2007 TAX NEWSLETTER

• Alternative Minimum Tax. The AMT is a parallel tax system directed at taxpayers who pay too little regular income tax because of the use of certain deductions, credits, and tax preferences. The AMT tax rates are 26% on AMT income of up to $175,000 and 28% on AMT income above $175,000. The AMT exemption amount increase for 2006 has expired and we are hoping that Congress will pass an increase before the year ends.
• Deduction Limits for Charitable Contributions. Beginning tax year 2007, donations of clothing and household goods will only be allowed for items in good used condition. Cash donations will no longer be deductible without a receipt from the charity showing its name, date and amount of contribution or a cancelled check, bank record or pay stub showing date and name of the charity. The charitable deduction for a vehicle is generally limited to the proceeds from the vehicle resale by the charity effective for contributions made after December 31, 2004.
• Energy Tax Incentives. A tax credit of 10% of the cost of skylights, outside doors, windows, pigmented roofs, high-efficiency furnaces, water heaters and central air conditioners is in effect for tax years 2006 and 2007. The maximum credit is $500 if items are installed in your primary home. There is also a 30% credit for the cost of solar energy systems used to heat air or water for your main residence or vacation home. This credit is capped at $2,000 each for furnaces and water heaters. An alternative vehicle credit, ranging from $250 to $3,150, for hybrid vehicles applies to certified vehicles purchased or placed in service after January 1, 2006. Professional home builders can also qualify for a $1,000 or $2,000 Energy Efficient Home Credit in 2006 and 2007.
• Farm Disaster Assistance. If you sold more livestock than you normally would during the year because of drought, flood, or other weather-related conditions, you can include the income from selling the additional livestock in next year’s income. To qualify, the weather-related condition must result in an area designated as eligible for assistance by the federal government. The livestock does not have to be raised or sold in the disaster area, but the sale must occur solely because of weather-related conditions that affect the water, grazing, or other requirements of the livestock. Disaster payments, insurance or federal assistance money, received as a result of crop damage or destruction is generally taxable in the year received. You may, however, be eligible to elect to defer such payments until next year’s tax return by showing that income from the damaged crops would have been reported in the next year or later.
• IRA Contributions. From January 1, 2006 to January 1, 2008, up to $100,000 per year of IRA distributions made directly to an IRA trustee of a qualified charitable organization by an IRA owner who is 70 ½ years old will be tax free and qualifies as a charitable deduction.
• Kiddie Tax. For tax year 2007, any unearned income above $1,700 of a child under 18 (previously 14) will be taxed at the top rate of the parent. In tax year 2008, the rules apply to children under 19 and to full time students under age 24. Adjusting a child’s portfolio in 2007 may result in significant tax savings in 2008.
• Private Mortgage Insurance Deduction. This is the first time that homeowners with low down payment loans will be able to deduct the cost of their mortgage insurance premiums, resulting in an average annual tax savings up to $300 for taxpayers taking the itemized deduction. You can deduct PMI on mortgage insurance contracts issued in and allocable to 2007, if your adjusted gross income is $100,000 or less (or $50,000 if you are married and filing separately). For adjusted gross incomes between $100,000 and $110,000, the PMI deduction phases out: it’s reduced by 10% for each $1000 that your adjusted gross income exceeds $100,000. If your adjusted gross income is $110,000 or more, the deduction is not available to you and 2007 premiums on mortgages you took out in prior years aren’t eligible. The new law that makes PMI deductible is in effect only for 2007. However, it’s likely to be renewed by Congress beyond 2007.
• Section 179 Deduction. The Federal annual expense limit is $125,000 for qualified depreciable property purchased and placed in service during 2007. The deduction is limited to the taxable income from the trade or business and is reduced dollar-for-dollar as asset acquisitions exceed $500,000. Kentucky’s annual maximum dollar limit for Section 179 is $25,000 for tax year 2007. The Kentucky deduction is limited to the taxable income from the trade or business and is reduced dollar-for-dollar as asset acquisitions exceed $200,000.
