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Beat the IRS: Cash in on 7 prime-time tax opportunities

by on
in Small Business Tax,Small Business Tax Deduction Strategies

Uncle Sam often gives with one hand and takes away with the other. For instance, several key tax breaks that were created by legislation in recent years are going off the books at the end of 2007 (unless Congress takes action to extend them).

Strategy: Cash in your tax chips while you can. Below we’ve listed seven prime-time tax-savers that won’t be available once the clock strikes midnight on Dec. 31.

Of course, Congress may decide to renew these tax saving opportunities before the end of the year, but why take the chance?

1. Give IRA funds to charity

Under the Pension Protection Act of 2006, an individual age 70 1/2 or older can transfer up to $100,000 in an IRA directly to a charity without paying any income tax. By doing so, you can effectively reduce or even eliminate the tax due on required minimum distributions (RMDs). Normally, you would pay tax on RMDs at ordinary income rates.

As things stand now, qualified charitable distributions must be made before Jan. 1, 2008.

Tip: The distribution must go directly from the IRA trustee to the charitable organization. So you never actually touch the money.

2. Install energy-saving improvements

The 2005 energy law carved out tax credits for making energy saving improvements to your home before 2008. For instance, you can claim a 10% credit for energy efficient building components, including insulation materials or systems that reduce heat loss and/or gain; exterior windows (including skylights); exterior doors; and certain metal roofs with special coatings designed to reduce heat gain.

Also, you may be eligible for a credit of 100% of the cost of other energy efficient property. For more details, visit www.energystar.gov. Click on the tab for “Tax Credits Under the Energy Bill.”

Tip: The overall lifetime credit for these home improvements is $500, but only $200 of the credit may be for energy saving windows.

3. Secure a mortgage insurance deduction

If you decide to obtain mortgage insurance for your home, you may be able to take advantage of a one-time tax break. For the 2007 tax year—and 2007 only—some individuals can write off the cost of their mortgage insurance premiums.

This tax break is only available for premiums paid in 2007 on new originations. Make sure you finalize the loan before 2008.

Tip: The tax deduction phases out for an AGI between $100,000 and $109,001. No deduction is allowed above the $109,001 limit.

4. Score high tax marks on tuition

A tax relief law passed late in 2006 retroactively extended the above-the-line deduction for college tuition expenses. The deduction, which had technically expired after 2005, is now available through 2007. Under current rules, you may deduct up to $4,000 of tuition and related expenses if your AGI doesn’t exceed $130,000 for 2007 ($65,000 for single filers). The maximum deduction is $2,000 for an AGI between $140,001 and $160,000 ($65,001 and $80,000 for single filers).

Tip: If you didn’t claim the tuition deduction in 2006, file an amended return for that year.

5. Rediscover research tax credits

Similarly, the 2006 tax relief law extended the business credit for qualified research expenses. Generally, this credit is equal to 20% of your company’s expenditures for qualified research activities. But a taxpayer may elect to claim an alternative incremental credit based on a stated percentage of average expenditures over a four-year period.

The new law increased the stated percentages and added an alternative simplified credit for 2007.

Tip: This credit has been extended several times in the past, but it is slated to expire after 2007.

6. Sidestep the ‘kiddie tax’ trap

For 2007, the kiddie tax applies only to children underage 18. The higher age limits for the tax won’t kick in until 2008. So, if you have a child between the ages of 18 and 22, you may arrange for them to trigger taxable income before the end of the year. All of the income will be taxed at the child’s low tax rate; none will be taxed at your higher rate.

For kiddie tax purposes, your child’s age on Dec. 31 is the controlling age.

Tip: If your child turns age 23 in 2007, you will have no kiddie tax worries next year either.

7. Give food and books to the needy

As part of the hurricane relief package enacted in 2005, Congress approved a special charitable deduction for donations of food and books by business entities. Subsequently, Congress extended this tax break through 2007.

The deduction is equal to the lesser of (1) two times the basis in the property or (2) the basis plus one-half of the fair market value above the basis. Donations do not necessarily have to be made for hurricane victims.

Tip: The special deduction for food isn’t limited to C corporations. It’s also available to S corporations, partnerships and sole proprietors.

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