The end of the year is always a busy time for T. M. Byxbee accountants because we try to do tax planning both for the year end--and for the next year. The end of 2007 is no different, but it is complicated somewhat because Congress did not pass any legislation relating to either the alternative minimum tax (AMT) or the estate tax. If nothing is passed increasing the AMT exemption amount for 2007, it is estimated that an additional 20 to 25 million taxpayers will be subject to the AMT. For those living in Connecticut, New York and Massachusetts, many taxpayers are already subject to the AMT because one of the triggers is a large state income tax deduction. If you have any questions about the AMT and its impact on you, contact your Byxbee principal. If you are subject to the AMT every year, there is little planning that can help. But if you are sometimes subject to the AMT and sometimes subject to regular tax, you might think about accelerating income to an AMT year--the rates are lower than for regular tax--and deferring certain deductions to a regular tax year. For example, if you know you are subject to the AMT in 2007, and you suspect you will be subject to the regular tax in 2008, you should pay your state and local income and property taxes in 2008 and accelerate income into 2007.

INCOME TAX CHANGES FOR 2007 There was one major tax bill in 2007 that produced some good and some not so good changes in the tax rules. Here is a summary of what you need to know:

INCREASED SECTION 179 DEDUCTION

In 2007, the Section 179 deduction, which allows you to expense a personal property acquisi-tion in one year, is now $125,000, with a phase-out starting at $500,000 in total personal prop-erty acquisitions. This allows you to deduct even more tangible personal property in 2007 without having to depreciate it over a number of years.

QUALIFIED JOINT VENTURES

In 2007, if a husband and wife are in business together, they can elect to file as a partnership or file two Schedule C’s, if they qualify under the IRS rules for “qualified joint ventures.” A

(Continued on page 2)

T. M . BYXBEE COMPANY, P. C . W INTER 2 007

Increased Section 179

Deduction

Qualified Joint

Ventures

Subchapter S Corp

Changes

Kiddie Tax Changes

IRA Charitable

Contributions

Estate Tax Update

Estate Planning

in 2007

Continue Making

Gifts

Consider Using FLPs

And FLLCs

Review Allocation

To Your Credit

Shelter Trust

Employee Profile

1

1-2

2

2

2

2-3

3

3

3

3-4

4

Inside this Issue

Page 2

qualified joint venture is a joint venture involving the conduct of a trade or business, if (1) the only members of the joint venture are a husband and wife, (2) both spouses materially participate in the trade or business, and (3) both spouses elect to have the provision apply.

SUBCHAPTER S CORPORATION CHANGES

If you have an S corporation, the rules have been slightly modified--for the better. One, a tax on excessive S corporation unearned income (dividends, interest, rents, etc.) was changed to exclude capi-tal gains from the definition of unearned income. Two, if you have a qualified subchapter S subsidiary, and you sell less than 100% of the subsidiary, your recognized gain will be less than under former rules.

PLANNING POINT

If you do business in either a C corporation or an S cor-poration with prior C corporation earnings, making divi-

dend distributions to owners in 2007 or 2008 may make sense. The tax on qualifying dividends is 5% or 15% in 2007 and the 5% tax rate goes to 0% in 2008. In future years, we may not always have such favorable rates on qualifying divi-dends (and capital gains).

KIDDIE TAX CHANGES

The "kiddie tax" is a term referring to the fact that children with unearned income above a certain amount must pay tax on that unearned income at their parents’ income tax rate. The 2007 tax changes did not impact the kiddie tax rules as they apply in 2007 but did change the kiddie tax rules for 2008 and thereafter. In 2007, the kiddie tax applies if: 1. The child has not reached the age of 18 by the close of the table year and either of the child’s parents is alive at such time;

2. The child’s unearned income exceeds $1,700; and 3. The child does not file a joint return. In 2007, the net unearned income over $1,700 of a child under age 18 is taxed at the parents’ tax rate if the parents’ tax rate is higher than the income tax rate of the child. The remainder of a child’s taxable income (earned income, plus unearned income up to $1,700 for 2007, less the child’s standard deduc-tion) is taxed at the child’s income tax rate, regardless of whether the kiddie tax applies to the child. The kiddie tax applies regardless of whether the child may be claimed as a dependent by either or both parents. Starting in 2008, the kiddie tax applies to children who are 18 years old or younger or who are full-time students over age 18 but under age 24. The expanded kiddie tax applies only to children whose earned income does not exceed one-half of the amount of their support.