• Adoption Credit. The maximum adoption credit allowed in 2007 is the amount of adoption expenses up to $11,390. The adoption credit begins to phase out for taxpayers with modified adjusted gross income in excess of $170,820.
• Automobile Depreciation. 2007 automobile depreciation, including section 179 and first year deduction, is limited to $3,060 for passenger autos, and $3,260 for light trucks and vans weighing 6,000 lbs or less. Heavier luxury sports utility vehicles between 6,000 and 14,000 pounds have a section 179 limit of $25,000, with any excess depreciated using MACRS rules.
• Captial Gains. For capital assets held more than one year, the top tax rate on net capital gains remains at 15%. A 5% capital gain rate applies to gains in 10% or 15% ordinary income tax brackets. However, certain capital gains in the 5% rate drop to 0% from 2008 to 2010. With proper planning some taxpayers could generate income, implement various asset management strategies, or satisfy gift and income shifting objectives at no tax cost. Collectibles or realty, up to amount of prior allowable depreciation, are taxed at 28% and 25%, respectively. The IRS now says that an office located within the home does not have to be treated as business property when the residence is sold. If you qualify for the capital gain exclusion on sale of a residence ($250,000 for single and $500,000 for joint filers), only capital gain up to the amount of allowable depreciation would be taxable at a maximum rate of 25%. Capital losses are fully deductible against capital gains with any excess deductible against ordinary income of up to $3,000 per year.
• Child or Dependent Care Credit. A credit is available for 20% or more of your eligible employment-related child or dependent care expenses to a maximum credit of $3,000 for one dependent or $6,000 for two or more dependents.
• Child Tax Credit. The tax credit for each dependent child under age 17 in 2007 is $1,000. The child tax credit begins to be phased out on tax returns with modified adjusted gross income in excess of $110,000 for married filing joint taxpayers, $75,000 for single or head of household filers, and $55,000 for married taxpayers filing separate returns. The law also makes the child tax credit refundable to the extent of 15% of the taxpayer’s earned income in excess of $11,750.
• Combat Zone & Armed Forces. There are several exclusions and credits related to combat pay for individuals serving in the armed forces in a combat zone. In addition, there are provisions for extensions for filing returns and paying taxes and licenses.
• Coverdell Education Savings Accounts. An education savings account is a trust created exclusively for the purpose of paying the qualified higher education expenses of a designated beneficiary if certain requirements are met. A contribution of up to $2,000 per child is available for joint filers with $190,000-$220,000 of AGI, and single filers with $95,000-$110,000. (Any contributions to an Educational Savings Account do not affect ability to contribute to a Traditional or Roth IRA.) Contributions may be made as late as April 15 of the following year. Tax-free withdrawals may be used to pay for qualifying costs not only at college but also at any level of education from kindergarten through graduate school. Covered expenses include tuition, fees, room, board, books, computer equipment, and uniforms.
• Dividends. Individual shareholders will generally pay tax on dividends received from their qualified stock and mutual funds, held outside of a tax-deferred plan, at a maximum rate of 15% or 5% if in the lower 10% or 15% income tax brackets. The 5% rate drops to 0% from 2008 to 2010 and both rates will revert back to ordinary rates after 2010.
• Domestic Production Activity Deduction. For tax years beginning in 2005, certain taxpayers that report income from lease, rental, license, sale, exchange, or other disposition of qualifying production property that is manufactured, produced, grown or extracted by the taxpayer significantly in the U. S. may be eligible to receive a maximum 6% deduction on their Form 1040 if they have W-2 wages. This is an increase from 3% in the prior years.
• Education Credits. If you, your spouse or dependent incur qualified tuition and related expenses for post-secondary education, you may be able to claim a Hope Scholarship Credit (for the first two years) - maximum credit of $1,650 per student (increases to $1,800 in 2008); or a Lifetime Learning Credit-maximum credit of $2,000 per taxpayer return. Eligibility for the credits is phased out as AGI increases from $94,000 to $114,000 (married filing joint) and $47,000 to $57,000 (single & head of household).
• Educator Expense. A Federal deduction of up to $250 of unreimbursed qualified expenses for items used in the classroom expires 12/31/2007. You must be a kindergarten through 12th grade teacher, principal, counselor or aide who works at least 900 hours during a school year.
