News

Dear Client:

With the year drawing to a close, now is an ideal time to review your tax situation and evaluate strategies that may help minimize your tax bill.  As is the case year after year, favorable changes to the tax laws over this past year are also accompanied by unfavorable modifications. Add to this reality the unusual number of tax incentives that are scheduled to expire at the end of this year, and the need for year end tax planning becomes even more urgent for many taxpayers as we head toward the end of 2007.

TRADITIONAL TAX STRATEGIES

Year end tax planning tips typically fall into two general groups: (1) the traditional strategies that have proven themselves useful year after year, and (2) new opportunities that have arisen from recent changes to the tax laws.

Tried and true tax planning techniques can help virtually every taxpayer save money; some, of course, more than others. How much you can save depends on your individual circumstances but examination of the following general areas is worth a look in addition to considering the tax impact of any special circumstances in which you might find yourself this year.

Income shifting - One of the most fundamental year end tax planning techniques involves accelerating deductible expenses in 2007 and deferring income, if economically feasible, into 2008. By delaying taxable income you defer taxes. Delaying taxable income may also prevent you from losing lucrative tax breaks that can be reduced or eliminated altogether as your income level rises and propels you into a higher tax bracket.

The ability to gauge your income and expenses for 2007 and into 2008 provides a golden opportunity to shift income or expenses into one year or the other depending on what will enable you to save the most overall taxes.

Deduction management - Essential end of the year tax planning requires determining whether you will take the standard deduction or whether you will itemize your deductions. Consider “bunching” deductible expenses into one or the other year depending upon whether the standard deduction may be taken in one year or whether the adjusted gross income limits for medical (7.5 percent) or miscellaneous itemized deductions (2 percent) may be more easily met.

Even if you know you will itemize deductions, accelerating or deferring them is often a question of determining your probable tax bracket for year end and the next year to maximize their after-tax value. Sometimes planning is as simple as paying your state estimated tax or real estate taxes in one year or the other; at other times, it’s a question of making certain you gather the right proof and follow the proper steps in time to be entitled to a deduction in one year or the other.

Portfolio timing - The end of the year is an ideal time to examine your investments (winners and losers over the course of the year) to take the steps necessary to minimize your capital gains income and maximize the benefit of any capital losses. Long-term capital losses can be used to fully offset long-term capital gains. Losses taken in excess of gains can also be used to offset up to $3,000 in ordinary income (or $1,500 for a married couple filing separately). The strategy for short-term gains and losses follows a similar game plan, although coordinating the two sometimes takes special care.

Retirement planning - Year end planning for 2007 also involves maximizing annual contributions to your retirement plan accounts. While contributions to IRAs may be applied retroactively if made before the filing deadline, contributions to qualified plans must be made before the end of the calendar year.

Maximizing contributions to your retirement plan before year end also allows you to reduce your adjusted gross income in direct proportion to those contributions. This, in turn, can give you the benefit of increasing the deductibility of medical and other deductions subject to adjusted gross income floors.

Gift-giving - Take advantage of the 2007 annual and lifetime gift-giving limits to reduce your income and estate tax liabilities. For 2007 and then again in 2008, you can transfer $12,000 per person, per year, without paying gift tax on the amounts transferred. Married couples can gift $24,000 per person, per year without tax liability on the amounts transferred. That strategy not only avoids the possibility of paying a hefty estate tax later, but it removes earnings from those gifts from your taxable income bracket into that of the lower bracket gift recipient.

NEW-FOR-2007 OPPORTUNITIES (AND DRAWBACKS)

Tax law changes constantly, and therefore so must individual tax planning. Tax year 2007 is no exception. While fundamental techniques should not be overlooked, attention to tax legislation — both tax laws passed since last year and those tax laws that may be put to a vote in Congress before year’s end — is equally important for most taxpayers. Here are the more important changes directly impacting 2007 yearend tax planning.

Kiddie Tax - The Small Business and Work Opportunity Tax Act of 2007 introduced a number of tax incentives for small business, but included a few pitfalls for individuals. For 2007, a child under the age of 18 is subject to the “kiddie tax” (and thus pays tax at his or her parents’ highest marginal tax rate on unearned income in excess of $1,700). But in 2008, the applicable age rises and the kiddie tax will apply to a child under the age of 19 and full-time students under age 24. In light of this development, parents should consider selling appreciated stock and other assets belonging to their children now, especially if they will be in the 19 to 24 year-old category next year.

