With the Tax Code constantly in a state of flux with new tax laws, not to mention delayed effective dates on tax provisions, sunsetting provisions, and phase-ins and phase-outs, every year offers some new wrinkles for tax professionals to worry about.The 2007 tax year is no exception.
As we saw in 2006, sometimes the tax changes for a particular year are not nailed down until December, or sometimes even later. Based on what is currently in the legislative hopper, it is possible at this point to identify new tax provisions for 2007 that tax practitioners and their clients should be aware of, as well as provisions that might expire at the end on 2007 and with respect to which the possible tax benefits may be lost unless action is taken this year.
Let's look at some of those provisions, as well as whether it appears likely that Congress will extend some of them.
* Charitable contributions. Starting with some individual provisions, new for 2007 is the requirement that all cash donations be supported by a bank record or receipt. A client-created record will no longer qualify. Clients should be aware of this requirement so that they can have the necessary documentation come tax time. This change is permanent.
2007 is also the last year that charitable contributions can be made directly from IRA accounts for those over age 70-1/2. It's not clear that Congress will extend this, which first became available for 2006 and, reportedly, has been quite popular.
2007 is also the last year that the more generous adjusted gross income limits on qualified conservation contributions are available. New restrictions also became effective in 2007 with respect to contributions to donor-advised funds.
* Mortgage insurance premium deduction. New for 2007, and currently expiring at the end of 2007, is the mortgage insurance premium deduction. The premiums paid for qualified mortgage insurance can be treated like deductible interest.
* Energy efficient home improvements. While the tax credit for solar and fuel cell home improvements has been extended, the $500 lifetime credit for energy-efficient exterior elements and systems improvements is still due to expire at the end of 2007. The House, in its recently passed bill related to energy, did not include an extension. Clients contemplating energy-saving home improvements may want to try to complete them prior to the end of 2007 to qualify for the credit.
* Retirement plans. The AGI phase-out range for IRA deductions has increased significantly, particularly for married taxpayers filing jointly. The phase-out range is now modified AGI between $83,000 and $103,000. The phase-out range for a deduction for contributions for non-working spouses has also increased, to between $156,000 and $166,000.
The Roth IRA contribution eligibility range is subject to cost-of-living adjustments for the first time in 2007, with a modified AGI range of $156,000 to $166,000 for joint filers and $99,000 to $114,000 for single filers, heads of household, and married-filing-separately taxpayers who lived apart.
Contribution limits for 401(k), 402(b), 457 and Simple plans, which had been subject to statutory increases over the last several years, are, starting in 2007, subject to cost-of-living adjustments, with the maximum contribution increasing to $15,500 in 2007 ($10,500 for Simple plans). With the catch-up, the limit is $20,500 ($13,000 for Simple plans).
The phase-out range for the Retirement Savings Contribution Credit is also subject to cost-of-living adjustments for the first time in 2007. Other new provisions for 2007 permit non-spouse beneficiaries to roll over a distribution from a qualified plan of a deceased employee to an IRA.
* Health Savings Accounts. A number of changes are effective in 2007 for HSAs. The maximum deduction is no longer limited by the amount of the deductible of the related health plan, and a rollover is permitted from an IRA to an HSA. Also, the HSA contribution limit calculation may assume that a taxpayer who is eligible during the last month of the year was eligible for the entire year.
* Alternative Minimum Tax. While under current law the AMT exemption amount will fall sharply in 2007 and a number of tax credits would not be allowed for AMT purposes, Congress is expected to remedy the situation before tax season. Most observers do not believe that Congress will allow an additional 20 million voters to become subject to the AMT in 2007.
One positive AMT change for 2007, particularly helpful for people with a minimum tax carryforward from prior years due to situations such as exercising incentive stock options, is a new AMT refundable credit amount. The credit includes a phase-out tied to the personal exemption phase-out range: AGIs of $234,600 for joint filers and $156,400 for single filers.
* Kiddie Tax. The year 2007 will be the last year that the "Kiddie Tax" is still tied to the under-18 age. In 2008, the age range increases to under 18, under 19 if a dependent, or under 24 if a full-time student and a dependent. Clients whose children would have to sell assets before reaching an age at which they would be free of the Kiddie Tax may want to sell in 2007 for a 5 percent tax rate, rather than face a 15 percent tax rate in 2008 and beyond.
* Other expiring deductions. The sales tax deduction, higher education tuition and fees deduction, and the teachers' out-of-pocket expenses deduction all expire at the end of 2007. While most observers expect Congress to extend these deductions, tax practitioners may want to monitor the situation for their clients. Clients contemplating expenditures related to these deductions may want to do them before the end of the year if their future looks cloudy as the year end approaches.
* Simplified reporting for family businesses. Moving now to some business-related provisions, spouses in business together who, in the past, were required to file as a partnership but who in fact often allocated all of the income to one spouse to avoid the complexities of the partnership return, may now report the business on a separate Schedule C for each spouse. This will permit both spouses to qualify for Social Security.
* Small business expensing. The Code Section 179 small business expensing election limit has been increased to $125,000 for 2007 and the asset phase-out increased to $500,000. In the GO Zone set up following the Gulf Coast hurricanes in 2005, those limits are $225,000 and $1.1 million, respectively.
* Domestic Production Activities Deduction. For 2007, the Code Sec. 199 deduction doubles from 3 percent to 6 percent. Tax practitioners who checked on the deduction a couple of years ago for their clients and decided that it was not worth the trouble will want to do a recalculation based on the more generous 2007 limit.
* Musical compositions and copyrights. Creators of musical compositions may for the first time in calendar year 2007 treat the composition or copyright of that work as a capital asset in their hands.
* Work Opportunity Tax Credit. A number of changes to the Work Opportunity Tax Credit are effective in 2007. The welfare-to-work credit was merged into the Work Opportunity Credit. The Work Opportunity Credit is also allowed for AMT purposes. Changes have been made to categories of eligible employees affecting qualified veterans, ex-felons, food stamp recipients and designated community residents. The due date for Form 8850, the pre-screening notice and certification request, has been extended by a week, and a list of rural counties qualifying under the "designated community residents" category has been added.
* FICA credit for employee tips. In a change that really preserves the status quo, the FICA credit for employee tips can still be calculated based on the old minimum wage rate of $5.15 per hour, rather than the new minimum wage rates that started to take effect in 2007. The FICA tip credit is also allowed for AMT purposes starting in 2007.
As usual, Congress has provided a few twists and turns to keep on top of as the year progresses. Practitioners should alert their clients to new 2007 provisions as soon as possible so that their clients can take maximum advantage of them for 2007. Similarly, practitioners will want to monitor the status of provisions changing at the end of 2007, so their clients can take advantage of them while they are still available in the event that the break disappears or becomes more restrictive in 2008.
George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at CCH, a Wolters Kluwer business.
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