For the 2007 tax year, you may want to examine several key items, such as Section 179 deductions and income averaging deductions, according to Gary Hoff, Extension specialist in taxation, University of Illinois Tax School.

While there haven't been wholesale changes in this year's tax code, Hoff offers the following as important points to discuss with your tax advisor:

For 2007, the Section 179 deduction has been increased to a cap of $125,000, compared to last year's level of $108,000 and $105,000 in 2005.

The deduction applies to tangible property like machinery and equipment, certain single-purpose agricultural structures (see IRS Farmer's Tax Guide, Publication 225), bulk storage facilities (e.g., grain bins), gasoline storage tanks, office equipment and even off-the-shelf computer software purchased for the business.

“It's a dollar-for-dollar reduction up to a ceiling limit of $500,000 in purchases,” says Hoff. “For example, if 2007 purchases totaled $140,000, the total 179 deduction will be capped at $125,000. However, the deduction is conversely reduced dollar-for-dollar for purchases exceeding $500,000. For example,the deduction would be capped at $124,000 if the purchases totaled $501,000.”

This deduction has increased over the years because it's indexed for inflation, according to Hoff. “However, Section 179 has a sunset date of 2009, after which it will drop back down to the old base level of $25,000 plus the indexed inflation amount,” he says. “If applicable, it's probably wise to capture as much deduction as you can each year.”

Section 179 is also flexible enough in what qualifies for deductions so you can tailor or adjust your tax liability accordingly.

In short, the deductions allowed under Section 179 offer a good way to lower your Schedule F income. For a sole proprietor, using Section 179 can also reduce self-employment income tax,according to Hoff.

This could be a big year for income averaging, says Hoff. Farmers are allowed to average their income over the prior three years. That means they can tax part of their 2007 income as if it were earned in 2004, 2005 and 2006. (Income averaging is covered under IRS Section Code 1301.)

Based on the income level and taxes paid, Hoff suggests discussing with your tax advisor what tax savings may be possible — if any — if you were to equally allot portions of income over the prior three years, taking into account the various tax brackets.

“Farmers will just have to pencil it out with their tax advisors,” says Hoff. “It just might lessen the tax sting in 2007 through averaging and shifting some income into some unused brackets of prior years, capturing some potential tax benefits by amending those past returns.”

With better-than-normal grain markets, this might be a good time to examine and consider the various types of available retirement plans — whether they are Roth or Traditional IRAs or 401(k) plans — according to Hoff. The taxpayer can establish a retirement plan prior to December 31 and still make contributions in early 2008.

“While contributions of up to $45,000 are available, each plan has its own unique limitations and may or may not require employee contributions,” says Hoff. “The bottom line is that a good financial or tax planner can help guide you through the maze of plans and focus on those offering the best tax savings in the short and long term.”

In last year's tax story (November 2006 issue) about children's savings for college education — which was impacted by the Tax Increase Prevention & Reconciliation Act (TIPRA) — it was pointed out that the “kiddie tax” applied to those up to age 18.

“Beginning on the 2008 tax returns, this kiddie tax will include dependent students 19-24 years old,” says Hoff. “This is a key change, and it means that their savings, investment income or other interest-bearing accounts can be taxed at the parents' highest tax or top marginal rate.”

The few exceptions to that, according to Hoff, are in cases where children may furnish more than half of their own support from earned income during a summer job, for example, and then taxed at the corresponding rate for that level of income. Another exception would be if the child is married and files a joint return with the spouse.

“Again, I recommend exploring the 529 education savings plans with your tax advisor,” says Hoff. “They escape the kiddie tax, but these special plans do differ by state.”