• 55,000 to 70,000 phase-out range
• for single filers
• 110,000 to 140,000 phase-out range
• for married filing jointly

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Higher Education Tuition Deduction

• Deduct up to 4,000 (If AGI does not exceed
  65,000 for single and 130,000 for married
  filing joint)
• Deduct up to 2,000
• Phase-out limits apply
• Single 65,000 -80,000
• Married 130,000 - 160,000
• No need to itemize

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Homeowner Strategies Deductions

• Mortgage interest on first and second homes
• Up to 100,000 in home equity loan
• or line of credit interest
• Points paid on mortgage or refinancing (over
  term of loan)
• Real estate property taxes

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Selling Your Home

• Exclude up to 250,000 in capital gains
• from sale of home 500,000 for joint filers
• Must own and use home as principal residence
• for two out of five years preceding the sale
  date
• Eligible only once every two years
• Reduced exclusion available

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Investment Strategies Dividends

• Top dividend tax rate of 15 for qualifying
  dividends
• Rate is 5 for taxpayers in 10 and
• 15 brackets
• Check ex-dividend date
• Does not apply to interest payments

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Capital Gains Tax

• Maximum tax rate on long-term gains is 15
• 5 for taxpayers in 10 and 15 brackets
• Asset must be held more than one year
• Tax rate of 28 applies to collectibles

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Offset Capital Gains with Losses

• Capital losses offset capital gains
• 3,000 (1,500 for married filing
  separately) in net capital losses can be
  deducted against ordinary income
• Beware of wash sale rule

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Retirement Strategies Employer-Sponsored Plans

• Contributions help reduce tax bill
• Take advantage of employer matches
• 15,500 is 2007 maximum contribution
• 5,000 additional contribution for age 50
• and older

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IRAs

• 4,000 is maximum 2007 contribution
• 1,000 additional catch-up contribution
• for age 50 or older
• Phase-out applies
• Open by April 15, 2008

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Business Strategies Structure

• C Corporation
• S Corporation
• Partnership
• Limited Liability Company
• Sole proprietor

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Expensing Deduction

• Deduct up to 100 of the cost of up to
• 125,000 in property
• Applies to new or used property
• Equipment must be put into service by
• December 31, 2007
• Now applies to software
• Phase-out rules apply

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Additional Business Strategies

• Deduct 100 of health insurance costs
• if self-employed
• Defer income and accelerate deductions
• Make the most of business-related
• deductions travel, auto, meals and
• entertainment and interest expenses

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Year-End Tips Charitable Deductions

• Donate appreciated property and avoid
  capital gains tax
• Donate clothing, household goods, furniture
  in good condition and deduct fair market
  value
• Volunteer your time and deduct qualified
  travel and related expenses

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Flexible Spending Accounts

• Reduce taxable income
• Use up remaining 2007 balances
• Over-the-counter drugs are now allowable

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Avoid AMT

• AMT triggers
• Higher than average dependency exemptions
• Large deductions for state and local
• income taxes and real estate taxes
• High miscellaneous itemized
• deductions and medical expenses
• Incentive stock options

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2007 AMT Exemption Amounts

• Single 44,350
• Joint 66,250
• Married, Filing Separately 33,125

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Key Takeaways

• Focus on tax savings year-round
• Consider year-end opportunities
• Get help if you need it