Yes, it's early. April 15 is months off and who wants to think about 1040s, W-2s, and 1099s when cheerier holiday thoughts seem more appropriate.
But ignoring taxes until 2008 could be a mistake. Changes in the rules are adding opportunities and traps, making 2007 year-end planning especially important. There are still ways taxpayers can prepare before the year-end. Although the deadline for most maneuvers is Dec. 31, now is the time to start thinking about and implementing them, says Boston accountant Ed Smith, a partner at BDO Seidman.
"Don't wait until after Christmas to perk up and take action," Smith cautions.
Capitalize on capital gains
This might be a good time to take long-term capital gains. The top tax on such investment profit is 15 percent, and many advisers fear the rate may rise because of political shifts in the nation's capital.
"People with appreciated shares they expect to go still higher can consider selling now for a low-taxed profit, then reinvest in those same shares," says Robin Christian, an analyst at Thomson Tax and Accounting, a publisher of professional tax guides.
People in the bottom two tax brackets, generally this year with taxable income of up to $63,700 after deductions for a couple and $31,850 for a single filer, can get a bonus by waiting until January to cash in. Though their long-term capital gains tax for 2007 is just 5 percent, it's scheduled to drop to zero for 2008. Partial tax may be due if the gain pushes them into a higher bracket.
"Harvesting losses" can also pay off, Smith said. Cleaning up a stock portfolio by selling some dogs before year-end can generate losses to offset tax on capital gains you've taken and up to $3,000 a year of other income.
Go green
It's too late for Toyota and Lexus fans, but prospective buyers of other hybrid models who purchase by year-end can get a tax credit to trim this year's tax by $250 to $3,000, depending on the model.
Because sales of hybrid brands made by Toyota have exceeded a cap, credits for those cars have been eliminated for sales after Sept. 30. Honda credits will gradually phase out next year. So while other hybrids still get a nod from Uncle Sam, there is no longer a tax incentive to buy a Toyota-made model.
Additionally, this is the last chance to claim up to $500 in credits against tax by making energy-saving improvements to your home. The credits, for upgrading such items as heating and cooling units, windows, and insulation are scheduled to expire at the end of this year. There might still be time to install some qualified items before year-end.
An adult-size kiddie tax
Beware: Your children may now face the kiddie tax even when they're no longer kiddies.
The tax is designed to block parents in a high tax bracket from shifting income-producing assets to a child in a low bracket. Before 2006, it targeted youngsters under age 14 by making them potentially liable for tax at their parent's higher rate -up to 35 percent compared with as little as 10 percent for the child.
For 2007, kiddie tax can hit through age 17, and for 2008 it can hit through 18 or through 23 for full-time students. Exceptions may apply to older children who hold jobs and mostly support themselves, but the new sweep is broad.
"Children who are not subject to the kiddie tax this year may be hit by it next year," cautions accountant James Erdekian, a partner at Feeley & Driscoll in Boston.
Tactic: If a sale of some investments is planned for a young adult who will be pulled back into the kiddie tax next year, consider selling this year to nail down a 5 percent capital gains bite, compared with the 15 percent tax they may face next year.
One way to sidestep kiddie tax is to focus on long-term growth or tax-exempt municipal bonds instead of current taxable income.
Some youthful income might still be lightly taxed. The kiddie tax kicks in for 2007 when a child's investment income tops $1,700, or $1,800 for 2008.
To deduct, or not to deduct
One year-end gambit for people who don't claim the standard deduction is to accelerate itemized deductions.
Paying in December this coming January's final installment of estimated state income tax for 2007 makes the payment deductible on this year's federal return. Likewise, paying a mortgage bill due in January before year-end can pull more deductible interest into 2007 - but keep your own careful record of the interest paid because it's not clear whether the advance payment will be reflected on a year-end statement from the bank.
Also, "self-employed people should consider Christmas shopping for deductible office supplies and equipment," suggests accountant Arthur Ford, of Sullivan Bille in Tewksbury. That lowers taxable income and thus cuts both income tax and self-employment Social Security tax.
Warning: People hit by the federal alternative minimum tax don't benefit by accelerating state or local tax payments since those aren't deductible when figuring AMT, a special extra levy intended to limit the tax savings of the high-income taxpayers with lots of deductions. Because of glitches in its design, including not being adjusted to reflect inflation, the AMT now threatens to impose extra tax on many middle-income families with rather ordinary deductions. Congress has been imposing temporary restraints on the AMT's spread pending a more permanent fix.
Charitable urges
Making donations in December that you planned to make early next year is an easy way to boost overall itemized deductions for 2007. Not so easy are new rules to document the giving.
Though audits are few, the IRS now expects you to be able to prove with a cancelled check or receipt any cash donation. Clothing and household items you give away must generally be in good or better shape to be deductible.
Tip: Donating appreciated stock lets you avoid capital gains tax on the shares and also deduct their full value. Your broker and the charity can help with the process, but don't dawdle. "You want to start as soon as possible to allow time for the transfer," urges Peter Blank, editor of the Kiplinger Tax Letter.
Bay State alert
Don't assume that moves to shave federal tax will necessarily trim Massachusetts state tax.
Long-term capital gains, for example, are taxed by the state as regular income, and state-specific rules may also apply to other investments.
There's also no state deduction for contributions to a traditional IRA. But that means the state won't fully tax withdrawals, as the Feds do. "To figure the state's partial bite it's vital to have records of past contributions and earnings in the account," Ford says.
Separately, there's something new in the state: Most Massachusetts residents who don't have newly mandatory health insurance by year-end will lose their personal exemption on 2007's state return. The penalty next year, for each month of no coverage, will be even higher and based on a formula tied to the cost of health insurance.
Slow down
Take a breather before filing, says IRS spokeswoman Peggy Riley. Expected 11th-hour action by Congress to restrain the burgeoning alternative minimum tax may require revising instructions and calculations on some forms. And though you may be eager for a refund, wait until you're sure you have all the facts about your income and deductions. Some statements from brokers, employers, and others might be delayed into February or later. And because of the delayed patch to the AMT for 2007, the IRS says many refunds of early filers will be delayed.
"Filing early may not be easy to do," Riley warns.
