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Tuesday, September 19, 2006

2007 FEDERAL TAX INFLATION ADJUSTMENTS

RIA, a publisher of tax guides and research, has calculated 2007 adjustments to various Federal tax numbers that are calculated each year based on the prior year rate of inflation. These calculations are not the final IRS figures, but are typically an accurate projection of the final adjustments. Below are some of the more important inflation adjustment figures - remember, these apply in 2007, not 2006.

GIFT TAX ANNUAL EXCLUSION. The gift tax annual exclusion will be $12,000 (same as for gifts made in 2006).

ESTATE TAX SPECIAL USE VALUATION REDUCTION LIMIT. The limit on the decrease in value that can result from the use of special valuation will increase to $940,000, up from $900,000 in 2006.

PORTION OF ESTATE QUALIFYING FOR 2% INTEREST RATE ON DEFERRED ESTATE TAX. In determining the part of the estate tax that is deferred on a farm or closely-held business that is subject to interest at a rate of 2% a year, for decedents dying in 2007 the tentative tax will be computed on $1,250,000 (up from $1,200,000 in 2006) plus the applicable exclusion amount ($2 million for 2007, same as in 2006).

INCREASED ANNUAL EXCLUSION FOR GIFTS TO NONCITIZEN SPOUSES. The annual exclusion for gifts to noncitizen spouses will be $125,000 (up from $120,000 in 2006).

THRESHOLD FOR FOREIGN GIFTS THAT TRIGGERS REPORTING. If the value of the aggregate "foreign gifts" received by a U.S. person (other than an exempt Code Sec. 501(c) organization) exceeds a threshold amount, the U.S. person must report each "foreign gift" to IRS. ( Code Sec. 6039F(a) ) Different reporting thresholds apply for gifts received from (a) nonresident alien individuals or foreign estates, and (b) foreign partnerships or foreign corporations. For gifts from a nonresident alien individual or foreign estate, reporting is required only if the aggregate amount of gifts from that person exceeds $100,000 during the tax year. For gifts from foreign corporations and foreign partnerships, the reporting threshold amount will be $13,258 in 2007 (up from $12,760 in 2006).

TAX AVOIDANCE MOTIVE - EXPATRIATION. A tax avoidance motive is generally presumed for an expatriate whose average annual net income tax liability for the 5 tax years ending before the date of loss of citizenship or residency exceeds $136,000 in 2007 (up from $131,000 in 2006) or whose net worth on that date exceeds $2 million (not indexed for inflation).

FOREIGN EARNED INCOME EXCLUSION. The foreign earned income exclusion amount increases to $85,700 in 2007 (up from $82,400 in 2006).

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