PLANNING POINT

In 2007, you may be able to benefit by having a child aged 18 or older sell capital gain property and recognize

capital gain at a 5% rate. In such a case, you should consider transferring appreciated capital gain property before the end of 2007, and having the child sell the property before the end of 2007. It is important to note that earned income is not subject to the kiddie tax and that the earnings from an investment in a child’s 529 plan are not taxable if distributed for qualifying educational expenses. These two options look even more fa-vorable, now that the kiddie tax has been changed.

IRA CHARITABLE CONTRIBUTIONS

If you have an IRA, are charitably motivated, and are 70 ½ years of age or older, you should consider making a direct transfer of up to $100,000 to a qualified charity before the end of 2007. This is particularly true for anyone who wishes to make large charitable contributions in 2007, or who does not regularly itemize their deductions. At this time it is not known whether the provision allowing a qualified charitable distribution from a traditional or Roth IRA will be extended beyond 2007. Contact your Byxbee Company principal to discuss the tax benefits of this strategy.

ESTATE TAX UPDATE

The staggered implementation of estate tax changes enacted

in 2003 makes estate planning complex, unpredictable and for

the most part very short-term. This is especially true in 2010,

when there is no estate tax, and then that year is followed by

2011 in which the old estate tax rules are reinstated.

It appears that relatively few people really expect the estate

tax to be phased out completely in 2010, although in 2007 no

one really knows for sure when or if the current rules will be

replaced by other rules or what those other rules might be.

The chart below gives the estate tax exemption amounts and

the estate tax marginal tax rates by year from 2007 through

2011.

ESTATE TAX RATES AND EXEMPTION AMOUNTS

(Continued from page 1)

(Continued on Page 3 )

Year

Exemption

Amount

Estate Tax

Credit

Beginning

Rate

as of the

Exemption

Amount

Top Rate

2007 $2 Million $780,800 45% 45%

2008 $2 Million $780,800 45% 45%

2009 $3.5 Million $1,455,800 45% 45%

2010 Unlimited N/A N/A N/A

2011 $1 Million $345,800 41% 55%

Page 3

The lifetime gift exemption amount is now $1,000,000 and, under current law, is scheduled to remain at that level. Since 1999, the annual gift tax exclusion has been subject to an inflation adjustment, with any increase rounded down to the nearest $1,000. For 2007 (and 2008), the annual gift tax ex-clusion is $12,000 (or $24,000 for a married couple making the gift splitting election). Gifts used for tuition or medical expenses are not limited by the $12,000 maximum annual exclusion limitation in the following circumstances. An unlimited gift tax exclusion is allowed for tuition payments paid on behalf of a donee directly to an educational organiza-tion. (Amounts paid for books and dormitory fees on behalf of the donee are not eligible for the exclusion.) Amounts paid directly to health care providers for medical services on behalf of a donee also qualify for the unlimited gift tax ex-clusion.

PLANNING POINT

One way to get a more “bang for the buck” in terms of gifting for those who have not yet made their 2007

gifts is to make your gifts for 2007 and 2008 close in time. You could make a $12,000 gift in December and another in January, 2008 and not invade your $1,000,000 lifetime gift exemption. It appears that permanent resolution of the estate tax rules is essentially a political question that will probably not be re-solved in 2007 or in the Presidential election year of 2008. In 2009, as the scheduled one year repeal of the estate tax in 2010 nears, a new Congress and a new President may be motivated to arrive at a permanent resolution of this issue—or they may simply extend the 2009 rules into 2010 and per-haps beyond. From a 2007 perspective, all of this is pure speculation.

ESTATE PLANNING IN 2007

Given the instability in the estate tax rules, many tax advisors might be tempted to throw up their hands and just advise their clients to wait for permanent estate tax rules before they do anything. This would probably be a mistake since from a 2007 perspective obviously no one knows when, or if, the estate tax rules will be stable and consistent. Also, of course, no one knows when he or she is going to die, so no one can ignore the need to plan even in unstable times. In 2007, certain fairly elemental planning steps probably make sense in almost all cases where the client is potentially subject to estate tax. Assuming that the estate tax will be retained in some form, tax advisors might consider the fol-lowing planning options in 2007.

1. Continue Making Gifts

As noted, an individual may utilize a $1 million gift tax ex-emption amount for gifts made during the individual’s life-

time as well as an annual exclusion ($12,000 in 2007) every year for each individual donee. Gifts serve to remove the appreciation on the gifted property occurring after the gift, as well as any income earned after the gift is made, from the estate of the donor. Some tax practitioners recommend that their clients utilize the $1 million lifetime exemption as quickly as possible when the donor will be gifting rapidly appreciating property so as to avoid gift or estate taxation on the future appreciation of the gifted asset.

