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The accounting firm of Wegner LLP is pleased to provide this update of tax changes for 2007. This article hits only the high spots. Your particular situation may require the counsel of a tax professional.
By John Gillis, CPA
Line 7. Elective salary deferrals. The maximum amount that an individual can defer under all contributory retirement plans is generally limited to $15,500. Individuals over 50 can make a catch-up contribution of $5,000.
Line 23. The $250 educator expense deduction may still be taken for 2007.
Line 25. Health Savings Account deduction. Beginning in 2007, (1) an individual can fund his HSA by making a one-time direct transfer from his IRA to his HSA; (2) qualifying health FSA or HRA distributions may be rolled over on a one-time-only basis via direct transfer to an HSA; (3) the maximum deductible contribution is no longer limited to the annual deductible under the high deductible plan; (4) for computing the annual HSA contribution, a taxpayer who is an eligible individual in the last month of a tax year is "deemed eligible" during every month of that year (he must remain eligible during a testing period); and (5) an individual is allowed a maximum HSA contribution of $2,850 for single coverage ($5,650 for family coverage).
Line 26. Moving expenses. The deduction for moving expenses stemming from job relocations is 20¢ per mile.
Line 32. IRA deduction. The IRA contribution limit is $4,000 ($5,000 if over 50 at the end of 2007). For 2007, the AGI phaseout ranges for making deductible contributions to regular IRAs by taxpayers who are active participants in an employer-sponsored retirement plan are higher (e.g., $83,000 to $103,000 for joint return filers).
Line 40. Standard deduction. For 2007, the standard deduction is $5,350 for single filers and for married persons filing separately, $10,700 for joint filers and qualifying widow(er)s, and $7,850 for heads of household.
Line 42. Personal exemptions. The exemption for 2007 is $3,400. Exemption starts to phase out if adjusted gross income exceeds: $156,400 for single filers, $117,300 for married persons filing separately, $234,600 for joint filers and qualifying widow(er)s, and $195,500 for heads of household. For 2007, a taxpayer loses only 2/3 of the amount he would otherwise lose under the regular phaseout computation.
Line 45. Alternative Minimum Tax. On Dec. 19, 2007, the House of Representatives approved the Senate-passed version of the “Tax Increase Prevention Act of 2007” (Act) , thus clearing the Act for the president's signature. The Act provides for a one-year patch of the Alternative Minimum Tax (AMT) for 2007 and allows additional credits against AMT. The AMT is the excess, if any, of the tentative minimum tax for the year over the regular tax for the year. In arriving at the tentative minimum tax, an individual begins with taxable income, modifies it with various adjustments and preferences, and then subtracts an exemption amount (which phases out at higher income levels). The result is alternative minimum taxable income (AMTI), which is subject to an AMT tax rate of 26% or 28%.
Under the Tax Increase Prevention Act, the AMT exemption amounts (before phaseout) for 2007 for individuals are: 1)$66,250 for married individuals filing jointly and surviving spouses (up from $62,550 for 2006); 2) $44,350 for unmarried individuals (up from $42,500 for 2006); and $33,125 for married individuals filing separately (up from $31,275 for 2006).
As this is being written the instructions for Form 6251, on which the AMT is calculated, had not been published. Please carefully check the exemption when you prepare your return.
Under pre-Act law, personal nonrefundable credits for 2007, other than the child credit, the adoption credit, and low income saver's credit, couldn't have exceeded the excess of regular tax liability over the tentative minimum tax.
Under the Act, for tax years beginning in 2007, the combined total of the following credits is limited to the sum of: regular tax liability reduced by the foreign tax credit: a) dependent care credit; b) credit for the elderly and permanently and totally disabled; c) mortgage credit; d) child tax credit; e) Hope and Lifetime Learning credits; f) adoption credit; g) lower income saver's credit; h) non-business energy property credit for energy-efficient improvements to a principal residence; i) residential energy efficient property credit for photovoltaic, solar hot water, and fuel cell property added to a residence; and j) first-time D.C. homebuyer credit.
In other words, under the Act, the sum of the above credits may offset both regular tax and AMT.
The "kiddie tax". A child subject to the kiddie tax pays tax at his or her parents' highest marginal rate on the child's unearned income over $1,700 for 2007 if that tax is higher than the tax the child would otherwise pay on it. A child is subject to the kiddie tax if he or she has not attained age 18 before the close of the tax year; either parent of the child is alive at the end of the tax year; and the child does not file a joint return for the tax year.
