13611 Barrett Office Drive, Suite 202 · Manchester, MO 63021-7802

phone  314.965.1040 · 800.965.0355 · fax 314.965.2110 · email ralph@callier.com · www.callier.com

                                                                                                            January 2007

Greetings!

Here it is – my Newsletter!  This year, to prevent taxpayer implosion, the IRS has extended a bunch of rules that were set to expire in 2006. 

The Alternative Minimum Tax (AMT), the cash cow for the IRS, was modified very slightly (surprise, surprise) to prevent more middle-income folks from creeping into the AMT Club (a higher-tax situation designed for higher incomers).  This too circumvented a civil tax war.  Hopefully, I will have presented some meaningful tax info for you here.  Why not start reading…

Long-Distance Telephone Tax—Gone!  Now Some Refunds on Your 2006 Return

The IRS is providing refunds of this tax on your 2006 tax return.  You have an option:  dig through old telephone bills and account for the actual tax (2/28/03 - 08/01/06) or receive a credit from 30 to 60 bucks.  We will send you a special form to fill out if you choose the actual expense route.  Checking “Yes” on the worksheet will trigger that form to you.  Either way you choose, you will get the credit on your 2006 tax return from this office. 

Good Choices as Tax-Saving Vehicles

· 529 Plans – College savings plans for your kids and grandchildren

· Dependent Roth Pay-in – If your child worked, make the Roth pay-in for him/her.

· Maximize your deferrals – Make maximum use of 401(k), SEP, IRA plans etc.  For sure, take advantage of any company matches.  Don’t forget the catch-up contributions for those 50 and over.

· Pay for medical and education expenses directly to the institution for donees.  They aren’t counted in the $12,000 annual gift tax exclusion.

· Give appreciated stock to your 18-year-old to sell.  The tax is 5% instead of 15%.  Also, the first $850 of investment income (interest and dividends) is tax-free.  $850 - $1,700 is taxed at the child’s rate (low).  Over $1,700 is at the parent’s rate.  Plan your child’s portfolio to generate less than $1,700.

· Begin a Health Savings Account (HSA) if you have a high-deductible medical plan.  This plan makes the insurance expense 100% deductible, whereas itemizing allows only the amount above 7.5% of income as deductible.

Selling Your Personal Residence

In 2006 the housing market dropped.  When faced with not selling your home in a down real estate market, some consider renting it temporarily.  Consider these issues:

· Since May 1997, $500,000 of gain on home sales is tax-free ($250,000 if single).

· For the tax-free gain to take place, you must live in the home two of the last five years.

· Tax-free treatment is not available for the sale of your vacation home or a rental you are holding as an investment.

· In a soft market and faced with two mortgages, rental probably comes to mind.  Temporary rental doesn’t negate the tax-free treatment.  However, at the end of the third year of no sale, you’ll have to kick them out (sorry) and move back in to qualify for the two-out-of-five-year rule!  If that seems a little intrusive, consider reducing the sale price for quick sale to meet the two-out-of-five-rule date deadline.  We can calculate the reduced price needed to come out ahead fairly easily.  Realize, you can always rent the new place if really strapped.

· Several years ago, the IRS did made it okay to rent out a room of your residence and still qualify for the tax-free gain on sale. 

New Limits

· For 2007, you can kick in up to$15,500 to your 401(k), 457, or 403(b) plans; $20,500 if you were born before 1958.

· SIMPLE plans increase to $10,500 in 2007.

· IRA contributions remain $4,000 for your 2006 tax return and for the year 2007. 

· Add in $1,000 if you’re 50-70 for 2006 and 2007.

· The Social Security wage base is $97,500 for 2007. 

· The 2007 standard mileage rate for business driving is 48½ cents per mile.  Medical and moving mileage rates – 20 cents per mile in 2007.  Charitable driving remains 14 cents per mile.

· For 2007, you can give $12,000 (same as 2006) free of gift tax to anyone you wish.  This means that a couple can give $24,000 to any one person.

· The adoption credit increases to $11,390.  The break phases out for incomes between $170,000 and $211,000. 

