As you plan for your tax year, keep in mind that some tax deductions are “above-the-line” and are available whether deductions are itemized or not. In addition to the educational “above-the-line” deductions mentioned earlier, the following deductions are noteworthy.

• Hybrid Vehicle Tax Incentives - Purchasing a hybrid vehicle can provide you with a tax credit ranging from $250 to $3,400.
  
  This tax credit directly offsets the regular income tax. However, it cannot be used to offset the Alternative Minimum Tax (AMT). In addition, each manufacturer is limited to producing 60,000 vehicles on which these credits are available. Thus, before purchasing a hybrid vehicle, consider the following:
  
  (1) Make sure you are not in the AMT and can benefit from the credit,
  (2) Verify the amount of credit available for the vehicle being purchased, and
  (3) Make sure the credit is not limited because the manufacturer has exceeded the 60,000 car limit.
  (Note:Toyota and Lexus have already exceeded the 60,000 car limit and therefore no credit will be available for those vehicles purchased after September 31, 2007).
  
  Additionally, one should evaluate whether the extra cost usually commanded for hybrid vehicles can be recouped by a combination of the tax benefit and anticipated fuel cost savings over the period the vehicle is expected to be driven.
  

• Health Savings Acounts - A Health Savings Account is a trust account into which tax-deductible contributions may be made by qualified taxpayers who have high deductible medical insurance plans. Interest earned on the HSA balance is tax-free. The funds from these accounts are then used to pay qualified medical expenses not covered by the medical insurance for an eligible individual. If these funds are not used, they roll over year to year. Once the taxpayer turns 65, the funds can be used as a retirement plan (taxable when withdrawn, but not subject to a withdrawal penalty) or saved for future medical expenses. Since the contribution is an above-the-line deduction, a taxpayer need not itemize deductions to take advantage of this new tax break. High deductible plans are defined as those with the following deductible amounts for 2007: Self-only coverage with an annual deductible of $1,100 or more and limits on annual expenses, other than premiums, required to be paid by the plan during the year, up to $5,500; or Family coverage with an annual deductible of $2,200 or more and limits on annual expenses, other than premiums, required to be paid by the plan during the year, up to $11,000.
  
  
• Teacher's Expenses - It is anticipated that Congress will extend the $250 above-the-line deduction for educators which was scheduled to expire after 2007. Thus, educators who work in a school (grades K-12) for at least 900 hours during a school year are allowed a deduction of up to $250 for their qualified expenses. Qualified expenses generally include books, supplies, computer equipment, and supplemental classroom materials. Qualified educators include teachers, instructors, counselors, principals, and aides.
  
  
• Itemized Deductions - If a taxpayer's itemized deductions exceed the standard deduction, he or she will want to itemize their deductions. Itemized deductions consist of five basic categories, each with its own limitations and special considerations. For higher-income taxpayers, the itemized deductions are reduced by the smaller of 3% of the amount by which the AGI exceeds $150,500 ($75,250 if married filing separately), or 80% of the itemized deductions that are affected by the limit, which generally include taxes, home mortgage interest, charitable contributions, investment expenses and employee business expenses. If your deductions only marginally exceed the standard deduction, consider “bunching” your deductions in one year. This allows you to produce higher than normal itemized deductions that year and then take the standard deduction the other year. So, if you are close to exceeding the standard deduction in 2007, consider prepaying some deductible 2008 expenses in 2007. Or, if you will fall short of being able to itemize in 2007, delay paying some of the 2007 expenses until 2008. The following is an overview of the itemized deductions.
  
  
• Medical Expenses - Deductible medical expenses are limited to unreimbursed expenses for the taxpayer, his or her spouse and dependents that exceed 7-1/2% of the taxpayer's AGI for the year.
  
  For AMT purposes, your medical deduction will be less because only the excess of unreimbursed expenses above 10% of your AGI is deductible. Those expenses most frequently thought of as deductible medical expenses include medical and dental insurance premiums, charges by doctors and dentists and the cost of prescription medication. Medical insurance premiums and other expenses paid with pre-tax dollars (e.g., through a cafeteria plan) cannot be included. Some new or less common deductions include the following:
  
  - The cost of a weight loss program (not including food) for the treatment of a specific disease or diseases (including obesity) diagnosed by a physician.
  
  - Medicare-B premium payments and the new Medicare-D premiums for drug coverage.
  
  - Participation in smoking-cessation programs and for prescribed drugs (but not nonprescription items such as gum or patches) designed to alleviate nicotine withdrawal.
  
  - Elder Care, generally including the entire cost of nursing homes, homes for the aged and assisted living facilities. Long-term care insurance premiums are deductible, but with an additional limitation on the allowed amount based on the taxpayer’s age.
  
  - Medical dependent - For medical purposes, an individual may be a dependent even if his gross income precludes a dependency exemption, thus enabling the taxpayer to deduct the individual’s medical expenses that the taxpayer paid.
  
  A child of divorced parents is considered a dependent of both parents (so that each parent may deduct the medical expenses he or she pays for the child.)
  
  

  2007 Long-Term Care Insurance Deduction Limit Based On Age
  Age	40 or less	41 to 50	51 to 60	61 to 70	71 & Older
  Limit	$290	$550	$1,110	$2,950	$3,680

  
  
  Generally, travel costs (not including meals) may be a deductible expense if the trip is primarily for medical purposes. Cosmetic surgeries are generally not deductible.

