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The Online Advisor

August 2007


What's New in Taxes

Manage "AGI" to keep tax breaks from disappearing


At tax time it pays to read the fine print. A variety of allowances, deductions, credits, and exemptions are phased out as income rises. If your income reaches these "phase-out" levels, you may lose tax benefits.

For example, let’s say you finally snag that big promotion. If the promotion causes this year’s income to climb into the phase-out zone, your deduction for college bond interest or child credits may be reduced. The result? You earn more money, but more of it is taxed. Your big promotion — after taxes — is now smaller.

Some items subject to phase-out income levels are the child tax credit (starts at $110,000 for joint filers), the Hope and Lifetime Learning credits ($94,000 to $114,000), Roth IRA eligibility ($156,000 to $166,000), and the college bond interest exclusion ($98,400 to $128,400). These phase-out levels are for "adjusted gross income" — also known as AGI — on 2007 joint returns.

Clearly, many middle-class families and small business owners reach these income levels. And these are just a few of the items affected by phase-outs. Others include personal exemption amounts, rental real estate passive loss allowances, exclusion of social security benefits, charitable deductions, and medical deductions.

How can you avoid losing all or part of these tax benefits as your income rises? One way is to manage your AGI, the main number used to determine your taxable income. The goal is to manage income levels so you won’t lose tax benefits for which you would otherwise qualify. Here are three suggestions.

* Take more "above-the-line" deductions. These deductions are reported on your tax return above where the AGI is calculated. They include contributions to individual retirement accounts, self-employed retirement plans, and health savings accounts. Other "above-the-line" deductions are alimony payments, moving expenses, payments for student loan interest, and self-employed health insurance.

* Reduce your business’s taxable income. Companies are taxed on their net income. To reduce this year’s taxable income you might consider sending out invoices in late December so you’ll receive payments after year-end. Bumping up year-end expenses — such as business equipment purchases, advertising, and repairs — is another strategy to keep your AGI below the phase-out levels.

* Defer income. Even if you don’t own a business, you can sometimes push your income into the following year, thus lowering your AGI. For example, you might work out an arrangement with your boss to receive a bonus in January rather than December. Or you might wait to sell that stock until after year-end.

For assistance with the tax planning that will help you retain your tax benefits, give us a call.

For details or for assistance with your tax planning, give our office a call.

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