For the most part, the window of opportunity for 2007 tax year planning closes on December 31. Here are a few points to consider as you contemplate any year-end tax moves and then look forward to the 2008 tax year.

New Zero Percent Tax Rate
Currently, the maximum federal income tax rate for most long-term capital gains and qualifying dividend income is 15%. Individuals in the lowest two tax brackets receive the benefit of an even lower 5% maximum rate. Beginning January 1, 2008, however (and continuing through 2010), the maximum rate drops all the way to zero for individuals in the lowest two tax brackets.

This presents an important planning opportunity. Make year-end gifts (up to $12,000 per individual gift tax free) of appreciated assets to family members currently in the lowest two tax brackets, who would then be able to sell the assets after January 1, 2008 without any resulting federal income tax. There's one big catch, though: the new "kiddie tax" rules.

New "Kiddie Tax" Rules
Generally, the kiddie tax rules apply when a child has unearned annual income (e.g., interest, investment earnings, taxable gain resulting from the sale of an asset) exceeding $1,700 (in 2007).

In 2007, the kiddie tax rules apply to children under the age of 18. Beginning in 2008, however, the kiddie tax rules apply to children who are under age 19, and to full-time students under age 24. (There's an exception for any child who earns more than one-half of his or her own support.)

So, if you want to take advantage of the zero tax bracket in 2008 by transferring appreciated assets to a low-tax-bracket family member, make sure the kiddie tax rules won't apply. Otherwise, the resulting income--at least the portion that exceeds $1,700--will be taxed at your (presumably higher) tax rate, eliminating most or all of any potential tax savings. For the remainder of 2007, though, the old rules apply--a child who will reach age 18 by year end is able to sell appreciated assets and potentially pay tax on any resulting income at the (still low) 5% rate.

AMT Uncertainty
Legislation signed into law in early 2006 brought the most recent in a long series of temporary "fixes" for the alternative minimum tax (AMT), which continues to reach further into the ranks of middle-income families. This temporary fix, in the form of increased AMT exemption amounts, expired at the end of 2006. If Congress doesn't act, the number of taxpayers subject to AMT is projected to increase from 4.24 million in 2006 to 23.19 million in 2007 (Source: Joint Committee on Taxation, March 5, 2007). Some action regarding the AMT is likely, but the form it will take is uncertain, making it important to stay up to date on any new developments.

Other Important Considerations
Unless there is additional legislative action, 2007 is the last year that a taxpayer age 70½ or older is able to make charitable contributions of up to $100,000 directly from an IRA to a qualified charity.

• 2007 is also the last year for other deductions, including the option to deduct state and local general sales tax (instead of state and local income tax) and the above-the-line deduction for qualified higher education expenses.
• For small businesses, legislation this year increased the Section 179 expensing limits.

Talk to a Professional
A qualified financial professional can explain how these issues, and others, might affect your 2007 tax situation.