• Electronic Filing. The IRS e-file program has many benefits for taxpayers. Tax refunds are received in half the time compared with paper filing and are received even faster with direct deposit. The IRS e-file computer system quickly checks for errors and omissions, thereby reducing the likelihood that a taxpayer will receive an error notice from the IRS. IRS e-file provides a proof of receipt within 48 hours to confirm that a tax return has been accepted. Taxpayers with a balance due may also choose to e-file early and schedule a payment for a future date. Please advise us when you bring in your information if you want direct deposit.
• Electronic Payment. The Internal Revenue Service (IRS) is now letting individuals pay their federal tax and their estimated tax payments via its Electronic Federal Tax Payment System (EFTPS) over the internet. Millions of businesses already use EFTPS to make payroll tax deposits over the Internet. Sign up by filling out an enrollment form at the EFTPS Web site, www.eftps.gov. You will get a personal identification number (PIN) from the IRS in approximately 15 days with instructions on how to obtain an Internet password. Armed with your PIN and password, you can then send payment instructions to the IRS over the Internet, and EFTPS will automatically debit your bank account. Payment instructions must be initiated at least one day before they are due, but can be scheduled up to one year in advance.
• Email. Our tax software will allow us to e-mail your tax return to you electronically for review if you provide us your e-mail address. You will need Adobe Acrobat Reader 4.05, or higher, for this option to work.
• Estate Planning. The federal estate tax exclusion is $2,000,000 for 2006-2008; and $3,500,000 in 2009. For deaths occurring in 2010, there will be no estate tax but this is true for tax year 2010 only. In 2011, under the general “sunset” provision of the law, estate taxes are due to return, unless additional legislation is passed. Even during 2010, when the estate tax is temporarily repealed, taxpayers will be exposed to tax complexity. Because of the estate tax repeal, the unlimited marital deduction is also eliminated. The stepped-up basis that estates now enjoy will be replaced by new modified carryover basis rules. Stepped-up basis allows property to be transferred after death without paying capital gains tax that would have been due had the same property been sold before death. Upon repeal of the estate tax in 2010, the new modified carryover basis rules will result in a decedent’s heirs receiving property at the lesser of a decedent’s adjusted basis or the fair market value at date of death. To this value, the executor can allocate a limited stepped-up basis of $1.3 million of property, with an additional $3 million for property passed to a spouse. The decedent’s adjusted basis is generally equal to what he paid for the asset adjusted for depreciation or improvements to the property. Consequently, under the new rules, the heirs may have to pay capital gains tax when they sell the asset. Also, the act identifies specific assets, such as retirement plans and IRAs to which an executor is not permitted to allocate a stepped-up basis. A tax will continue on lifetime gifts above a $1 million exemption. Don’t Drop Plans or Protection—Be careful about changing estate plans already made, or dropping insurance coverage designed to pay estate taxes. Count on estate planning complexity to continue for the next decade, especially if Congress takes no further action to prevent “sunset” in 2011. People who assume their estate will owe no tax, because of the increasing Unified Credit Exemption Equivalent, may leave heirs vulnerable to new estate tax rules Congress may create in the future. If insurance coverage is canceled, there is no guarantee that it can be replaced at the same rates in the future – or if it will even be issued if the insured’s health has declined.
• Exemption Amount. Personal and dependent exemption amounts are $3,400 in 2007. The Adjusted Gross Income phase out of the exemption starts at $234,600 for married taxpayers filing jointly, $156,400 for single filers, $117,300 for married filing separately and $195,500 for head of household filers.
