It's not too late for deductions

THE END OF THE YEAR'S APPROACHING! IT'S TIME FOR those last-minute tax deductions! Quick, before January hits! Buy this, sell that—wait, it's what? March? Oh. Too late, then.

Not so fast. You still may be able to lower your tax bill. As you gather receipts and statements for your tax return preparer, check out these nine tips and 2007 tax code changes, then consider which ones can benefit you before you file your returns. But remember: Don't try this at home. Check with your accountant or tax consultant before assuming anything. There are exceptions and nuances to each of these rules, and he or she can help you understand them.

1 Retirement plan? It's not too late.

It's high time to maximize your retirement options. Some of you aren't taking full advantage of your profit-sharing or 401(k) plans. If you didn't talk with your financial advisor in 2007, what are you waiting for? If you don't have a plan in place, there's still time to set up a simplified employee pension plan (SEP) and have it benefit you for 2007. Do it by the time your return is due (including extensions) to claim the deduction and credits for 2007. That's Oct. 15, 2008, in the case of sole proprietorships or Sept. 15 for corporations, including both C and S corporations. The limit for SEP contributions is $45,000 per participant for 2007. Consult a retirement expert to make sure you stay within the allowable limits.

2 New tax break increases depreciation.

Many of you are familiar with rapid depreciation, or Section 179 depreciation. This special break, designed for small business owners, allows you to write off or deduct up to $125,000 of the cost of equipment you purchased in 2007. You can claim the deduction on your 2007 return whether you paid cash or financed the equipment—as long as you bought it and were using it before the end of the year. Congress thinks the Section 179 deduction is so good for the economy that it has increased the maximum for 2007 taxes from $125,000 to $128,000. The new Economic Stimulus Act will make it even sweeter: $250,000 is the 2008 limit. Of course, you can't claim the Section 179 deduction for personal items you purchased. However, if you live in a state that doesn't have a personal income tax or if you had little or no personal state income tax withheld in 2007, you have the option to claim a deduction for sales tax on personal items you purchased. This can be particularly beneficial if you purchased a new car or big-ticket item in 2007. The deduction is claimed on Schedule A if you itemize deductions on your personal return.

3 Savings accounts for children take a hit.

This one's for 2008, but you'd better know about it early. If you have children who hold investments in their name—savings accounts, college funds, etc.—take note. Your kids' income will be taxed at your rate if they're 18 or younger. If they're full-time students and receiving half of their income from you, the age is 24. In the good old days, the kiddie tax ended when the child turned 14. That meant that investment income a child received from dividends, interest, or capital gains, for example, was taxed at his or her own rate once she turned 14. In 2006 the age was raised to include children younger than 18. This tax kicks in at $1,700 of investment income. If your child turns 18 in 2008 and has sizable unrealized capital gains, be sure to consult with a knowledgeable tax advisor before selling any of these stocks.

4 Alternative minimum tax gets a one-time bandage applied—and that's good.

Some of you have been hit in the past by the dreaded alternative minimum tax. This tax, instituted in its current form in 1986, made sure everyone paid their fair share in taxes—including the super-rich who, in theory, came up with lots of ways to pay little or no taxes. Over the years, the tax has hit more and more middle-class taxpayers. In 2007, Congress raised the alternative minimum tax exemption to $66,250 for a married couple filing jointly and $44,350 for singles and people filing as head of households. That may sound low, but more and more equine doctors in states that charge personal income tax are winding up paying the alternative minimum tax.

5 Protecting your home becomes deductible.

Home buyers are required to buy mortgage insurance if they don't put at least 20 percent down on the purchase of their home. In previous years, this was treated as just another cost of owning a home. New in 2007, though, homeowners can deduct mortgage insurance premiums in the same way they deduct interest they pay on their loan. This deduction applies only to new insurance contracts and only the insurance cost that applies to the current year. Also, you won't get the deduction if your income is too high.

6 Surviving spouses get a tax reprieve.

Whether it applies to you or your aging parents, the time limit for which you can take a tax exclusion for the sale of a personal residence has been increased in the case of a spouse's death. In the past, the exclusion ($500,000) was available only to the surviving spouse if the home was sold in the year of the other spouse's death—essentially the year a joint return could be filed. Beginning in 2008, the full $500,000 exclusion is available for two years after the date of death. That's assuming all the other requirements are met.

7 Watch your rent income—is it passive?

If you own your building and charge rent to the practice, it's important to remember that this rental income is not passive income. Remember, passive income is generated from an activity you don't earn a living doing—for example, you're an equine veterinarian with rental property or other businesses for which you provide the working capital or in which you invest. This is especially important for those of you who have other rental property that generates passive losses, like rental houses or commercial property that you lease to other tenants. A good tax strategy has been to acquire real estate that generates losses to offset income that generates profit. Don't lump your office in with any of these properties. Passive losses can only offset passive income, not active. If you suspect that this might be the case in your situation, this area of the tax code is extremely complex. Make sure you get competent advice regarding passive and active income.

8 Don't dump driving deductions.

Whether you drive a lot all day every day or just for special calls, pay attention: This is your mileage refresher course. The standard mileage rate for 2007 is 48.5 cents per mile. If you don't deduct actual operating expenses for your vehicle (this usually relates to your personal automobile that you use for business purposes), you can deduct 48.5 cents per mile for your documented business use of the car. For practice-owned trucks, you can deduct the cost of the insurance, repairs, fuel, and so on. If you use your own personal vehicle for going to the bank, CE courses, or meeting with your accountant, you can document the miles you've driven. The IRS lets you use the mileage rate to obtain this deduction. For 2008 income tax returns, the rate will go up to 50.5 cents per mile. (For more information on deductions, see Gary Glassman's column.)

9 Remember your student loan.

Interest you pay on student loans continues to be deductible as an above-the-line deduction of up to $2,500. That means it's not itemized on your return, so you don't have to worry about mortgage interest and charitable contributions—all those expenses you need to track to file the "long" form. The deduction goes away as you hit $110,000 in earnings married or $55,000 single.

None of us want to retire the national debt by ourselves. Knowing about the legitimate deductions available to you can help you pay no more than you're required to pay and sleep soundly at night knowing the IRS isn't building a case against you.

Elise M. Lacher, CPA, is the head of Lacher McDonald Consulting Inc., an accounting firm in Seminole, Fla. Send your questions or comments to ve@advanstar.com