Taxpayers Should Optimize Use of 2007's Tax Breaks

NEW YORK -- The new year may only be three days old, but it's not too soon to start looking into and taking advantage of the many tax breaks available to taxpayers in 2007.

Many consumers will be able to leverage the many changes that became effective Jan. 1 such as higher contribution limits for 401(k)plans, a decline in the top federal estate-tax rate, and a new deduction for many people who buy mortgage insurance.

In addition, the standard mileage rate rose, as did the personal exemption, income brackets and several other tax items that are typically adjusted for inflation every year.

Still others will be hit by higher taxes — for example, about 11 million workers will have to pay higher Social Security taxes, and the Tax Policy Center estimates more than 23 million people will be affected by the alternative minimum tax this year.

The following are some of the major tax breaks, according to the New York Times, that consumers are looking at for 2007 and how they will affect Americans:

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Retirement savings - for 2007, the maximum amount you can contribute to a 401(k) plan increases to $15,500 from $15,000 in 2006. Consumers ages 50 or older by the end of 2007 can put away an additional $5,000. The maximum contribution limits for individual retirement accounts are unchanged — $4,000 if under age 50, and $5,000 for those 50 or older.

The income limits increased for making contributions to a Roth IRA — for joint filers, the amount that can be contributed phases out if the filer's income is $156,000-$166,000. For most single filers in 2007, the range has increased to $99,000-$114,000.

Lastly, under a new law, a child or any other non-spouse who inherits money in a qualified retirement plan can transfer it directly into an IRA.

Estate tax — based on current law, the basic federal estate-tax exclusion will remain $2 million in 2007 and 2008. This exclusion is scheduled to rise to $3.5 million in 2009, and then in 2010 it disappears for one year. In 2011, it returns with an exclusion of $1 million.

Mileage rate - in 2007, the rate for calculating deductible costs of using a personal car for business is 48.5 cents a mile. The rate is 20 cents a mile for medical and moving expenses.

Mortgage insurance — under a new law, consumers who buy and pay for mortgage insurance this year pay a new deduction that begins to phase out once their adjusted gross income exceeds $100,000 (or $50,000 for married people filing separately).

Social Security taxes — the maximum amount of earnings subject to the Social Security tax increased to $97,500 in 2007.

Charitable donations — starting in 2007, taxpayers who want to deduct a donation have to provide a "bank record" such as a cancelled check or a receipt from the charity.

Income brackets — since the IRS is required by law to adjust its tax tables and other numbers annually for inflation, the impact of this on taxpayers will depend on their income and other details.

Alternative minimum tax — temporary higher exemption levels expired at the end of 2006. It's still uncertain what Congress will do to prevent this tax from affecting six times as many people as it did in 2006.

IRA transfers — taxpayers age 70 1/2 or older have until the end of 2007 to transfer as much as $100,000 directly from their IRA to a qualified charity without being taxed on that money. The transfer counts towards their required minimum distribution.

In addition to the above changes, taxpayers should also be aware that paying the Internal Revenue Service on an installment plan is now more costly. The agency's "user fee" increased to $105 this year from $43 in 2006 for someone who agrees to an installment plan without direct debit. The fee for a direct-debit installment agreement rose to $52 from $43.

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