"Those Disappearing Deductions...Use em or lose em!"

One of the most popular tax breaks set to disappear at the end of 2007 involves state and local sales taxes. If you itemize your deductions, you have the option of deducting your state and local taxes instead of your state and local income taxes. This provision benefits many people and more than 11.4 million taxpayers claimed this sales-tax deduction for 2005.

Older taxpayers can take advantage of a charitable giving provision, which is set to expire on December 31, 2007. If you are age 70 ½ or older you can transfer up to $100,000 directly from an individual retirement account, IRA, to a qualifed charity without having to pay income tax on the distribution. This transfer counts toward your required minimum distribution as well as assists you with estate planning.

For 2007 but set to expire on December 31, 2007 is the deduction for mortgage insurance. It does not apply to mortgage insurance contracts issued before 2007 and it begins to phase out once your adjusted gross income exceeds $100,000 or $50,000 for married people filing separately.

Deductions for higher education tuition and fees and a credit for certain energy efficient home improvements are also set to expire this year. The tuition deduction is taken as an adjustment to income not requiring taxpayers to itemize their deductions to claim. The tuition deduction applies only to the actual cost of tuition and fees and does not include books, supplies, etc. The Hope and Lifetime learning credit are the only education credits where you can itemize books and supplies.

At the end of 2007 the $250 per educator for the cost of books, computer equipment and other classroom supplies they pay out of their own pockets is an adjustment to income for elementary and secondary school teachers and other qualified educators. More than 3.5 million taxpayers took this deduction for 2005. To be eligible, you must be a kindergarten through grade 12 teacher, instructor, counselor, principal or aide for at least 900 hours during a school year.

It is advisable to review your investment portfolio, focusing on stocks, bonds sor mutual fund shares that are selling for less than you originally paid for them or for the basis you have in the investment. If you have been thinking of disposing of the investment, before the end of the year may be the perfect tax time.

Capital losses on the sales of such investments can offset realized capital gains. If your losses exceed your gains, or you did not have any gains for 2007, you can deduct as much as $3,000 a year from your wages and other ordinary income. The limit is $1,500 for married couples filing separately. Any unused loss can be carried forward into future years until loss is used or depleted.

You will want to watch for transactions called “wash sales” which typically happens when you sell a security at a loss and, within 30 days before or after the sale, you buy the same thing or something “substantially identical”. If you discover you did participate in a wash sale, you cannot deduct your loss. However, the disallowed loss on the transaction is added to the cost of the newly acquired security and the result is an increase in the basis of the new security.

Much tax savings can be obtained by fully participating in retirement plans available from your employer such as a 401(k) or 403(b) plan. Check with the human resources department where you work to see if you are participating at the maximum level and certainly to the extent the employer will match your contributions.

Seniors who continue to have earnings after age 70 ½ can contribute to a Roth IRA. You would be required to have a modified adjusted gross income below $156,000 on a married filing joint tax return or $99,000 for single taxpayers in order to make a full contribution of $4,000. The $4,000 could be supplemented by an additional $1,000 as a “catch up” contribution.

One of the more problematic tax issues arises when a taxpayer endeavors to be in business and the business is not profitable. The question that immediately surfaces is whether the loss created was done with a profit motive or was the activity engaged in as a hobby.

Hobby income is reported as “other income” on the taxpayer’s personal income tax return. Hobby related expenses are limited to the amount of hobby income and are claimed as a miscellaneous itemized deduction, deductible only by the amount exceeding 2 percent of the taxpayer’s adjusted gross income. It is normally believed that an activity is carried on for profit if it is profitable in three of the last five years, extended to two of the last seven years in the case of horse breeding, showing, training or racing activities.

Last, but certainly not least, never attempt to do your own return if you have complicated issues that you do not feel comfortable preparing yourself. Taxpayers find themselves needing tax debt help and having to hire tax resolution firms to assist them. It is always the best policy to be proactive rather than reactive.

S. Raines, Sr. Financial Advisor/Tax Preparer

www.effectur.com