The passing of President’s Day weekend means that it is time for most of us to start concerning ourselves with filing our income tax returns. There were relatively few major revisions in the tax laws from last year but as always there are changes in amounts allowed to be deducted from income in the area of exemptions and deductions.
Personal exemptions are up $100 from 2006’s $3,300 per person to $3,400 for the 2007 tax year. The standard deduction for those who do not itemize on Form 1040 Schedule A has increased by $200 for singles (from 2006’s $5,150 to this year’s $5,350) and $400 for married couples (2006’s $10,300 versus 2007’s $10,700). For those who are over 65 years old, the standard deduction is increased by $250 to $6,650 from the previous year’s $6,400.
If your employer does not offer a pension plan, then you can contribute up to $4,000 ($5,000 if you are 50 years old and up) regardless of adjusted gross income and deduct the amount from your gross income on Form 1040. If you do participate in a pension plan at your job and your 2007 adjusted gross income is less than $52,000 ($83,000 for joint return filers) then you can still deduct up to $4,000 on your tax return ($8,000 for married couples). If you earn between $52,000 and $62,000 ($83,000 and $103,000 for married couples) there is a phase-out which means that you are allowed a partial deduction for IRAs. Once you earn more than the AGI limit then you cannot contribute anything towards the traditional IRA.
The Internal Revenue Service is always finding more ways to scrutinize charitable contributions. Last year the IRS disallowed taxpayers to use the Kelley Blue Book values when they donated automobiles to charitable organizations. The organizations had to provide you a receipt for how much they were able to sell your old car. The IRS did show some mercy by allowing a minimum deduction of $500 for even the worst jalopy.
The IRS is now threatening to get tough on cash contributions. You are now required to substantiate all contributions that you are claiming on Schedule A. The general rule was that the IRS conceded about $250 per year ($5 per week in the church plate was the de facto understanding). Therefore, you should make sure that you always get receipts for any cash donation, keep copies of cancelled checks, and if you prefer making donations via credit card be sure to keep copies of each month’s statement. If you have a payroll deduction plan for charitable contributions from your job be sure to obtain a year-end statement from your employer.
College grads are now getting a break if mom and/or dad pay the interest back on their student loans. In the past the IRS did not allow well-meaning parents to deduct that interest since they were not the students and the students did not get the deduction either since they were not the ones paying out of their pockets. Now students get the student loan interest deduction thanks to their parents’ generosity. Parents should note however that any loan repayments on behalf of their kids will count towards the estate and gift tax.
Despite all the frustrations voiced by nearly everyone about the alternative minimum tax (the tax that you would pay if you were not allowed to use certain deductions such as state and local income taxes, real estate taxes, unreimbursed job-related expenses and medical expenses), the AMT is alive and well in 2007. When the AMT was created in 1969 it was designed to force wealthy taxpayers who were benefitting too well from Schedule A itemized tax deductions to “pay their fair share.” Because the AMT was never properly indexed for inflation over the years, more and more middle class taxpayers are now subject to its whims. The 2007 income threshold amounts are up slightly from the preceding year, but the prediction is that millions more taxpayers will have to pay a higher tax than they expect thanks to the AMT. Make sure to fill out Form 6251 to see whether your tax liability will increase because of it.
It is always recommended that you speak with a tax professional. It is also a good idea to get familiar with tax laws and tax planning strategies by picking up a copy of either J.K. Lasser’s “Your Income Tax 2008” (Wiley Publishing) or Ernst & Young’s 2008 “Income Tax Guide” (Basic Books).
(Editor’s note: Both Lloyd Carroll and Sidney Askew are certified public accountants and members of the accounting faculty at Borough of Manhattan Community College. In addition, Carroll is a frequent contributor to the Queens Chronicle.)
For the complete article, please go to:
http://www.zwire.com/site/news.cfm?newsid=19318636&BRD=2731&PAG=461&dept_id=575596&rfi=6