Broadened kiddie tax. For tax years beginning after May 25, 2007, the Small Business Act expands the kiddie tax rules to apply to children age 18, and children over age 18 but under age 24 who are full-time students – if their earned income doesn't exceed one-half of the amount of their support.
Line 49. Education credits. For 2007, the Hope and Lifetime credits phase out ratably for taxpayers with modified AGI of $47,000 to $57,000 ($94,000 to $114,000 for joint filers). Use Form 8863.
Line 54. Credits from certain forms. This line is used to report the adoption credit from Form 8839. The maximum adoption credit for 2007 is $11,390, and begins to phase out when modified AGI exceeds $170,820.
Line 58. Self-employment tax. Maximum amount of self-employment income subject to FICA tax is $97,500; no ceiling on Medicare wage base.
Line 67. Excess Social Security and RRTA tax withheld. Maximum Social Security (OASDI) tax for 2007 is $6,045 (computed on the first $97,500 of wages) for purposes of credit for excess tax withheld.
Schedule A Itemized Deductions 2007
Line 1. Medical and dental expenses. The standard mileage rate for medically related use of an auto is 20¢ per mile.
Line 13. Qualified mortgage insurance premiums. A homeowner who obtains a qualified mortgage in 2007, and whose AGI is less than $110,000 ($55,000 if married filing separately), may be able to deduct some of the mortgage insurance premiums paid during the tax year (as if they were mortgage interest) as an itemized deduction.
Line 16. Gifts to charity. Charitable deductions will be denied for post-August 17, 2006, contributions of clothing and household items that are not in good used condition or better (but deduction may be allowed if amount claimed for the item exceeds $500 and the taxpayer includes a qualified appraisal of the item with his return). Household items include furniture, furnishings, electronics, appliances, linens, and other similar items, but don't include food, paintings, antiques, and other art objects, jewelry, gems, or collections. In addition, the IRS may deny a deduction for any contribution of clothing or a household item with minimal monetary value, such as used socks or undergarments.
For cash contributions, the taxpayer must keep either a cancelled check, receipt or other reliable evidence. Charitable contributions of $250 must be substantiated by a contemporaneous written acknowledgement (not just a cancelled check) from the charity. In general, the written acknowledgment must state: (1) the amount of cash and a description (but not the value) of any property other than cash contributed; (2) whether the charity provided any goods or services in consideration for the contribution; (3) a description and good-faith estimate of the value of those goods or services; and (4) if the goods or services consist entirely of intangible religious benefits (e.g., admission to a religious ceremony, but not religious school tuition or fees), a statement to that effect
Line 20. Unreimbursed employee expenses. The standard mileage rate is 48.5¢ per mile for 2007.
Line 28. Total itemized deductions. The allowable amount of itemized deductions will be reduced if adjusted gross income in 2007 is more than $156,400 ($78,200 for married filing separately). For 2007, a taxpayer will lose only 2/3 of the amount he would otherwise lose under the regular reduction computation.
Schedule B Interest And Dividend Income 2007
Line 1. Interest. Accrued interest on Series E U.S. Savings Bonds issued in 1967 or in 1977 is taxable.
Line 3. Excludable interest on Series EE or Series I U.S. Savings Bonds. The exclusion for education related savings bond interest phases out at higher income levels. For 2007, the phaseout begins at modified adjusted gross income above $65,600 ($98,400 on a joint return).
Line 9. Car and truck expenses. The standard mileage rate is 48.5¢ per mile for 2007.
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Line 11. The subtraction for college tuition paid is expanded to include mandatory student fees. The maximum subtraction is increased from $4,536 per student to $4,843. The subtraction for medical care insurance now applies to people who are not employed and have no self-employment income. Premiums paid for Medicare Parts B and D are considered payments for medical care insurance. Amounts received as a Wisconsin incentive payment relating to the use of land for all terrain vehicle corridors are exempt from income and franchise tax.
Line 30. Three new credits are available – the Enterprise Zone Jobs Credit, The Internet Equipment Credit, and the Manufacturing Facility Investment Credit. All of these credits need to be certified by the Wisconsin Department of Commerce.
Posted January 3, 2008