Taxpayers can take steps to lower their 2007 tax bills

With the end of 2007 rapidly approaching, taxpayers are worrying about the expiration of tax provisions currently in Congress' hands. According to The Wall Street Journal, if Congress does not extend several provisions that have expired or are scheduled to expire, many people will be paying much higher tax bills for 2007.

One of the biggest issues is the alternative minimum tax (AMT), which is a separate method for calculating income taxes that has its own set of rates and different rules for deductions. It tries to ensure that anyone who benefits from tax advantages pays at least a minimum amount of tax and increases tax liability for the individuals who would otherwise pay less tax. It is unclear how Congress will prevent the rapid spreading of AMT before it affects 25 million taxpayers for 2007—4 million more than in 2006.

Also unclear is the fate of tax breaks scheduled to expire this year, including sales-tax deductions. For this reason, tax advisers are encouraging clients to consider taking advantage of these tax breaks in case Congress doesn't renew them.

One way taxpayers can cut their tax bills is by itemizing deductions, which gives them the option of deducting their state and local sales taxes instead of their state and local income taxes. This is especially useful for people who live in states with relatively low or no state income tax.

Regarding a charitable-giving provision that is scheduled to expire, taxpayers who are 70 1/2 years old or older can transfer a maximum of $100,000 from an individual retirement account to a qualified charity without having to pay income tax on the money. In addition, the transfer counts toward taxpayers' required minimum distribution.

People who bought mortgage insurance during 2007 are eligible for a deduction, which is set to expire. However, the provision begins to phase out once a taxpayer's adjusted gross income exceeds $100,000. In addition, taxpayers can take advantage of the disappearing deductions for higher education tuition and fees; tuition is an "above-the-line" deduction and can be taken advantage of whether or not taxpayers itemize their deductions.

Finally, taxpayers should consider tax deductions for investment losses. If there are shares selling for less than what taxpayers paid for them, it may be a good time to sell. Realized capital losses can be used to offset capital gains, and if taxpayers' losses exceed their gains or there are no gains at all, they can deduct as much as $3,000 per year from wages and other ordinary income.

Date : 9/19/2007