• Health Savings Accounts. A health savings account (HSA) is a tax-exempt trust or custodial account that you set up with a U.S. financial institution (such as a bank or an insurance company) which allows you to pay or be reimbursed for certain medical expenses. This account must be used in conjunction with a high deductible health plan (HDHP).Tax-favored HSAs can be established by eligible individuals who are covered by a high deductible health plan and not covered by any other health plan. For 2007, a health plan with deductibles of $1,100- individual and $2,200-family, with out of pocket limits of $5,500-individual and $11,000-family is a high deductible plan. For 2007, if you have self-only coverage, you can contribute up to the amount of your annual health plan deductible, but not more than $2,850. If you have family coverage, you can contribute up to the amount of your annual health plan deductible, but not more than $5,650 ($6,450 if you are age 55 to 65). You must have an HSA all year to contribute the full amount. The HSA can be established using a qualified trustee or custodian that is different from the HDHP provider. Contributions to an HSA must be made in cash or through a cafeteria plan. Contributions of stock or property are not allowed. You may enjoy several benefits from having an HSA. You can claim a tax deduction for contributions you make even if you do not itemize your deductions on Form 1040. Contributions made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income. The contributions remain in your account from year to year until you use them.The interest or other earnings on the assets in the account are tax free. Distributions may be tax free if you pay qualified medical expenses.
• Interest on Higher Education Loans Deduction. Interest you pay on education loans used to pay tuition, room and board and other related educational costs can be deducted up to a limit of $2,500. The income limits to claim the deduction are $110,000 - $140,000 for joint filers and $55,000 - $70,000 for single filers. The interest deduction may be taken directly from gross income.
• IRA Conversions. Conversion from an IRA to a ROTH IRA can be made at any time. The 10% tax on early withdrawal does not apply to the conversion. However, if you withdraw these funds within the five-year period beginning with the year of conversion then that withdrawal is subject to a 10% penalty. Currently, only taxpayers with an adjusted gross income of less than $100,000 are eligible to roll over or convert an IRA into a ROTH IRA. However, the new law eliminates the income limits for conversion after December 31, 2009.
• IRA Provisions. The total amount you may contribute to a deductible IRA plan is $4,000 in 2007 and $5,000 in 2008. The “catch-up” provision for taxpayers over age 50 is $1,000 for both years. Contributions for a tax year must be made before the tax filing deadline-no extensions. The adjusted gross income phase-out for traditional IRAs for taxpayers who are active participants in a pension plan is $52,000 - $62,000 for single filers; $83,000 - $103,000 for joint filers; and $0 - $10,000 for married filing separate filers. For 2007, if you are not covered by a retirement plan, but you either live with or file a joint return with a spouse, then your IRA deduction is phased out if your AGI is more than $156,000 but less than $166,000. If your AGI is more than $166,000, you cannot take a deduction for contributions to a traditional IRA. Traditional IRA's required minimum distribution must begin by April 1 of the year following attainment of age 70 ½. Taxpayers have three minimum distribution options for an inherited IRA; 1) a plan owner with a spouse more than 10 years younger can extend the minimum distribution period; 2) a non-spouse beneficiary can elect to take payments over their life expectancy regardless of the owner’s age at date of death; or 3) the owner’s account can be split into separate beneficiary accounts, which allows each beneficiary their own life expectancy payout. Estates can choose a 5-year payout or lump sum distribution.
• Itemized Deduction Limitation. For 2007, taxpayers with adjusted gross income over $156,400 ($78,200, Married filing separate) will have their itemized deductions reduced by 3% of adjusted gross income. Timing of deductions may allow you to maximize your itemized and standard deduction election.
• Kentucky Limited Liability Entity Tax. Limited liability pass-through entities will be subject to the Limited Liability Entity Tax (LLET) imposed by KRS 141.0401 (2). Each separate “corporate entity” will pay the greater of corporate income tax, alternative minimum calculation tax (based on gross receipts or gross profits if greater than $3,000,000) or $175 . Any LLET tax paid (allocated on a ratio of distributive share income) less $175, will be picked up as part of a credit calculation on the individual income tax return. All other “corporate entities” will revert back to reporting distributive share income on their individual tax return after December 31, 2006 and pay tax at the individual level.
• Kentucky Pension Exclusion. Kentucky's pension exclusion from income tax remains at $41,110.
• Kentucky Use Tax. Please advise us of any purchases of out of state tangible personal property you made for use in Kentucky on which sales tax was not charged (i.e., catalog and internet purchases or magazine subscriptions). KRS 139.330 requires reporting on at least an annual basis at 6% of total out of state purchases.
