TEXT OF INTERVIEW
Tess Vigeland: You'd think that 232 years into this grand democratic experiment of ours, America would've figured out a way to make taxes consistent and reasonable.
But no, each year Congress and the IRS make all kinds of new laws and rules that change everything around and drive us all crazy as we try to figure out what's old, what's new, and what's up.
Well, joining us again as he did at this time last year is the Wall Street Journal's tax columnist Tom Herman.
Vigeland: Welcome back to the program.
Tom Herman: Thank you Tess. Good to be with you.
Vigeland: Let's talk about 2007 first -- that's obviously what folks are most worried about right now. What are some of the big changes that they need to look out for as they prepare their returns?
Herman: Well Tess, there's some good news. Three major deductions that were on last year's return were very hard to find because Congress didn't make the law clear until very late the prior year after the IRS's forms had gone to press. This year, those deductions are very easy to find and they're important ones. One of the deductions is you have the choice of whether to deduct your income taxes at the state and local level or your sales taxes. People in states with no income taxes such as Florida or Texas or Washington state find this very, very important. This is a big deduction for them. Another deduction is the higher education deduction. Essentially, it allows you to decrease your income subject to tax by up to $4,000 and this is for tuition and fees, not just tuition. These have to be expenses for a student who's enrolled in an eligable educational institution and it could be either you or it could be your spouse or it could be a dependent and these are tuition and fees that are acquired for enrollment or attending an eligable post-secondary educational institution, but they don't include personal expenses or family expenses such as room and board. And the third one is the deduction for elementary and secondary school teachers. This is a deduction of as much as $250 a year for out-of-pocket classroom supply costs, such as books or computer equipment. There was no clearly marked line on the form last year, because again, Congress was so late in changing the law. This year, it is clearly marked.
Vigeland: Alright, so those are some deductions to look out for if you weren't aware of them last year -- or didn't know where to find them on your tax forms. I also remember that for 2007, isn't it getting a little harder to prove your charitable deductions? You have to have a little more proof than you used to.
Herman: Yes, you do. You need proof of a charitable donation if you want to deduct it no matter how big the deduction is, so if you dropped $50 into the church plate last year, but you don't have any receipts, you're not supposed to deduct it this year unless you have some sort of proof. Now I know one lawyer in Los Angeles who actually changed the way he gives. He, instead of giving cash at the church, he would actually put a note in the plate and they would bill him so that he has receipts for all of his donations and therefore, he can deduct those donations.
Vigeland: Alright, and there's also a new option for older taxpayers in terms of donating money from their IRAs.
Herman: That's right. That provision expired at the end of last year. I'm getting a lot of e-mail about that. The law says that you could deduct up to $100,000 out of your IRA directly to a qualified charity and you would not have to pay any taxes on that transfer. You couldn't take it out of the IRA and then donate it; you had to make the transfer directly from the IRA to charity. That transfer would qualify for your minimum required distributions for your IRA, so that appealed to a lot of people and I've heard from many charities. They say they've gotten millions of dollars in additional gifts because that provision existed.
Vigeland: Ok, and that's something that you would have had to have completed the transaction by December 31 then?
Herman: That's right. There is one thing you still can do for last year to cut your taxes. That is, you could fund your old IRA. You could put in the contribution limits and still deduct that up to April 15, but other than that, I can't think of anything you can do now to cut your taxes for last year.
Vigeland: Well, let's go to the housing situation and tell us about the home sale exclusion for widows and widowers. I know you've written about this.
Herman: There's a new law that took effect at the beginning of this year and it helps a lot of people whose spouse died and who can't or don't want to sell their home right away. So under the old law, what would sometimes happen is someone's spouse would die late in the year, you could file "married, filing jointly" for that year but not the following year. The new law says you can still get that full $500,000 exclusion if the widow or widower sells the house within two years of the date of death and in many cases, it will mean that the widow or widower who sells will not have to pay any capital gains tax on the sale of the home as long as they sell it within two years.
Vigeland: We got a question from a listener recently who has heard the phrase "zero capital gains." Tell us about this. I understand it applies to lower-income investors, right?
Herman: That's right and I've gotten a lot of questions from readers too -- it's confusing. Here's how it works: In most cases, when you sell stocks or bonds or mutual fund shares, the top long-term capital gains rate is 15 percent. That's if you've owned the stock or mutual fund for more than a year, but in 2008, there is a rate of zero for people whose incomes put them in the two lowest ordinary income brackets -- those are the 10 and 15 percent brackets. So if you're income falls into those brackets including your capital gains, the capital gains tax rate is zero in 2008.
Vigeland: And finally, if you were hoping to shield some of your income by giving it to your young kiddies, little too late to avoid the kiddie tax. Tell us about this.
Herman: Congress has expanded the so-called kiddie tax. It's a strange name. Basically, the kiddie tax in English means certain income is taxed at the parent's higher rate instead of the kid's lower rate. The kiddie tax age has been moved up over the years. The idea of moving it up again, the reason Congress did it, was because of that zero capital gains rate in 2008. Congress wanted to make sure that wealthy parents couldn't move a lot of stocks and bonds and mutual fund shares to their kids, have the kids sell them in 2008 and then pay no tax. So now, the ages have been moved up and you can't do that -- as several had hoped they would be able to do for 2008.
Vigeland: Alright. Tom Herman is the tax columnist for the Wall Street Journal. Thanks for coming back and helping us out with 2007.
Herman: My pleasure Tess.