Tax Tips, Tax Changes, Retirement Accounts

Tuesday, March 06, 2007

2006 TAX TIPS
The April IRS tax filing deadline is looming. Here are some tax tips from the Senior Advantage Real Estate Council to use as you prepare your own returns.

-Early mortgage and property tax payments-
If you made your January, 2007 mortgage payment before the end of 2006, be sure to deduct the mortgage interest for that January payment on your 2006 taxes. The same goes for pre-paid property taxes.

-Retirement Contributions-
If you're self-employed and have a Simplified Employee Pension (SEP), you have until April 16, 2007 to make contributions for tax year 2006. If you file an extension on your tax returns, you can extend that date to October 15, 2007.

-Home office deductions-
If you're self-employed and qualify for a home office deduction, don't forget to write off a portion of heating and lighting costs and home insurance premiums.

-Energy-efficient renovations-
If you've modified your home with energy efficient products, such as solar panels, energy-efficient windows, and so forth, see whether you're eligible for a tax credit.

-Investment Properties-
Add up receipts associated with investment properties. Repairs to keep the property in good working condition are deductible during the year you pay them. Significant investments, like a major kitchen renovation, get depreciated over 27.5 years for residential real estate.

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2007 TAX CHANGES

There are a number of changes in the laws affecting estate, gift, and capital gains taxes. Here's some brief information on the changes.

Federal estate tax law amounts-
-For many over age 50, their home is the largest asset in their estate. The amount in an estate that is excluded from Federal Estate Tax is $2 million for 2007 and 2008. The exclusion rises to $3.5 million for 2009.

Gift tax-
-An individual can make a gift of up to $12,000 to any other individual without paying a gift tax or reporting the gift. Just a reminder: The tax on gifts over $12,000 is paid by the donor--the person giving the gift.

Capital Gains Tax-
In 2007 and 2008, the maximum tax percentage is 15% on long-term (over a year) capital gains (sales price minus basis, which varies based on the circumstances). On December 31, 2008, that maximum rises to 20%.

The minimum tax percentage fluctuates. It is 5% in 2007, dips to a zero minimum (0%) in 2008 and then goes up to 10% on December 31, 2008.

In 2007, the capital gains tax exemption amounts remain the same: $250,000 is not subject to tax for an individual, and for couples, the figure is $500,000.

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NEW LIMITS: RETIREMENT ACCOUNTS

(Most Baby Boomers are still contributing to retirement accounts. For those who are no longer working, the distributions may be their primary source of money to live. The source of money impacts their housing and lifestyle goals.)

Contribution limits: Roth IRAs and traditional IRAs
2007: $ 4,000
2008: $ 5,000
Roth IRA Basics:
-Contributions are made with after-tax dollars
-Contributions are not deductible
-Can contribute even after the age of 70 -1/2
-Money can stay in a Roth IRA for your lifetime
-No tax penalty if you withdraw early
-Qualified distributions are tax free
-No income restrictions
-No income tax on withdrawals during retirement

Roth IRA income limits increase in 2007:
-Single people: A full contribution is allowed if income is $99,000 or less. A partial contribution is allowed if income is up to $114,000.
-Married couples: Contribution limits range from $156,000 to $166,000.
-To convert from a traditional to a Roth IRA, income cannot exceed $100,000, regardless of marital status.
Catch-up contributions: Individuals age 50 and older can make "catch-up" contributions to their retirement plans.
-Regular IRAs: Limits for 2007: $5,000; Limits for 2008: $6,000
-SEP IRAs, 401K, 403(b) and 457 plans: Limits for 2007: $5,000
-SIMPLE plans: Catch-up contributions equal 50% of whatever the current limit is for 401k, SEP, and 457 plans.

Qualified retirement plans: The current contribution limit allowed to be considered when determining contribution amounts and benefits is $250,000.

Defined benefit plans:
-2007 cap on annual benefits is the lesser of $180,000 or 100% of the average compensation for the last three years.
-Annual additions are limited to the lesser of $45,000 or 100% of compensation.

401K, SEP, 403 B, Elective Deferrals: The 2007 limit is $15,500 for elective deferrals for 401k plans, tax sheltered annuities, and salary deduction simplified employee pension plans.

Annual elective deferrals to a SIMPLE plan: The 2007 limit is $10,500.

Annual deferrals under section 457 plans (such as deferred compensation plans or state or local governments or tax-exempt organizations): The 2007 limit is $15,500.

As always, consult with your tax advisor.