Volume 28 Number 2, Spring 2007

• Estimated Tax Planning for 2007 Gets Complicated
   
• PCAOB Issues Report on Successful Review
   
• Electronic Storage of Business Receipts
   
• How do your Deductions Compare to National Averages?
   
• Protecting Your IT Infrastructure
   
• The Better Way
   
• Check Out Our New Look!
  

Estimated Tax Planning for 2007 Gets Complicated

"Estimated tax" sounds simple but it is far from it. Estimated tax is the method used to pay tax on income that is not subject to withholding or if not enough tax is being withheld from a person's salary, pension or other income. To make it even more complicated, you have to keep up with the constantly changing tax laws so you aren't paying too much or too little. This is especially true for 2007 because of some important changes in the tax laws. The good news is that our office is here to do much of the work for you.

General guidelines. Everyone's situation is unique but there are some general guidelines about who must pay estimated tax. Generally, you must pay estimated tax if two conditions apply:

1) you expect to owe at least $1,000 in tax for 2007 after subtracting all your withholding and credits; and

2) you expect your withholding and credits to be less than the smaller amount of: 90% of the tax to be shown on your 2007 return or 100% of the tax shown on your 2006 return. Your 2006 return must cover all 12 months.

The IRS has a special rule for higher-income taxpayers. The percentage of tax for 2006 for individuals with adjusted gross incomes above $150,000 is 110%. This percentage also applies to a married person filing separately with an AGI of $75,000 or more.

Making things complicated. Calculating your estimated tax gets complicated because of many deductions and credits that you may be eligible for. You may be able to take an IRA deduction if you were covered by a retirement plan at work and your 2007 AGI is less than $62,000 ($103,000 for married couples filing jointly). You may also deduct catch-up contributions of up to $3,000 each year to your IRA if you participated in a 401(k) of an employer that was a debtor in a bankruptcy proceeding.

Other items to keep in mind include:
Ø Higher standard deductions for 2007
Ø Earned income credit
Ø Credit for prior year minimum tax
Ø Deduction for qualified mortgage insurance premiums
Ø Higher standard mileage rates for 2007
Ø The domestic production activities deduction

You also have to remember that some tax breaks that were available in the past are not available for 2007. These include the additional exemption for housing individuals displaced by Hurricane Katrina, tax-favored treatment of qualified hurricane distributions from eligible retirement plans and the qualified electric vehicle credit, among others.

If that's not enough, you also have to take into account the alternative minimum tax (AMT). In 2006, the AMT exemption amounts were $42,500 for single individuals and $62,550 for married couples filing jointly. For 2007, the exemption amounts are much less: $33,750 for single individuals and $45,000 for married couples filing jointly. Congress may extend the higher 2006 amounts into 2007 but that likely won't happen until later this year.

In other AMT-related news, certain credits are no longer allowed against AMT. These include the credit for child and dependent care expenses, the credit for the elderly or disabled and some residential energy credits, among others.

Quarterly due dates. Estimated tax payments are due quarterly. For most individual taxpayers, the due dates are:
v April 15 for the period January 1 through March 31
v June 15 for the period April 1 through May 31
v September 15 for the period June 1 through August 31
v January 15 next year for the period September 1 through December 31

These dates apply to an individual whose tax year ends on December 31, as is the case for most individual taxpayers.

Amount. Generally, the required installment is 25% of the required annual payment. However, if you receive taxable income unevenly throughout the year you can elect to pay either the required installment or an annualized income installment. Our office can run all the numbers and tell you precisely what your estimated payment should be.

Penalties. If you fail to make estimated tax payments, pay less than the required installment amount or your payments are late, you may be charged a penalty. You may be liable for a criminal penalty if the IRS determines that your failure to pay estimated tax was willful. Willful failure to pay estimated tax is a misdemeanor punishable by a fine of not more than $25,000, or imprisonment for not more than one year, or both.

If you have any questions about estimated tax, call our office today. Don't wait for the IRS to contact you. We'll be happy to sit down with you and determine if you should be paying estimated tax.

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PCAOB Issues Report on Successful Review

SEK&Co has successfully completed an inspection of the firm’s audit practice by the Public Company Accounting Oversight Board (PCAOB). The PCAOB notified the firm that the final report on the inspection was issued March 14, 2007. The scope of the inspection covered financial statement audits of the firm’s Securities and Exchange Commission registered clients and included a review of practices, policies and procedures related to the audit practice and an evaluation of the quality of audit work performed on specific audits.

The PCAOB inspection represents a part of the overall quality control monitoring process. Every three years, the firm’s entire accounting and auditing practice is subjected to a quality monitoring review performed by an independent CPA firm and administered by the American Institute of CPAs. Additionally, the firm conducts a comprehensive internal inspection annually.

"Smith Elliott Kearns & Company, LLC is committed to providing the highest quality accounting, auditing, tax and business advisory services. This successful review is an indication of that level of commitment," said Michael P. Manspeaker, CPA, firmwide director of Quality Control.