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Editor's note: Tax attorney and CPA Steven M. Nofar begins a series on taxes, both for individuals and attorneys advising on taxation and corporate issues. He will be frequenting the tax forum on legalnut to answer questions where appropriate.

 

Important Tax Figures to Help Prepare your 2007 Income Tax Return

As we turn the corner and enter the New Year, we will soon be bombarded with advertisements to purchase products and services from tax software companies and tax preparation centers.  Before you do, consider the following quick facts when filing your 2007 personal income tax return.

Get questions answered in the Legalnut Tax Forum.

1. Standard Deduction. The standard deduction is a dollar amount that reduces the amount of income on which you are taxed. You cannot take the standard deduction if you claim itemized deductions.  Your standard deduction depends on your filing status and whether you are eligible for certain additional deductions as follows:
a. Single:  $5,350
b. Head of household:  $7,850
c. Married filing joint & Qualifying widow:  $10,700
d. Married filing separate:  $5,350
e. Additional standard deduction may be claimed as follows:
i. Blind:  $1,050
ii. Age 65 or older:  $1,050
f. Persons claimed as dependents by another taxpayer must calculate heir standard deduction using an IRS worksheet.  
2. Personal/Dependency Exemption. Personal/dependency exemptions reduce your taxable income.  For year 2007, the personal and dependency exemption is $3,400 subject to a phase out listed below.  
3. Phase out of Itemized Deduction.  Itemized deductions will begin to phase out once your income rises to a certain level (i.e. threshold).  Check with your tax professional and his tax software for a more accurate calculation.  In year 2007, the phase out of itemized deductions depends on the taxpayer’s filing status and adjusted income as follows:
a. Single:  $156,400
b. Head of household:  $156,400
c. Married filing joint:  $156,400
d. Married filing separate:  $78,200
e. Qualifying widow:  $156,400
4. Phase out of Personal Exemptions.  The amount you can claim as a personal exemptions starts to phase out once income rises to a certain threshold.  If your income is within the range listed below then your personal exemption will be reduced.  If your income exceeds the range listed below then your personal exemption may be eliminated.  Phase out of exemptions depends on filing status and income:
a. Single:  $156,400 to $278,900
b. Head of household:  $195,500 to $318,000
c. Married filing joint:  $234,600 to $357,100
d. Married filing separate:  $117,300 to $178,550
e. Qualifying widow:  $234,600 to $357,100
5. Deferred Compensation (Salary deferrals).  In year 2007 the maximum annual amount a taxpayer could defer into an employer sponsored plan is as follows:
a. Traditional or Roth IRA.  $4,000 (for taxpayers under age 50) or $5,000 for taxpayers age 50 or older.  However, if you fund both a traditional and a Roth IRA, then your total contribution is limited to $4,000 or $5,000.
b. 401-K or 457 plan or 403(b) plan:  $15,500 for taxpayers under age 50; ($20,500 for taxpayers age 50 or older).
c. SIMPLE Plan:  $10,500 for taxpayers under age 50 & if it’s the taxpayer’s only retirement plan; ($13,000 for taxpayers age 50 or older).
d. Simplified Employee Pension (SEP):  25% of compensation, maximum of $45,000.  Use the IRS worksheet to calculate more accurately.  
6. Traditional IRA deduction. Contributions to a traditional IRA maybe deductible under certain circumstances:
a. Taxpayers covered by an employer sponsored retirement.  Depending on the taxpayer’s filing status and income, a taxpayer covered by an employer sponsored retirement plan may be able to deduct contributions to a traditional IRA as follows:
i. Married filing joint & qualifying widowers:  Modified Adjusted Gross Income Limits (“MAGI”) of more than $83,000 but less than $103,000.
ii. Single & head of household:  MAGI of more than $52,000 but less than $62,000.
ii. Married filing separate:  MAGI less than $10,000.    
b. One spouse covered by an employer sponsored plan.  For 2007, if you either lived with your spouse or file a joint return, and your spouse is covered by a retirement plan at work but you are not, your deduction is phased out if your MAGI is more than $156,000 but less than $166,000. If your adjusted gross income (AGI) is $166,000 or more, you cannot take a deduction for contributions to a traditional IRA
c. Bankrupt Employers.  If you participated in an employers sponsored 401(k) plan and the employer went into bankruptcy in an earlier year, you may be able to contribute up to $7,000 to your traditional IRA.
d. Earned Income Requirement.  Married filing joint, at least one spouse must have earned income.  Alimony and separate maintenance payments qualify as alimony.  In addition, non-taxable combat pay from the U.S. Armed Forces qualifies as earned income.  For self-employed persons, net earned income qualifies. 
e. Taxpayers’ age 70 & ½ or older by December 31, 2007 can not claim a deduction for contributions to a traditional IRA or treat them as nondeductible contributions.   
f. Roth IRA.  No deduction for Roth IRA contributions because they grow tax free.
g. No forms required by taxpayers to report contributions to a ROTH IRA.  Financial institutions who act as the trustee of the retirement account report contributions and values to the IRS.  
h. Check out the IRS What's New for 2007 webpage for more details. 
7. Itemized Deductions.
a. Medical expenses which exceed 7.5% of your AGI
b. Deductible taxes:  state and local income taxes, real estate taxes, vehicle license tabs
c. Home mortgage interest and certain mortgage points
d. Investment interest expense
e. Charitable contributions:  both cash and non-cash contributions to qualifying charitable organizations
f. Casualty, disaster and theft losses (subject to 10% floor and $100 deduction)
g. Gambling losses
h. Miscellaneous Itemized deductions subject to 2% floor:
i. Business use of home and/or car
ii. Business travel expense
iii. Business entertainment expense
iv. Income tax preparation expense paid
8. Standard Mile Rate.  For year 2007, the standard mileage rates are:
a. Work related:  48 ½ cents per mile 
b. Medical and moving:  20 cents per mile 
c. Charitable:  14 cents per mile
d. Written support (mileage log) is required when claiming mileage deductions.  Your mileage log should document the following for each travel (at a minimum):
i. The date of travel
ii. Starting point (point of origination)
iii. Ending point (destination)
iv. Purpose of the travel
v. Who attended
vi. Total number of miles (round trip)
vii. Coordinate the mileage log with a written calendar
9. Kiddie Tax (KT). What is it?  Basically, if your child has substantial investment income, it will be taxed at the parent's rate not the child's. It basically boils down to three key features:
a. KT affects children under age18. 
b. KT focuses on unearned income: Unearned income is income from investments held in the child's name. Whereas, earned income would be from job or self-employment.  Earned income is exempt from the Kiddie Tax.
c. KT affects unearned income above an annual threshold: For 2007, only unearned income above the annual threshold of $1,700 is affected by the Kiddie Tax.
d. Form 8615.  See form 8615 and the related instructions for more details. http://www.irs.gov/pub/irs-pdf/i8615.pdf