Expiring provisions

A variety of popular tax credits are set to sunset at the end of 2007, unless Congress extends them. Tax breaks set to expire at the end of 2007 include:

State and local sales tax deduction. Despite being one of the more popular tax breaks, the deduction for state and local sales taxes is not permanent and is set to expire at the end of 2007. The American Jobs Creations Act of 2004 gave taxpayers who itemize deductions the option of claiming either state and local income taxes or state and local general sales taxes. Therefore, if you have been contemplating the purchase of a big-ticket item, such as a car or boat, you should consider making it sooner rather than later because the deduction for state and local general sales taxes expires at the end of 2007.

Mortgage insurance premiums. Premiums paid or accrued in 2007 for qualified mortgage insurance are deductible as qualified residence interest. The insurance must be carried on acquisition indebtedness for a qualified residence. A “qualified residence” is the principal residence and one other residence that is not treated as business property.

Tuition and fees deduction. Taxpayers may deduct qualifying tuition and fees paid in 2007 that are required for the student’s enrollment or attendance at a post-secondary school. The tuition and fees deduction is an above-the-line write off that, depending on adjusted gross income, can reduce taxable income by as much as $4,000. They are frequently more valuable than taking a Hope or Lifetime learning education credit.

Classroom deduction. Full-time teachers, instructors, counselors and other educators can deduct up to $250 worth of books, supplies, software, and other qualifying materials that they provide as out of pocket expenses. The deduction is set to expire at the end of 2007, unless Congress extends it.

Residential Energy Credit. Eligible homeowners may claim a credit up to $500 for the costs of making certain energy efficient improvements to their principal residence if improvements are made before 2008.

IRA Distributions to Charity. For tax years beginning in 2006 and 2007, distributions from a traditional or Roth IRA up to $100,000 are excluded from income if paid directly to a charity.  The taxpayer must be age 70 1/2 or older and must not claim the deduction as a contribution.

ALTERNATIVE MINIMUM TAX

Unfortunately, the alternative minimum tax (AMT) may require both traditional year end planning techniques and new strategies to avoid, or at least minimize, its reach into a growing number of taxpayers’ pockets. A planning technique that may save you a significant amount under the “regular tax” may be worthless if you unexpectedly fall into the AMT.

Planning for the AMT typically focuses on carefully examining normal income tax deductions that become “tax preference” items and are no longer deductible under the AMT. These include:

• Personal exemptions
• Deductions for state and local taxes;
• Home equity loans and other mortgage interest not incurred in buying, building or improving your principal residence;
• Incentive stock options (which may generate AMT income even when sold at a loss);
• Interest from many tax-exempt bonds;
• Deductions for unreimbursed business expenses; and
• Other itemized deductions.

LOUISIANA TAX CHANGES

Gift Taxes. Effective 7/1/2008, Louisiana has repealed the gift tax.

Hurricane Funds. Louisiana allows a deduction for any funds received from a hurricane recovery entity (i.e. Road Home) if the income was required to be included in the federal income tax return.

Insurance Premiums. Louisiana created a nonrefundable credit against individual income taxes for 7% of the premiums paid by individuals on their primary residence for homeowners’ insurance, condominium owners insurance or tenant homeowners’ insurance.

Itemized Deductions. Louisiana allows a deduction of federal itemized deductions that exceed the federal standard deduction.  For 2007, a deduction of 57.5% of the excess itemized deductions is allowed.  For 2008, the allowable percentage is 65%.  For years 2009 and forward, the allowable percentage is 100%.

With the complexity of the tax law, understanding what tax planning provisions to incorporate into your year end tax planning strategy can be a daunting task. While this letter hopefully gives you a heads up on at least several strategies on which you might follow through before year end, there are many more techniques that can be used depending upon a client’s individual circumstances. For a more detailed plan that can be customized to your particular circumstances, please call our office.

Sincerely yours,

Hannis T. Bourgeois, LLP