2. Consider Using FLPs and FLLCs

Family limited partnerships (FLPs) and family limited liabil-ity companies (FLLCs) allow older family members to retain control over family businesses and/or assets and pass limited partnership interests or member interests in entities that own those businesses or assets to younger family members. In some respects transferring these interests is more tax efficient than transferring the underlying assets because of the ability to value the limited partnership interests that are gifted by using discounts relating to lack of marketability and lack of control as may be applicable. A FLP or FLLC may also help to protect family assets from judgment creditors, including ex-spouses. A FLP or FLLC may also facilitate a family’s overall invest-ment strategy by taking advantage of economies of scale, realizing investment diversification and gaining access to superior money managers. Technically a FLP is a limited partnership formed to hold the family business or invest-ments. The parents will make gifts of limited partnership interests to their children. Because the limited partnership interests are illiquid and lack control, they may be entitled to substantial valuation discounts relating to lack of control and lack of marketability for federal gift and estate tax planning purposes.

3. Review Allocation To Your Credit Shelter Trust

The transfer of assets between U.S. citizen spouses is gener-ally free from Federal gift or estate taxes as the martial de-duction applies in each case. Additionally, the estate tax ex-emption amount effectively shields an individual's first $2 million of taxable transfers from estate tax in 2007. For a married couple, the use of both the husband's and the wife's exemption amounts will protect the first $4 million from es-tate tax in 2007 and 2008. Assuming that a husband and a wife own exactly $4 million worth of property at the time of the first spouse's death, if the deceased spouse conveys all of his or her property to the surviving spouse then there is no tax at the death of the first spouse regardless of much or how little the first spouse to die owned. This result follows due to the unlimited marital deduction. Under certain circumstances transferring all assets outright to the surviving spouse can result in a very large estate tax on the death of the second spouse.

(Continued on Page 4)

(Continued from page 2)

T. M. BYXBEE COMPANY, P.C. 2319 Whitney Avenue Post Office Box 187169 Hamden, CT 06518 Published quarterly by:

T. M. Byxbee Company, P.C.

Certified Public Accountants

2319 Whitney Avenue, Hamden, Connecticut 06518

Http://www.byxbee.com

Due to the complexity of tax laws and variations in individual

circumstances, only a qualified professional can determine

whether a specific action is appropriate for you.

For further information, telephone any member of the firm at (203)281-4933.

Questions or comments can be sent via e-mail to: tmbinfo@byxbee.com To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

The Byxbee "team" has recently expanded with several new employees - Jeff Jermine, Mike Guidone, Marcia Kidney and Karen Davis. This edition will feature Marcia Kidney. Look for the others in future editions.

Marcia Kidney

A native of Connecticut, Marcia lived in the Adirondack Region of New York State for the past 40 years where she started her own company in 1993 to provide implementation, training and support for various accounting and other software packages. Marcia is certified in Mas90 accounting software and is currently completing her training for certification in Quickbooks 2008. She works predominantly with small and medium size businesses in supporting their accounting function and can also provide network consulting and hardware implementation services. Marcia was educated at Manchester Com-munity College and Adirondack College in New York. She has many diverse interests including gar-dening, hiking, kayaking, coin collecting and guitar playing, just to name a few, while also being active in community and church programs. Marcia currently resides in Vernon, CT.

The reader may obtain more information about the material in the newsletter by contacting any of the following principals of the firm:

Edward F. Cleary Frank A. Jordan John B. Loehmann

Pamela J. Matocha David M. Yaffe

(Continued from page 3)

In the case of a married couple a basic key to estate planning is to insure that both exemption amounts are fully utilized. Utilizing only the marital deduction at the time of the death of the first spouse will certainly eliminate estate taxation on the death of the first spouse, but it may not eliminate estate taxation on the death of the second spouse since the first to die spouse’s exemption amount would be completely unused at the time of his or her death and the surviving spouse may only use his or her own exemp-tion amount ($2 million in 2007). For a married couple, estate tax planning often first involves dividing ownership of assets between spouses to take maximum ad-vantage of tax saving opportunities. One of the most common tax-savings strategies for estates valued at over $2 million in 2007 is the full utilization of the $2 million estate tax exemption, or $4 million for a married couple through the utilization of a credit shelter trust and the marital deduction. Call your T. M. Byxbee Company principal if your estate plans are not fully up to date.