Fred J. Kline, CPA, MBA

Kline & Company, CPA, P.C.

Time Running out for 2007 tax planning

By Fred J. Kline, CPA, MBA
Kline & Company, CPA, P.C.

As we approach another year end, it is a good opportunity to plan to reduce taxes for your 2007 tax return. Most tax planning occurs before the end of the year. Some planning tips for 2007:

· Expense business equipment purchased during the year. Section 179 of the Internal Revenue Code allows most small businesses to deduct up to $125,000 of business equipment purchased during the year. There are specific exclusions for automobiles and certain other property purchased. For companies needing equipment in early 2008, it may make sense to purchase the equipment by December 31 of this year in order to reduce your 2007 tax liability.

· Maximize your deductible 401(k) contributions for the year if you are an employee. For 2007, the limit is $15,500 ($20,500 if you are 50 or over).

· Delay the invoicing of customers at year end if you file your business tax returns on the cash basis. This allows you to reduce your taxable income for the current year.

· Donate gifts of up to $12,000 to family members or others. This is the maximum donee maximum gift allowance before having to file a gift tax return.

· Consider selling stocks at year end. For 2007, individuals in the 10% or 15% income tax bracket are eligible for a 0% capital gains rate on sales of securities and other investments held for at least one year. Assets held for less than a year will be taxed at your ordinary income tax rate.

If you still end up with more taxable income than planned, a SEP-IRA retirement contribution can be made after the year end – provided there is not another retirement plan in place for your business. For self-employed individuals (or single member LLC’s), up to 20% of income to a maximum contribution of $45,000 can be deducted on your tax return. You are allowed to delay the funding up until the 2007 extension date (October 15, 2008) provided you have a valid extension with the IRS and do not file the return until making the contribution.

It would be my pleasure to answer any questions you may have regarding the tax planning tips above.

About Fred J. Kline, CPA, MBA

Founder and President of Kline & Company, Fred has been an accountant since 1982. His general areas of specialization include accounting, taxation and small business consulting; primarily with high technology and professional service companies. Fred has a particular expertise in consulting with Federal Government Contractors and representing DoD clients for DCAA (Defense Contract Audit Agency) audits. He is a member of the New Hampshire Society of CPA's, the AICPA and the New Hampshire High Technology Council.

Questions and Answers

QUESTION: I have been told in the past to pay my January 1st mortgage payment on or before December 31st. The intent is all me to take an additional deduction for interest paid on the current year by increasing the amount reported by my lender on the 1098 form. Is this something that you recommend?

ANSWER: You are correct that the amount of mortgage interest paid during the year is generally fully deductible on your tax return. Typically I do recommend that your final payment be made in December so that your interest can be deducted one year earlier on your tax return. The major exception to this is when you expect to be in a higher tax bracket the following year. As an example, if you are in the 15% tax bracket in 2007 and expect to be in the 25% tax bracket in 2008; I would recommend that the January 1, 2008 payment be made on or after January 1, 2008. The reason for this is that the tax savings on your 2008 payment would exceed the tax savings on your 2007 payment. If the amount of mortgage interest for the payment due January 1, 2008 was $1200; your tax savings would be $180 ($1200 times 15%) by making the payment in 2007 but would increase to $300 in tax savings ($1200 times 25%) if your rate increased to 25% in 2008.

QUESTION: I have read and heard that outfitting your home with new storm doors and windows or buying a gas-efficient hybrid car can lead to "energy saving" tax deductions. Is this correct, and are there specific limitations and information that I should be aware of?

ANSWER: Code Section 25C provides up to a $500 lifetime credit for certain energy efficient improvements including metal roofs, insulation, and exterior windows (including skylights) - each eligible for up to a 10% credit not to exceed $500 in total. The credit can also be used for specific types of heating and hot water boilers including electric heat pumps and geothermal heat pumps meeting specific energy efficiency standards. For water boilers and heat pumps, up to a 30% credit is allowed - although the same cap of $500 applies to the total of all of the credits. These credits apply only for purchases in 2006 or 2007.

For hybrid automobiles, combined total credits of $400 to $3,400 are available for both the overall fuel economy of the vehicle and also the fuel economy of the vehicle in comparison to other vehicles in its weight class. The amounts of credit available for each model can be obtained by your dealer or through your tax advisor. The hybrid motor vehicle credits are effective until December 31, 2010 although the credit is phased out over a period of 15 months once a manufacturer has sold 60,000 qualifying vehicles.