· Health Savings Accounts (HSAs) allow higher deductibles for 2007--$5,650 for a family and $2,850 for individual coverage.  Those born before 1953 may add an additional $800 to the account.

Keeping Records of Education Expenses Pays Off

The Form 1098-T is not a valid record of education expenses.  Most think it is!  In an audit this form won’t work!  This form often only records what the school billed, not what the student paid.  You should keep records of all tuition and related expenses to prove them in an audit. 

So What’s New?

· In 2007, itemizers can deduct private mortgage insurance premiums issued after 2006.  However, income cannot exceed $100,000 for couples or $50,000 for single folks.

· Beginning August 17, 2006, cash contributions must be substantiated for deductibility with a canceled check, bank record, or receipt from the donee (i.e. keep your pay stubs if you have payroll withholding).  The problem will be the cash you drop in the basket at church.  Also, non-cash donations must be in “good” condition.  IRS hasn’t informed me on what “good” means so taking a couple snapshots may help us convince them in an audit. 

· Congress renewed tax breaks that were to expire through 2007:  state sales tax deduction (mostly for states that have no state income tax), college tuition, and teachers’ supplies deduction.

· The low capital gains rate of 15% on stock and other personal asset sales is extended to 2010.  The same goes for the qualified dividends of U.S. corporations – 15%.  The rate is 5% if you are in the 10% or 15% bracket.  These rates are historically low! 

· Beginning 2006, folks 70-½ and older can donate to charitable organizations directly from their IRA account.  So what?  Well, none of the donation is treated as what would otherwise be taxable income; that’s what.  This especially helps those that don’t itemize deductions and take the standard deduction.

· A couple years ago the IRS ruled that your charitable auto donations were limited to the sale proceeds received by the charity when they sold the vehicle to get the cash.  The IRS now allows you to deduct the fair market value if the charity intends to use the vehicle for its own purpose, instead of selling it, or if they intend to give or sell it at less than market value to a needy person.

Business Issues

· If you produce products, construction and manufacturing for example, we can deduct 6% of income from your U.S. activities.  This is a free deduction.

· The automatic long-distance telephone tax refund mentioned above is for individuals.  Business must track and report the taxes to the IRS to obtain this refund.  I will send you a worksheet to determine the credit you are allowed. 

· An interesting court case:  Tax Court denied a sole-owner of an S-Corporation from deducting day-care for his two children.  He had hired his spouse to work part-time for the business to qualify these as “employee expenses”.  The ruling:  these expenses aren’t directly related to the S-Corp’s business—No deduction!

· For bank credit cards, not store cards, you may deduct the deductible item in the year charged, even if it was paid some time later into the next year.

· Remember that meal and entertainment expenses are only 50% deductible on your tax return.  However, if you have meals for special occasions for your employees or have meals on the premises on occasion for efficiency—these are 100% deductible.  Track them and report them separately on your books for us to do your tax return.  Call me if you need help on this. 

· S-Corporations are still the best entity in which to save taxes, over sole proprietorships and partnerships.  As S-Corporation officers, be sure to issue salaries in line with the dividends that you issue—in other words, that your salaries are not artificially low. 

· Small firms can expense up to $112,000 in lieu of taking depreciation on equipment purchases.

Final Notes

Here are some bonus itemized deductions often forgotten:

· Air conditioner necessary for allergies or respiratory ailments.

· Nursing, chiropractic, and acupuncture fees.

· Contacts and cleaners.

· Long-term-care insurance (nursing home).

· Dentures.

· Special equipment installed in a home to provide a medical benefit.

· Points paid on the purchase of a residence—on a refinancing, too, but conditional.

· Investment interest.

· Work clothes not suitable for normal wear.

· Charitable driving.

· Professional magazines, education, and licensing.

· Travel expenses related to managing investments.

· Estate taxes.

· Legal fees for collecting taxable income or keeping a job.

· Trust administration fees.

· Expenses related to tax planning, investment planning, and tax returns.

Well, we’ve got work to do!  Put this newsletter down and move on to Step Two—the Tax Data Worksheet—Yep!  Need some help?  Don’t spin your wheels; give me a call!   This is what I do!

Many Happy Returns,