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Before
departing for the year, Congress passed a couple of new tax laws that
affect numerous individual and business taxpayers. Here is a summary of
the changes.
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Patching the AMT Problem
An estimated 20-plus million taxpayers received some much-needed relief
from the alternative minimum tax (AMT). The Tax Increase Prevention Act
of 2007 increases the exemption amounts for tax filers across-the-board
and allows them to use personal tax credits to offset AMT liabilities.
Unfortunately, the last-minute measure only postpones the inevitable.
The latest "AMT patch" approved by Congress is only good for the 2007
tax year. Click here for the AMT details from our previous article.
Tax Provisions in a New Mortgage Law
President Bush signed the Mortgage Forgiveness Debt Relief Act of 2007
into law on December 20, 2007. The most important tax change involves a
three-year income exclusion for qualifying discharges of principal
residence debt.
As you will see, the law includes six other significant tax changes
too.
1. Exclusion for Principal Residence Mortgage Debt Discharges - The new
exclusion helps homeowners caught in the sub-prime mortgage crisis. It
does so by wiping out the tax bill that many homeowners owe if a lender
eliminates some of their liability under the cancellation of debt
rules.
For federal income tax purposes, cancellation of debt (COD) income is
taxable unless a specific exclusion makes it tax-free. The Mortgage
Relief Act creates a retroactive new exclusion for qualifying
discharges of home mortgage debt in 2007 through 2009.
Under the exclusion, a homeowner can have up to $2 million of
federal-income-tax-free COD income from "qualified principal residence
indebtedness," which means debt that was used to acquire, build, or
improve the taxpayer's principal residence and that is secured by that
residence. The basis of the taxpayer's principal residence is reduced
by the excluded amount.
Tax
Caution: This exclusion only applies to COD income from
debt used to acquire, build, or improve a principal residence.
Cancellation of debt income from discharges of home equity loans used
for other purposes does not qualify for the exclusion, nor will COD
income from discharges of vacation home loans. (However, other
exclusions may apply in these circumstances.)
Also, the new exclusion is not available to a taxpayer who is in a
Title 11 bankruptcy case.
2. Surviving Spouses May Now Be Eligible for $500,000 Home Sale
Exclusion - An unmarried individual can potentially exclude from
taxation up to $250,000 of gain from selling a principal residence.
Married joint filers can potentially exclude up to $500,000. However,
if you are an unmarried surviving spouse, you are not allowed to file a
joint return for years after the year in which your spouse dies (unless
you remarry).
Therefore, before the Mortgage Relief Act, you
could not take advantage of the larger $500,000 home sale gain
exclusion if you sold your home in a year after the year when your
spouse died. You were limited to the smaller $250,000 exclusion.
Thankfully, the new law addresses this problem -- effective for sales
after December
31, 2007.
Under the new provision, an unmarried surviving spouse can claim the
larger $500,000 gain exclusion for a principal residence sale that
occurs within two years after the spouse's death, assuming all the
other requirements for the $500,000 exclusion were met immediately
before that person died.
Tax
Caution:
The two-year eligibility
period
for the larger exclusion begins on the date of the deceased spouse's
death. Therefore, a sale that occurs in the calendar year following the
year of death, but more than 24 months after the deceased spouse's date
of death, does not qualify for the larger $500,000 gain exclusion.
3.
Mortgage Insurance Premium Write-off Extended for Three More Years - Premiums
for qualified mortgage insurance on debt to acquire, construct, or
improve your first or second residence can potentially be treated as
deductible mortgage interest.
Before the Mortgage Relief Act,
this break was only available for premium amounts paid during 2007. The
new law extends the break for three more years, through 2010.
Tax
Caution:
Unfortunately, due to an
income
phaseout rule, you may be unable to claim the write-off.
Here's
how the rules works. If your adjusted gross income (AGI)
exceeds $100,000, the deduction is phased out by 10 percent for each
$1,000 of AGI (or any fraction thereof) in excess of $100,000 (the
write-off is fully phased out when your AGI reaches $109,001). If you
use married filing separate status, and your AGI exceeds $50,000, the
deduction is phased out by 10 percent for each $500 of AGI (or any
fraction thereof) in excess of $50,000. The write-off is fully phased
out when AGI reaches $54,501.
4.
Liberalized Qualification Rules for Residential Co-ops - If
you are a tenant-stockholder of a cooperative housing corporation (or
co-op), the tax law potentially allows you to deduct amounts paid or
accrued by the corporation to the extent they represent your share of
real estate taxes and interest.
However, this beneficial rule is only available for buildings that meet
the tax-law definition of a residential co-op. The Mortgage
Relief Act adds two new ways for buildings to qualify as
co-ops, which means more taxpayers will qualify for the favorable co-op
tax rule. This helpful change applies to tax years ending after
December 20, 2007.
5.
Temporary New Break for Firefighters and Emergency Responders - Another
taxpayer-friendly new provision in the Mortgage Relief Act
creates a temporary exclusion from taxable income for members of
qualified volunteer emergency response organizations. For 2008 to 2010,
the exclusion applies to:
A qualified state or local tax benefit is
any reduction or rebate of state or local income, real property, or
personal property taxes on account of services performed as a member of
a qualified volunteer emergency response organization. Amounts treated
as tax-free under this rule must be subtracted from any itemized
deductions for state and local taxes.
A qualified payment is a payment or
reimbursement provided by a state or political subdivision on account
of the performance of services as a member of a qualified volunteer
emergency response organization. However, the taxable income exclusion
for these payments is limited to $30 multiplied by the number of months
during the year that you perform such services. So the maximum
exclusion is only $360.
6. More
Student Housing Eligible for Low-Income Housing Credit - In
a tax break for real estate investors, the Mortgage Relief Act
includes a provision that allows certain full-time students who are
single parents and their children to be eligible residents for purposes
of claiming the low-income housing tax credit, which is based on the
cost of qualified low-income buildings. This favorable change is
effective on December 20, 2007.
Revenue
Raisers: How Congress Paid for the New Provisions
Those are the favorable provisions. Now for
the bad news. The Mortgage Relief Act also includes
new revenue raisers ... better known as tax increases, such as:
Failure to File
Partnership Returns Will Be More Costly. The new law extends the period
for charging the monthly partnership return failure-to-file-penalty
from 5 to 12 months and increases the monthly per-partner penalty from
$50 to $85. This change applies to partnership tax returns due after
December 20, 2007. (Another unrelated new law increases this monthly
penalty $1 to $86 per partner.)
Failure to File S
Corporation Returns Will Also Be More Expensive. The new law imposes a monthly
penalty for failing to file an S corporation return or failing to
provide information required to be shown on the return. The penalty
amount is $85 per shareholder per month up to a maximum of 12 months.
This change applies to S corporation tax returns due after December 20,
2007.
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