• Taxes - Deductible taxes primarily consist of real property taxes, state and local income taxes and personal property taxes. In addition, a temporary provision for 2004 through 2007 allows taxpayers to choose between deducting state income tax or sales tax, whichever provides them the best benefit. To determine the deductible amount, taxpayers may use their total sales tax for the year backed up with receipts or use the amount pre-determined by the IRS for their income plus the sales tax for motor vehicles and boats. Those that live in states with no state income tax simply benefit from the additional deduction for the year. Non-itemizers may also find that the addition of the sales tax deduction might allow them to itemize for 2006. Planning tip: Since taxes are not deductible for AMT purposes, taxpayers should attempt to minimize the payment of taxes in a year they are subject to the AMT if they can avoid late payment penalties. Where property taxes were paid on unimproved and unproductive real estate, a taxpayer can annually elect to capitalize the taxes in lieu of deducting them.
  
  
• Interest - The only interest that is still deductible as an itemized deduction is home mortgage interest and investment interest. Although this category does not have an AGI limitation, each interest type has special limitations. Home mortgage interest is limited to the interest paid on acquisition debt that does not exceed $1 million and home equity debt (not exceeding $100,000) on the taxpayer’s main home and a designated second home. In addition, the interest on most equity debt is not deductible against the AMT. Note: Home acquisition debt is the original debt (current balance) incurred to purchase or substantially improve the home and is not increased by refinanced debt.
  
  Taxpayers can elect to treat any debt secured by the home as unsecured. The election is irrevocable without IRS consent. By making the election, the interest on the loan can be allocated to use of the proceeds, except none of the interest can be allocated back to the home itself. This election is for income tax purposes only and does not change how the loan is secured with the lender. If made, the election applies for both regular tax and AMT purposes, and it applies for the year the election is made and all future years. There is no specific IRS form to use to make the election. Instead, the taxpayer should attach a statement to their return (timely filed) for the year the election is to be effective stating the election is to apply.
  
  Investment interest is interest on debts incurred to acquire investments such as securities or land. The investment interest deduction is limited to net investment income (investment income less investment expenses), and any excess not deductible in the current year is carried over to future years. Interest on debt to acquire tax-free investment income is not deductible. A taxpayer can elect to treat capital gains as investment income in order to increase the amount of deductible investment interest. However, the same capital gains are then not eligible for the lower capital gains tax rate. Qualified dividends taxed at the reduced capital gains tax rates are not treated as investment income for the investment interest deduction calculation.
  

• Charitable Contributions - A taxpayer may, within certain limits, deduct charitable contributions of cash and property to qualified organizations to the extent he or she receives no personal benefit from the donations. All cash contributions regardless of the amount must be documented with a written verification from the charity or a bank record. Non-receipted cash contributions are no longer deductible after 2006. Non-cash contributions of $250 or more require an acknowledgement of the contribution from the qualified charitable organization. For non-cash contributions of more than $5,000 (except for publicly-traded securities), a taxpayer is generally required to have a qualified appraisal of the property donated. Please call this office for further details. Charitable deductions are limited by a percent of income depending upon the type of contribution. Contributions in excess of the AGI limitation may be carried forward for five years. Although there are 20% and 30% of AGI limitations, generally, contributions to qualified organizations are deductible to the extent they don’t exceed 50% of the taxpayer’s Adjusted Gross Income. One notable exception is the 30% limitation for gifts of capital gains property, where the contribution is based on the fair market value of the property.
  
  Frequently overlooked contributions include those made to governmental organizations such as schools, police and fire departments, parks and recreation, etc. Uniforms, travel expenses and out-of-pocket expenses for a charity are also deductible, but not the value of your time or the cost of equipment such as computers, phones, etc., if you retain ownership.
  
  Beginning in 2005, Congress has imposed some tough rules that will substantially limit the deduction for the popular charitable car donation. Past rules generally allowed taxpayers to deduct the fair market value (FMV) of the vehicle. Under the changes that took effect in 2005, if the claimed value of the vehicle exceeds $500, the deduction will generally be limited to the gross proceeds from the charity’s sale of the vehicle. The IRS provides Form 1098-C that incorporates all of the required acknowledgement elements for the donee (charitable organization) to complete. The donor is required to attach copy B of the 1098-C to his or her federal tax return when claiming a deduction for contribution of a motor vehicle, boat or airplane.
  
  There is an exception to the new rules for donated vehicles that the charity retains for its own use “to substantially further the organization's regularly conducted activities or provides to a needy family.” Please call this office for more information.
  

• Miscellaneous Deductions - Miscellaneous deductions fall into two basic categories: those that are reduced by 2% of a taxpayer's AGI and those that are not.
  
  - Those Subject to the 2% Reduction - This category generally includes your investment expenses, costs of having your tax return prepared, and employee business expenses.
  
  - Those NOT Subject to the 2% Reduction - This category includes gambling losses (but cannot exceed the amount reported as gambling income), personal casualty losses (after first reducing each loss by $100 and the total loss for the year by 10% of your AGI), repayments of income over $3,000) reported in prior years and estate tax deductions. The estate tax deduction is considered by many to be the most overlooked deduction in taxes. It is a deduction based on the additional taxes paid as a result of the same income being taxed to both the estate and to the beneficiaries of the estate. Only certain types of income are doubly taxed. As an example, if the decedent had a Traditional IRA account, the value of the IRA would be included in the decedent’s estate and also would be taxable to the beneficiary. If the estate paid any tax at all (on Form 706), the beneficiary in this example would have an estate tax deduction equal to a portion of the estate tax paid.