• Mileage Rate Allowance. The standard mileage rate allowed for business use of a car is 48.5 cents per mile for 2007 and increases to 50.5 cents in 2008. This rate is used to calculate the tax deduction for business travel for up to four vehicles as an alternative to deducting actual costs of maintaining an automobile. For 2007, the charitable mileage rate is 14 cents per mile and the medical and moving rates are 20 cents per mile.
• Minimum Wage. Effective July 24, 2007, the federal minimum wage increased to $5.85 per hour. The minimum wage will increase to $6.55 per hour effective July 24, 2008 and $7.25 per hour effective July 24, 2009.
• National Guard/Reserve Travel. Members of National Guard and Reserve units traveling at least 100 miles away from home and overnight may deduct their travel expenses. Federal and Kentucky both treat this as a deduction from Adjusted Gross Income.
• Qualified Tuition Plans (529 Plans). Qualified Tuition Plans (Section 529 Plans) are tax-advantaged programs authorized for state, state-sponsored, and private institutions. Contributions to Section 529 plans are made on an after-tax basis for federal tax purposes, and some states allow deductions against state income taxes. Distributions made to a designated beneficiary are excluded from taxable income. Tax-free distributions can be taken against a variety of education expenses, including tuition, fees, books, supplies and the costs of supporting a special-needs student. It’s important to note that penalties can apply at both the state and federal level on withdrawals that are not made for qualified education expenses, and these withdrawals also are fully taxable. The major tax advantages of the 529 Plans are: a) Qualified withdrawals will be exempt from Federal and Kentucky Income Tax; b) No income earnings limits apply to Qualified Tuition Plans; and c) There are no annual limits on amounts that may be contributed to Qualified Tuition Plans. Each state has different contribution limits. In Kentucky, the limit is $100,000 per beneficiary; however, there may be a gift tax return due for excess contributions.
• Property Tax Homestead Exemption. Any persons who are 65 years of age or totally disabled who own real property maintained as their permanent residence qualify for a homestead exemption of $31,400 for 2007 and 2008 against their property tax bill. Application with the property valuation administrator of the county in which the applicant resides can be made in the year the resident turns 65 or becomes totally disabled. Only one application need be filed and only one exemption per residential unit is allowed. Any person making application and qualifying for the homestead exemption after property tax bills have been paid shall be entitled to a refund of the property taxes paid in excess of the amount applicable to the value of the homestead exemption.
• Rate changes. The tax brackets for 2007 are:



Rate	Single	Head of Household	Married Filing Joint/Surviving Spouse	Married Filing Separate
10%	$0 - 7,825	$0 - 11,200	$0 - 15,650	$0 - 7,825
15%	$7,826 - 31,850	$11,201 - 42,650	$15,651 - 63,700	$7,826 - 31,850
25%	$31,851 - 77,100	$42,651 - 110,100	$63,701 - 128,500	$31,851 - 64,250
28%	$77,101 - 160,850	$110,101 - 178,350	$128,501 - 195,850	$64,251 - 97,925
33%	$160,851 - 349,700	$178,351 - 349,700	$195,851 - 349,700	$97,926 - 174,850
35%	OVER $349,700	OVER $349,700	OVER $349,700	OVER $174,850



• Retirement Plan Contributions. The table below lists the 2007 and 2008 employee/employer contribution limits for qualified plans. The "catch-up" provisions for taxpayers over age 50 have also been included. The limit for defined contribution plans cannot exceed 100% of compensation. The maximum compensation allowed for the calculation is $225,000 in 2007 and $230,000 in 2008. The maximum deduction for employer contributions is 25% of all participant's compensation. A self-employed individual may contribute up to the lesser of 25% of net earnings (less 1/2 social security and retirement contribution) from the trade or business or $45,000. The salary dollars you contribute are not subject to Federal or State income tax until you receive a distribution from the plan and your contributions are invested on a tax-deferred basis. Employer contributions for a tax year must be made before the tax filing deadline including extensions.



