As the holiday season nears, it’s also a good time to begin tax planning. As you pull out your 2006 return for guidance in planning this year’s taxes, keep several issues in mind. This roundup of topics is designed to help you plan for your 2007 return, but remember that your tax adviser is an invaluable resource for planning.
Capital gains
The maximum 15% tax rate on net long-term capital gains and qualified dividends, which had been scheduled to increase after 2008, will remain in place through 2010. The 5% rate, which applies to capital gains and dividends that would otherwise be taxed at 10% or 15% if ordinary income, is still applicable for 2007 and drops down to zero for 2008, 2009 and 2010. The odds are very good that after 2010, the rate on capital gains will be significantly higher than the current 15%.
Selling, trading, buying
Keep in mind that when you sell machinery or equipment on which you have taken a depreciation (or expensing) deduction, your profit will be taxed as ordinary income (not long-term capital gains) to the extent of that depreciation. This is not a problem when you trade. The undepreciated basis of your trade is added to the boot paid to come up with the new basis for depreciation. Note, however, that only the boot or additional monies paid is eligible for the Section 179 expensing deduction.
The Section 179 expensing election for 2007 has increased to $125,000. For every dollar you invest in qualifying property over $500,000, you lose $1 of 179 expensing. At $625,000 in qualifying property investment, you will have no expensing election available. The expensing election gives you a great deal of flexibility since you don’t have to make the decision to use it, or how much of it to use, until you actually file your return. You also now have the right to revoke or change the election without prior Internal Revenue Service approval.
Domestic production
The domestic production activities deduction goes from 3% of net income (qualified production activities income) to 6% for 2007. Originally created in 2005 in response to “trade distortion” concerns with other tax incentives, this deduction is for producers, manufacturers, building contractors and farmers. The deduction is limited to 50% of W-2 wages paid by the taxpayer during the year. Wages paid in commodities and other noncash wages are not included in W-2 wages for this measurement. The deduction is calculated on form 8903, Domestic Production Activities Deduction, which can be downloaded from the IRS Web site, www.irs.gov.
Conservation contributions
If you’ve been thinking about a conservation contribution, it may be to your benefit to get it done before year-end. Qualified farmers and ranchers may take a charitable deduction for a qualified conservation contribution of up to 100% of adjusted gross income, but the window of opportunity is small. Check with your tax professional for rules that came out this summer.
Marketing options
This has been an unusual year for marketing with surprises in yields both on the high side and the low. Be sure that price-later and deferred-payment contracts are written in such a way that you do not have “constructive receipt” of grain income before you plan to. Also, remember that while selling grain directly out of the field and “storing on paper” by buying back commodity futures or options may be a valid marketing strategy, it does not defer income. When you sell the grain, you have income. Replacing your physical position (owning the grain) with a paper position does not offset the income.
Kiddie-tax changes
Last year, the kiddie tax was extended to age 17. Beginning with 2008, the kiddie-tax rules will become more complicated and, in some cases, will apply to children as old as 23. This change has caught many people by surprise. It limits the opportunities for parents to shift investment income to children in a lower tax bracket and plays havoc with some long-term plans to have investments come through in time to finance college expenses. There is still a window of opportunity for the remainder of 2007 to possibly take advantage of the child’s 5% capital gains rate.
Time and effort put into tax planning will more than pay for itself. If 2007 was a good year for you, tax planning is very important to help you preserve the optimum amount of that income. If 2007 was a bad year, tax planning is even more important. The chart on this page will help. The IRS Web site, www.irs.gov, is a good source of information, publications, fact sheets and blank forms.
Grabowski writes Farm Tax Saver, a monthly farm tax planning newsletter filled with useful information you can keep on hand for planning. A subscription is $50. You can order online by visiting www.farmprogress.com/taxsaver, or you can call 800-441-1410 and speak to our customer service department during normal business hours.
| Useful Numbers for 2007 Tax Planning | ||||
| 1040-Individual Returns | ||||
| Married-Joint | Single | Head of Hsld | ||
| Standard Deduction | $ 10,700 | $ 5,350 | $ 7,850 | |
| Additional Elderly/Blind | $ 1,050 | $ 1,300 | $ 1,300 | |
| Taxpayer Claimed as Dependent | $ 850 | |||
| Personal Exemption | $ 3,400 | $ 3,400 | $ 3,400 | |
| Rate Brackets | ||||
| End of 10% | $ 15,650 | $ 7,825 | $ 11,200 | |
| End of 15% | $ 63,700 | $ 31,850 | $ 42,650 | |
| End of 25% | $ 128,500 | $ 77,100 | $ 110,100 | |
| End of 28% | $ 195,850 | $ 160,850 | $ 178,350 | |
| End of 33% | $ 349,700 | $ 349,700 | $ 349,700 | |
| 35% | $349700+ | $349700+ | $349700+ | |
| Alternative Minimum Tax Exemption | ||||
| (Congress may increase) | $ 45,000 | $ 33,750 | $ 33,750 | |
| Capital Gains by Category | ||||
| Gain on Collectibles | 28% | |||
| IRC § 1202 Gain | 28% | |||
| Unrecaptured § 1250 Gain | 25% | |||
| Net Long-Term Capital Gain | 15% | |||
| Long-Term Capital Gain if Ordinary Rate is 10% or 15% | 5% | |||
| FICA/Social Security | ||||
| Social Security Max (OASDI) | $ 97,500 | |||
| FICA (OASDI & HI) Tax Rate (Employee/Employer Match) | 7.65% | |||
| Self-Employed Tax Rate | 15.30% | |||
| Earnings Required for One Quarter of Soc. Sec. Coverage | $ 1,000 | |||
| Depreciation | ||||
| Section 179 Expensing Deduction | $ 125,000 | |||
| Phaseout on New Investment for 179 Expensing Deduction | $ 500,000 | |||
| Certain SUVs/Others after October 22, 2004--179 maximum | $ 25,000 | |||
| Depreciation limits for basic cars--2007 1st Year | $ 3,060 | |||
| Depreciation limits for pickups & vans--2007 1st Year | $ 3,260 | |||
| Standard Mileage Rates | ||||
| Business | 48.5 cents/mile | |||
| Charity Work | 14.0 cents/mile | |||
| Medical/Moving | 20.0 cents/mile | |||
| Retirement Plan Contribution Limits | ||||
| IRAs | $ 4,000 | |||
| IRA Age 50 Catch Up | $ 1,000 | |||
| SIMPLE | $ 10,500 | |||
| SIMPLE Age 50 Catch Up | $ 2,500 | |||
| Other Plans Age 50 Catch Up | $ 5,000 | |||
| 457 Plans | $ 15,500 | |||
| 401(k); 403(b); & SEP | $ 15,500 | |||
| Defined-Contribution Plan | $ 45,000 | |||
| Defined-Benefit Plan | $ 180,000 | |||
| Compensation Limit | $ 225,000 | |||
| Stock Bonus & Profit Sharing | 25% | |||
| U.S. Estate & Generation Skipping Transfer Tax | ||||
| Estate Tax Exclusion--2007 | $ 2,000,000 | |||
| Estate Tax Exclusion--2008 | $ 2,000,000 | |||
| Estate Tax Exclusion--2009 | $ 3,500,000 | |||
| No Estate Tax--2010 | $0 | |||
| Back to Pre 2001 Tax Act-2011 | $ 1,000,000 | |||
| Special Use Valuation Reduction Limit--2007 | $ 940,000 | |||
| U.S. Gift Tax | ||||
| Gift Tax Exclusion--2007 | $ 1,000,000 | |||
| Annual Exclusion for Gifts--2007 | $ 12,000 | |||