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Federal Tax Update: Congress Makes Several Late Changes That May Impact Your 2007 Income Tax Liability

In December 2007, Congress passed several changes to the tax code which impact the 2007 tax year.  All changes were signed into law by the President.  Key Acts passed by Congress include: 1) the Tax Increase Prevention Act of 2007; 2) the Mortgage Forgiveness Debt Relief Act of 2007; and 3) the Tax Technical Corrections Act of 2007.  Highlights of these Acts include:

  • AMT Exemption Amounts Were Increased, Providing AMT Relief.  The AMT is a parallel tax system which does not allow taxpayers to take several deductions otherwise permissible under the regular tax system, such as the deduction for state and local taxes.  When initially passed by Congress, the exemption amounts under AMT were not indexed to inflation.  This means that, as years go by, more taxpayers will be subject to tax under AMT as their wages nominally increase.  In recent prior years, Congress temporarily increased exemption amounts to prevent having millions of middle income taxpayers fall victim to the AMT.  In late December, Congress passed a temporary “patch” to the AMT problem for 2007, raising the AMT exemption amounts to $66,250 for married individuals filing jointly and $44,350 for unmarried individuals.
  • Certain Personal Credits May Be Used To Offset AMT Liability In 2007.  Congress permitted certain nonrefundable personal credits, including the elderly and disabled credit, the dependent care credit, and the Lifetime Learning and Hope Scholarship college credits to offset both regular and AMT liability for the 2007 tax year.
  • No Taxable Income From Discharge Of Qualified Mortgage Debt.  Under the 2007 Mortgage Relief Act, Congress exempted income from a discharge of qualified personal residence indebtedness occurring between January 1, 2007 and December 31, 2009.  This exemption will apply when taxpayers either restructure their home mortgage or lose their personal residence in a foreclosure.  The exemption only applies to forgiveness of debt used to purchase or improve the taxpayer’s principal residence (not to second mortgages or home equity loans).  The exemption is capped at $2 million ($1 million for married individuals filing separately).
  • Taxpayers May Deduct Certain Mortgage Insurance.  Taxpayers may treat amounts paid for qualified mortgage insurance as home mortgage interest and deduct those payments.  The insurance must have been issued in connection with home acquisition debt and issued after 2006.  The deduction begins phasing out for taxpayers earning over $100,000 and is not available for taxpayers earning over $109,000.
  • Partnership Failure To File Penalty Increased And S Corporation Failure To File Penalty Established.  Under the 2007 Mortgage Relief Act, Congress increased the period for calculating the monthly failure to file penalty for partnership returns from 5 to 12 months.  The per partner penalty amount increased from $50 to $85 per partner.  In addition, Congress extended this failure to file penalty to S corporation returns.
  • FUTA Surtax Extended To 2008.  The temporary FUTA surtax of .2%, imposed on the first $7,000 paid annually by covered employers to each employee, was extended through December 31, 2008.  The temporary surtax was scheduled to end in 2007.
  • Penalty For Substantial And Gross Valuation Understatements Attributable To Incorrect Appraisals Extended To Estate And Gift Tax Returns.  The Tax Technical Corrections Act of 2007 clarifies that the penalty for substantial and gross valuation understatements, attributable to incorrect appraisals, applies to substantial valuation understatements made for estate and gift tax purposes.
  • Tax Relief For Volunteer Firefighters And Emergency Medical Responders.  Under the 2007 Mortgage Relief Act, beginning in 2008, any state or local tax benefit provided to volunteer firefighters and EMS personnel on account of their volunteer services is excluded from the volunteer’s gross income.  The exclusion applies to rebates or reductions of both state or local income taxes and real or personal property taxes.  In addition, these volunteers may now exclude from income any reimbursements for expenses incurred in connection with their performance of emergency response services, up to $30 per month that the volunteer performs the services.  Both provisions are scheduled to expire in 2010.