Tax Tips
January 2008
2007 YEAR-END TAX LEGISLATION ALERT
For many of you, the New Year is a little brighter now that Congress has passed an alternative minimum tax (AMT) "patch." The patch and a host of other bills passed Congress just before lawmakers left Washington, D.C. in late December for their holiday recess.
AMT patch. The patch is a temporary fix to a big problem. Nearly 40 years ago, Congress created the AMT so that a handful of very wealthy taxpayers would not avoid taxation. The idea worked well at the beginning but over time inflation has eroded the value of the dollar. That handful of very wealthy taxpayers has grown to be many millions. Even more taxpayers, especially taxpayers with household incomes of between $75,000 and $100,000, would have been liable for the AMT this year but for the patch. The Treasury Department predicted that without the patch, up to 25 million taxpayers would face an average tax increase of $2,000 for the 2007 tax year.
The patch prevents the AMT from spreading by giving taxpayers higher exemption amounts and allowing them to use most nonrefundable personal credits to offset AMT liability for the 2007 tax year. The 2007 AMT exemption amounts are $44,350 for single taxpayers and heads of household; $66,250 for married couples filing jointly; and $33,125 for married filing separately. These amounts are slightly higher than the 2006 exemption amounts, which is also good news for many taxpayers.
Calculating the AMT is far from simple. In fact, it is one of the most complicated provisions in the U.S. Tax Code. The patch is also very complex. Our office is ready to help you. If you have any questions about the patch and AMT liability, please give us a call today.
2008 filing season. The IRS needs time to reprogram its computer systems for the patch. According to top IRS officials, the agency could need as many as seven to 10 weeks to reprogram its systems for the patch. The start of the 2008 filing season is already less than seven to 10 weeks away. Consequently, return processing, and refunds, could be delayed. The IRS has promised to get its computer systems reprogrammed as quickly as possible and to ensure that they process returns with 100 percent accuracy. We'll monitor the latest news from the IRS and keep you updated. The IRS has already revised many of the 2007 tax forms that are impacted by the AMT patch.
Foreclosure relief. The housing boom in many areas of the country is in danger of becoming a housing bust. Problems in the lending industry, especially with so-called subprime mortgages, have contributed to the slide in the home sales and home values. Congress and the Bush Administration have proposed a variety of measures to help homeowners who are caught in the mortgage meltdown. One measure is in the recently-enacted Mortgage Forgiveness Debt Relief Act of 2007. When a lender forecloses on property, sells the home for less than the borrower's outstanding mortgage and forgives all or part of the mortgage debt, the Tax Code treats the cancelled debt as taxable income to the taxpayer. The new law temporarily excludes from taxation discharges involving up to $2 million of indebtedness ($1 million for a married taxpayer filing a separate return) secured by a principal residence and are incurred in the acquisition, construction or substantial improvement of the residence.
Let's take a look at an example. Cara's principal residence is subject to a $300,000 mortgage debt. Cara's creditor forecloses in 2008. The residence is sold for $240,000 in satisfaction of the debt later that year. Cara has $60,000 in income from the discharge of indebtedness. Before the new law, the $60,000 would have been includible in Cara's gross income. Now, it is exempt.
The new law also addresses mortgage workouts. Sometimes, a mortgage workout or renegotiation may result in forgiveness of indebtedness income that would be taxable. The new law helps these taxpayers by giving them a full exclusion, too.
The exclusion in the new law is temporary. Taxpayers have three years ...until December 31, 2009... to take advantage of the change. The exclusion is also retroactive to January 1, 2007.
If you have any questions about foreclosure relief, give our office a call. We'll explain the fine points of the new law and explore if it can benefit you. We'll also keep an eye on further developments to help taxpayers facing foreclosure and reforms for the lending industry when Congress returns to work after its holiday recess.
Mortgage insurance deduction. In addition to foreclosure help, Congress also extended the itemized mortgage insurance deduction for three years. If you're unsure if your mortgage insurance qualifies, give our office a call. We'll let you know.
Home sale exclusion. The new law may also help some recently-widowed individuals. The new law extends the time in which a surviving spouse may use the joint-filers' $500,000 home sale gain exclusion before being treated as a single individual who is entitled to $250,000 exclusion. As of January 1, 2008, the sale of a residence that had been jointly owned and occupied by the surviving spouse and the deceased spouse is entitled to the $500,000 exclusion if the sale occurs no later than two years after the death of the individual's spouse. Some special rules about use and occupancy also apply.
More tax acts. As if the AMT patch and foreclosure help weren't enough last-minute tax legislation, Congress also passed a package of technical corrections to past tax laws, tax relief for volunteer emergency responders, an energy bill with some tax-related provisions, legislation to clarify the term of the IRS Commissioner, a bill to exclude memorial fund payments from gross income for the victims of the 2007 Virginia Tech tragedy, and an IRS budget for FY 2008.
Looking ahead. Lawmakers still have a lot of tax legislation on their agenda when they return from their holiday recess. The House and the Senate have passed different versions of a military tax relief package. They also have passed different versions of a farm bill, which includes many farm-related tax breaks. Lawmakers are expected to iron-out the differences in both of these bills in early 2008. Congress also may pass a package of extenders. These are popular but temporary tax breaks, such as the state and local sales tax deduction, the higher education tuition deduction and the teacher's classroom expense deduction. Congress could also revisit some of the consumer tax incentives that were dropped from the final energy bill, including extending some tax breaks for energy-efficient improvements to your home. There's also talk on Capitol Hill of holding hearings on abolishing the AMT. We'll be sure to keep you posted of all the important tax legislative developments in 2008.
If you have any questions as to how these rules apply to your particular situation, please do not hesitate to call the Certified Public Accountants at Wood, Johnson, Heath, P.C. at 512-343-8075.
