Individual Income Tax 2007 Update

1. Individual Income Tax 2007 Update Shana L. Francis Kevin D. Klein

2. Today’s Presentation • 2007 Federal Update • Looking Forward: 2008 Federal Changes • 2007 Virginia Update • Looking Forward: 2008 Virginia Changes

3. Elective Salary Deferrals • 401(k) maximum elective deferral for 2007: • Under age 50: $15,500 • “Catch up” contribution of $5,000 allowed if age 50 or older

4. IRA Contributions • Maximum to a traditional or Roth is $4,000 • Catch up contribution of $1,000 for taxpayers at least age 50 by the end of 2007 • Have until due date of return (not including extension)

5. Health Savings Accounts • Pay out-of-pocket medical expenses with pre-tax income • Fund an HSA account with direct transfer from IRA • Maximum Contribution of $2,850 for single coverage ($5,650 for family coverage) • If 55 or older, additional $800 catch-up contribution is available

6. Higher Education Expenses • Expires after 2007 • Deduct up to $4,000 instead of Hope or Lifetime Learning tax credits • Subject to phase out • Deduction taken on Form 8917

7. Qualified Educator Expenses • Available for any Teacher, Instructor, Counselor, Principal, or Aides teaching K-12 grades • Must work at least 900 hours during taxable year • Can deduct “above-the-line” up to $250 of expenses incurred for books and (non-athletic) supplies • Expires after 2007 taxable year

8. Sales & Use Tax Deduction • Available through 2007 • Deduct either state income tax or sales and use tax • Use Receipts Method or Sales Tax Table

9. Mortgage Insurance Premiums • Mortgage insurance required when loan balance > 80% of FMV of property • Mortgage premiums now able to be deducted as qualified residence interest • By law, homeowners are not subject to mortgage insurance premiums when loan balance falls below 78% of FMV of property

10. Charitable Contribution Substantiation • Some form of substantiation for charitable contributions must be retained Examples: Cancelled check, Letter from Charity, etc. • Deductions only available if taxpayer itemizes deductions • Distributions directly from IRA, expires in 2007

11. Education Credits • Hope Credit • Maximum $1,650 credit per student • First 2 years of undergraduate education • Half time student • Lifetime Learning Credit • Maximum $2,000 credit per return • Available for unlimited number of years • Less than half time enrollment-non degree seeking students *Both credits subject to phase-out

12. Alternative Motor Vehicle Credit • Credit between $650 and $3,400 generally available • Credit phases out over one year after manufacturer sells over 60,000 qualified vehicles • First six months into phase out period, purchasers receive 50% of credit • Last six months, purchasers receive only 25% of credit

13. Telephone Excise Tax Credit • Was only available on your 2006 return • Can file a From 1040X to amend return to claim credit

14. Residential Energy Credits • Nonbusiness Energy Property Credit • Residential exterior doors, windows, heat pumps, furnaces, central air and water heaters for principal residences only • Available for items placed into service in 2006 or 2007 • Lifetime Maximum of $500 in credit • Max $200 credit for qualified windows • Max $50 credit for qualified ceiling fans • Max $150 credit on qualified natural gas, propane, or oil furnace or hot water boiler • Max $300 credit on any item of energy-efficient building property

15. Residential Energy Credits Cont. • Residential Energy Efficient Property Credit • 30% of the cost of eligible solar water heaters, solar electricity equipment and fuel cell plants placed in service in 2006 and 2007 • Maximum credit is $2,000 per tax year for each category or solar equipment and $500 for each half of kilowatt of capacity or fuel cell plants installed per year • Cannot be used to heat swimming pools and hot tubs

16. Excluded Combat Pay • Can elect to have excluded combat pay count as earned income in the calculation for the earned income tax credit • Counts towards “compensation” for IRA contribution limitations

17. Looking forward: 2008 • Elective deferrals contribution limits will remain the same as 2007 amounts • IRA contributions will increase by $1,000 • Expiring adjustments, credits, and deductions

18. Looking Forward: 2008 Kiddie Tax • Now effects children ages 19-23 who are full time students • Earned income is less than half of support • Investment income greater than $1,800

19. Looking Forward: 2008 Capital Gains • Capital gains that would have been taxed at 5% will not be taxed at all • Capital gains that would have been taxed at 15% will remain at 15% • Will expire in 2010 when the 0% rates will go to 10% and 15% rates will go to 20%

20. Virginia Sales Tax Holidays • May 25-31, 2008 – Hurricane Preparedness Equipment • August 1-3, 2008 – School Supplies, Clothing & Footwear • October 10-13, 2008 – Energy Star Qualified Products

21. Virginia Deduction for Energy Efficient Purchases • New in 2007, Virginia offers deduction for sales tax paid on energy efficient items • Deduction is 20% of sales tax paid on purchase • Deduction limited to $500 per taxable year

22. Looking Forward: Virginia • College Savings Plans • Effective 2009, allowable deduction for contributions will increase to $4,000 per plan • Note: there are currently no restrictions on deduction amounts for individuals who are 70 or older

23. Summary • 2007 Federal Updates • Looking Forward: 2008 Federal Changes • 2007 Virginia Updates • Looking Forward: 2008 Virginia Changes

24. Questions • Shana L. Francis • Phone: 804-545-7448 • Email: sfrancis@theroselinegroup.com • Kevin D. Klein • Phone: 804-545-7459 • Email: kklein@theroselinegroup.com The Roseline Financial Group, LLC 140 Virginia St., Suite 200 Richmond, VA 23219