10. Section 179 Expense Deduction.  The maximum section 179 deduction you can elect for qualified section 179 property placed in service in 2007 has increased to $125,000 ($160,000, for qualified zone and qualified renewal property). 

11. Earned Income Tax Credit (Refundable Credit). For year 2007, taxpayer with income less than the amounts listed below may be able to claim the EITC:  

a. Child lived with you and your AGI was less than $37,783, for single persons; $39,783 for married filing jointly.
b. Child did not live with you and your income was less than $12,590 for single persons; $14,590 for married filing jointly. 
c. The maximum investment income you can earn and still qualify is $2,900.  

12. Instructions for form 1040.  Always consult with the appropriate instruction to the tax return prior to filing your taxes.  http://www.irs.gov/pub/irs-pdf/i1040gi.pdf

13. Mailing Addresses. Always check the instructions to the tax return for changes in mailing address.                                  
14. The following no longer apply:

a. Telephone Excise Tax.  This was a refundable tax credit for year 2006.  If not claimed in year 2006, then if eligible, amend year 2006 to claim a credit.  This credit is not available for years after 2006.  
b. Housing exemption for persons displaced by hurricane Katrina does not apply for years 2007 or later.


Facts and circumstances differ for each taxpayer. So, please always consult with your tax professional to research your tax issues before filing your tax returns.  

Source for tax related information

IRS Website    

Revenue Procedure 2006-53

IR-2006-162
For law students:
    Federal income tax outline.
    Federal tax procedures outline.

About the Author

Steven M. Nofar of Michigan Trust & Tax, P.C., Rochester Hills, Michigan, is a licensed attorney practicing in the areas of estate planning, taxation, and estate administration. Mr. Nofar is also a licensed Certified Public Accountant (“CPA”) and a former Tax Attorney for Deloitte (formerly Deloitte & Touche LLP). He is a member of the Taxation and Probate & Estate Planning Sections of the State Bar of Michigan, the Taxation Section of the American Bar Association, the Estate Planning and Taxation sections of the Michigan Association of Certified Public Accountants, and a member of the Chaldean American Bar Association.

Get questions answered in the Legalnut Tax Forum

 
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