In the last few days before Congress adjourned for 2007, a number of tax law changes finally made it through the two chambers and on to President Bush. The president has either already signed or indicated his willingness to sign each piece of legislation. Several of the provisions enacted will have an impact on 2007 tax returns.Even with this flurry of activity, a number of pieces of legislation, including most of the energy-related tax proposals, an agriculture bill with tax provisions, military tax relief, and the extension of expiring provisions, as well as a fairly extensive list of offsetting revenue raisers, got left off the table and will be addressed again in 2008. The following is a summary of each of the tax laws enacted, the principal provisions, and the impact, if any, on 2007 tax returns.
AMT RELIEF
After much delay and bickering over whether Alternative Minimum Tax relief needed to be paid for, Congress finally agreed that AMT relief needed to be passed in spite of the impasse. The AMT relief provision as enacted raises the AMT exemption amount to $44,350 for single filers and $66,250 for joint filers for 2007. The legislation also includes the extension of the provision allowing nonrefundable credits for AMT purposes for 2007. The legislation passed without any offsetting revenue-raising provisions attached.
Indications from the Internal Revenue Service had been that it needed seven weeks to update its systems for any changes to kick off the 2007 return-processing season on Jan. 14, 2008. Congress has provided the IRS with only about half of that time. It seems likely, therefore, that the 2007 filing season will be somewhat delayed, and some refunds will be delayed, unless the IRS finds a way to speed up the update of its systems from its projected time requirements.
MORTGAGE DEBT
Congress’ response to the sub-prime mortgage crisis has been the enactment of the Mortgage Forgiveness Debt Relief Act of 2007. The key provision of the legislation is a three-year mortgage debt forgiveness exclusion for up to $2 million in qualified acquisition debt on a principal residence, retroactive to Jan. 1, 2007.
The legislation also extends the mortgage insurance premium deduction for three years, includes an exclusion for benefits to volunteer firefighters and emergency medical responders, extends the joint return sale-of-principal-residence exclusion to certain post-marriage sales by surviving spouses, clarifies student housing eligible for the low-income housing credit, and provides alternative tests for qualifying as a cooperative housing corporation.
To pay for these provisions, the legislation increases the penalty on failure to file partnership returns, imposes a new one on shareholders of S corps for failure to file returns, and modifies the amounts due on particular dates with respect to estimated taxes due from large corporations. In addition to the mortgage debt forgiveness exclusion, other provisions effective for 2007 tax returns are those with respect to student housing, cooperative housing corporations, and the penalty provisions with respect to failure to file partnership and S corp tax returns.
TECHNICAL CORRECTIONS
The final tax legislation approved as Congress left town for 2007 was a technical corrections bill. The House had passed technical corrections as part of the military tax bill; however, when the military bill looked like it would be modified in the Senate, requiring referral back to the House, the House passed a stand-alone technical corrections bill and sent that to the Senate as a second option as the House was adjourning.
The modified military bill was left for further action in 2008, but the Senate did pass the stand-alone technical corrections bill. The legislation is composed of a number of technical corrections to nine prior tax acts going as far back as the IRS Restructuring and Reform Act of 1998.
Among some of the topics addressed are the AMT refundable credit amount; tax-free distributions from IRAs for charitable purposes; contributions of charitable property by S corporations; contributions of fractional interests in tangible personal property; the base of tax on private foundation net investment income; donor-advised funds; excess benefit transactions involving supporting organizations; look-through rules with respect to foreign personal holding company income; the determination of tax liability for U.S. citizens and residents living abroad; the active business definition for distributions of stock and securities of a controlled corporation; the national limitation for the credit for production from advanced nuclear power facilities; the alternative-fuel vehicle refueling property credit; the research credit; the credit for production of low-sulfur diesel fuel; the credit for electricity produced from certain renewable resources; the straddle rules; rents from real property with respect to real estate investment trusts; disclosures of chief counsel advice; and several excise taxes, as well as a large number of clerical corrections.
President Bush had indicated his willingness to sign this legislation when it reaches his desk. Technical corrections generally relate back to the laws to which they are making amendments and will, in general, therefore have a potential impact on 2007 tax returns.
ENERGY LEGISLATION
Although Congress passed significant energy legislation at year-end, the tax breaks that had been included as part of the legislation were stripped out in the Senate prior to passage.
The two surviving tax provisions of the Energy Independence and Security Act of 2007 are revenue raisers: an extension of the additional 0.2 percent Federal Unemployment Tax Act surtax, which has been around since 1976, and seven-year amortization of geological expenditures for certain major integrated oil companies. The change from five-year amortization is effective for amounts paid or incurred after Dec. 19, 2007.
VIRGINIA TECH EXCLUSION
Congress passed earlier in December tax legislation providing for an exclusion from gross income for payments from the Hokie Spirit Memorial Fund to victims of the Virginia Tech shooting tragedy. The provision applies to any payments made on account of the April 16, 2007, shooting at Virginia Tech. The revenue offset for this provision is a $1 increase in the penalty for failing to file partnership returns.
SUMMARY
At press time, the IRS had issued a release saying that it will do its best to start the processing of tax returns as soon as possible, but that with this late congressional action, it anticipated that there may be some delays. Tax practitioners will also want to make sure that, before returns are filed for 2007, they have taken into account this end-of-year tax legislation.
With the appropriations for fiscal year 2008 finally approved as Congress left town, the IRS was also granted additional funding to permit it to continue to press forward with its enforcement activities to help pay for those tax breaks that passed without being paid for.
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.
