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2007 Tax Law Changes

There have been several tax law changes this year, some of which may affect you. Here are some of the current issues to be aware of.

Charitable Contributions

Effective for all contributions made in 2007, you cannot take a charitable contribution deduction for the donation of clothing or household items unless the item is in “good used condition or better.” The law does not define “good condition” so you will need to be a little discriminating with the items you are donating and you may want to take photos of large value items to help verify their condition. Additionally, a description of “3 bags (boxes) of clothing” will no longer be sufficient, please itemize your donations with their applicable used value.

Also, starting in 2007, you are no longer able to deduct small amounts of cash given to charities, such as the Salvation Army bell ringers or the church collection basket. In short, you will not be able to take deductions for any contributions not paid by check or acknowledged in writing by the charity. However, the State of California does not conform to these regulations and individuals are still permitted to take these small cash deductions on their California return as long as the individual has retained a record or log tracking these donations.

If you are involved in a charitable organization you may want to speak with the Board of Directors about how to provide receipts for small amounts of contributions you make.

Direct Disbursement from IRAs to Charities

In 2007, if you were at least 70 ½, you can make a charitable contribution directly from your IRA. If you make regular annual contributions this is a great deal. There are big tax benefits to making your contributions directly from your IRA, but there are tricky rules we need to discuss.

Sales of Property

California just liberalized their rules for tax withholding on sales of real estate. For most sales of property, other than a principal residence, California requires tax withholding at the rate of 3 1/3% of the sales price. For sales occurring on or after January 1, 2007 , the new law allows the seller the option of having withholding taken at the rate of 9.3% of the estimated tax gain. We are available to assist you with calculating the tax gain and filling out the required forms.

Sales Tax Deduction

Congress voted to extend the deduction for sales tax. So, don't forget to bring your invoice on the purchase of your new car to your tax interview.

Pensions and IRAs

The amounts you can contribute to pension and IRAs have increased dramatically in the last few years. In 2007, you can contribute $4,000 to an IRA and if you're 50 years or older by the end of the tax year, you can kick in an additional $1,000. In 2008, the contribution is increased to $5,000 plus the additional $1,000 catch-up contribution for those aged 50 years or older by the end of the year. In 2007 and 2008, you can contribute up to $15,500 to your 401(k) and an extra $5,000 if you are at least 50.

There are a host of new opportunities in the pension and IRA area including a new reason to make a nondeductible IRA contribution for those who don't qualify to make deductible IRA contributions. (Don't forget to ask us about the new rules on Roth conversions that begin in 2010!)

The “Kiddie Tax” now applies to more kids

In 2007, children of age 18 who earn more than $1,700 of investment income pay tax on that income at their parent's tax rate. In 2008, the rules are changing to include all kids aged 18 and under and those under the age of 23 that are full time students and have investment income of $1,800 or more.

Capital Gain Tax Rates

If you have any questions on the new tax rates on capital gains in 2008, please call us. The calculations for computing which rate to use are complicated and will vary greatly between individuals.

Mortgage Interest Deduction

As a reminder, the maximum amount of mortgage interest deductible is the interest paid on qualified acquisition debt of $1,000,000 and $100,000 of equity debt. Home acquisition debt is a mortgage you took out to buy, build, or substantially improve a qualified home (your main or second home). The additional debt may qualify as home equity debt. Please let us know if you have any questions on this matter or need further explanation.

Registered Domestic Partners

Under new California State law, registered domestic partners must file as married for State of California tax years after January 1, 2007 . The bill requires domestic partnerships that are registered with the Secretary of State as of the close of the taxable year to file using the same rules that apply to married couples, even though they are prohibited from doing so under federal law. We must ask all taxpayers that filed as single in the prior year if they are registered as domestic partners with the California Secretary of State as of the end of 2007 to comply with the new regulations. If you have further questions on this matter please contact us.

AMT

Finally, most people have heard about the controversy surrounding the Alternative Minimum Tax in the news for the last few months. Congress eventually voted to extend and increase the AMT exemption amount through 2007. Since the law extends only through 2007, Congress must again address the AMT issue in 2008.

Use Tax

If you purchase merchandise from a vendor located outside the state or the country, you may owe California use tax. This includes purchases you make over the Internet. When we prepare your taxes, we will be asking you if you made purchases outside of California because you can pay the use tax with your income tax return.

Use tax is like sales tax but you pay it directly to the state, rather than to the retailer. The rule of thumb is: You owe use tax if what you bought would have been subject to sales tax if you purchased it at a local store and you did not pay California sales tax. You generally owe California use tax when you use, store, or consume – in California – tangible personal property purchased from and out-of-state vendor. If the vendor does not collect the California tax on the purchase, the purchaser must pay the tax directly to the state. If you don't report and pay your use tax in a timely manner, such as with your income tax return, the state will assess penalties and interest.

What is and is not subject to sales and use tax can be complicated. There are numerous exceptions to the rules, but here are some common ways that people make out-of-state purchases that are subject to use tax:

These are some common examples of items subject to use tax :

Items that are exempt from sales tax are also exempt from use tax . Here are a few examples:

What if another state sales tax was paid?

If you are required to pay, and did pay, another state's sales tax on the purchase, you may take a credit against the California use tax due. So, for example, if you paid 7% sales tax to another state, you are only required to pay the difference between the 7% and your rate.

Why use tax and why now?

The use tax is intended to protect California merchants who otherwise would be at a competitive disadvantage when out-of-state vendors make sales to California customers without charging tax.

With the advent of Internet purchases and an increase in people buying from mail-order businesses, California has experienced a loss of sales tax revenue. Use tax is not new, but most people were not aware that it existed.

So, the state has created a campaign to educate people and is starting to actively pursue people who don't pay use tax.

How do you pay the use tax?

If you do not have a California resale permit, you may either:

•  Pay the use tax on your California income tax return; or

•  Complete Form BOE-401-DS, California 's Individual Use Tax Return

If you have any questions or concerns regarding the tax changes for the 2007 tax year, please don't hesitate to contact any of our tax staff at (510) 235-1044.