Year	401(k), 403(b) & SAR-SEP	Over age 50	SIMPLE IRA Plan	Over Age 50	Defined Contribution Plan
2007	$15,500	$20,500	$10,500	$13,000	$45,000
2008	$15,500	$20,500	$10,500	$13,000	$46,000



• ROTH IRA. Contributions made to a Roth IRA are not tax deductible. The major benefit of Roth IRAs is that earnings from investments are tax-free. Unlike the Traditional IRA, there is no 70 1/2 age limit on making contributions, individuals of any age with compensation are eligible to contribute to a Roth IRA. The total amount you may contribute to a Roth IRA plan is $4,000 in 2007 and $5,000 in 2008. The “catch-up” provision for taxpayers over age 50 is $1,000 both years. Your ROTH IRA contribution is phased out if your adjusted gross income is $95,000 - $110,000 for single filers; $150,000 - $160,000 for joint filers; and less than $10,000 for married filing separately. A Roth IRA can be established at any time during the year but contributions for a tax year must be made before the owner’s tax filing deadline. There are no minimum distribution requirements for withdrawal during the owner’s lifetime.
• Saver's Tax Credit. A permanent tax credit of 10%, 20% or 50% will be available to individuals who put their own money into retirement plans and have AGI of $52,000 or less for joint filers, $39,000 or less for head of household or $26,000 or less for single filers. The taxpayer must be at least 18 years old, not a full time student and not claimed as a dependent on another’s tax return. Example: A single filer contributes $2,000 to a Roth IRA and has AGI of $20,000. The credit will be calculated as 10% of $2,000 ($200). Since the credit reduces taxes dollar for dollar, this will be like getting a $200 “matching contribution” from the government.
• Self-employed Health Insurance Deduction. Self-employed taxpayers can deduct 100% of their health insurance premiums (not in a pre-tax cafeteria plan) as an adjustment to income on their Federal and Kentucky returns.
• Small Company Retirement Plans. Small companies with 100 or fewer employees may take a tax credit of up to $500 against qualified plan expenses in each of the first three years after starting a new plan. The law simplifies the “top-heavy rules” which subject many small companies to complex requirements while making compliance with these rules more manageable.
• Social Security. The maximum FICA Wage Base increases from $97,500 in 2007 to $102,000 in 2008. Social Security recipients under age 65 have an earnings limit of $12,960 for 2007. The earnings test for an individual reaching full retirement age in 2007 is $34,440 and $36,120 in 2008. Those over full retirement age (65+8 months) can continue to earn unlimited amounts without reduction in Social Security benefits. Wage earners and self-employed individuals earn one-quarter credit for each $1,000 in 2007, for up to four quarters per year. If your AGI is above $32,000 to $44,000 for married filing joint or $25,000 to $34,000 for single filers then 50% to 85% of your Social Security benefits may be taxable.
• Standard Deduction. For 2007, the federal standard deduction is $5,350 for single filers and married filing separate filers, $10,700 for married filing joint or qualifying widow, and $7,850 for head of household filers. You are entitled to an additional standard deduction of $1,050 for each married individual or $1,300 for single individuals if you are blind or 65 years of age or older. The standard deduction for dependent children is the greater of $850 or $300 plus earned income of the dependent up to $5,350. The Kentucky standard deduction is $2,050 for 2007.
• Tuition Deduction. $4,000 in tuition costs can be deducted against taxable income for taxpayers with income limits below $65,000, single and $130,000, joint. Taxpayers with income between $65,001 - $160,000, joint will be limited to a $2,000 deduction. However, a deduction and an education credit cannot be taken for the same student in the same year. The deduction is not available to married couples filing separate returns. The deduction is scheduled to end after 2007.

As a result of perceived abuses, the treasury has recently promulgated regulations for practice before the IRS. These circular 230 regulations require all attorneys and accountants to provide extensive disclosure when providing certain written tax communications to clients. In order to comply with our obligations under these regulations, we would like to inform you that since this document does not contain all of such disclosures, you may not rely on any tax advice contained in this document to avoid tax penalties.

Spragens & Higdon, P.S.C.
Attorneys at Law
15 Court Square
P.O. Box 681
Lebanon, KY 40033