Federal Tax Law Changes for 2007 Returns

In letter FS-2008-1 on Jan. 2, 2008, the IRS explained a number of changes that affect 2007 tax returns.

At the end of December, Congress increased the AMT exemption to $66,250 for a married couple filing jointly and $44,350 for single persons and heads of households. For the approximately 13.5 million taxpayers who file the forms affected by the AMT change, they should delay filing until February 11, 2008. After that date, the IRS computers will be updated and able to process AMT calculations for tax returns.

Other changes for 2007 affect the tax extenders such as the educator expense deduction and tuition and fees deduction. These are now in their normal places on the IRS forms. Previously, the tax extenders were passed so late in the year by Congress that they were not on the regular form.

Finally, the IRA contribution limits and many other items were increased. 401(k) elective contributions increase to $15,500. These limits and the additional $5,000 “catch up” amount for persons age 50 to 70½ also apply to 403(b) plans maintained by most nonprofits.

Any gift to charity of cash now requires a written confirmation. This can be a bank record or a written receipt from the charity showing the date and amount of the gift. Receipts are also required for gifts over $250 to charity or for a “quid pro quo” gift. This is a gift over $75 with benefit received from a charity. A typical example of this “benefit received” gift is a donor who pays $100 for a seat at the annual charity gala dinner. The value of the dinner will reduce his or her charitable deduction.

Mileage rates were also adjusted in 2007. The business use rate is 48.5 cents, the medical travel rate is 20 cents per mile and charitable mileage rate 14 cents per mile.

Savings with Tax Credits

In FS-2008-2 the IRS encouraged all taxpayers to take available credits. The credits are particularly valuable, since they reduce taxes dollar-for-dollar.

The earned income tax credit (EITC) is available for working families with incomes under $39,783 or childless workers with incomes under $14,590. Dependent children under age 17 will qualify for a credit of up to $1,000 per child. This is in addition to the $3,400 exemption.

If your child is a dependent and under age 13, then you may qualify for the child and dependent care credit. For parents with students in college, there is a Hope credit for the first two years for students enrolled at least half-time. There also is a lifetime learning credit. Education credits are explained in IRS Publication 970.

The Saver’s credit is available for single persons with incomes under $26,000 and married couples with incomes under $39,000. By contributing to an IRA before April 15, 2008, the Saver’s credit may be claimed.

With the increase in oil prices and energy costs, many home improvements could qualify you for the energy-saving tax credit. Insulation, windows and doors, water heaters, heat pumps and other components may qualify for the $500 credit. In addition, there is a 30% credit for the cost of photovoltaic or solar water-heating units.

eFiling and Free File

During the last filing season, over 77 million taxpayers used the eFile system to send in their returns. Many CPA’s and other tax professionals are now encouraging their clients to use electronic filing. In addition, taxpayers who complete their returns with software from a commercial provider may also use the eFile system. The eFile returns generally benefit from the error checking in the tax preparation software and are likely to have fewer mistakes.

Approximately 95 million taxpayers will also be eligible for IRS FreeFile. The FreeFile online tax program is a joint venture between the IRS and a number of commercial software tax software providers. Individuals with adjusted gross incomes of $54,000 or less are eligible. The FreeFile program is available on www.irs.gov.

Editor’s Note: To access any of the extensive information on the IRS site or to use FreeFile, a person should visit www.irs.gov. There have been millions of email messages to individuals claiming to represent the IRS that are fraudulent. The IRS does not use a .com, .org, .tv, .cc or any other address for its official site. The safe and sure way to access the site is to type in www.irs.gov.

IRA Rollover and Other Extenders “Temporarily” Expire

In November the House passed H.R.3996, the Temporary Tax Relief Act of 2007. It included one-year extensions of many popular tax credits, tax deductions and other tax provisions. Over 25 different tax provisions were included in the bill, but the Senate was not able to pass these provisions by the end of the year. As a result, the 25 provisions technically expired on Dec. 31, 2007.

How likely is passage of these provisions retroactive to January 1, 2008? It is very likely that the “extenders” will be included in legislation during 2008. The history of extenders is that they have been passed every year with no exceptions since 1993. Therefore, it is highly probable that the extenders will be passed again in 2008.

Key extenders bill provisons of interest to tax professionals and charitable organizations are the following:

IRA charitable rollover for individuals over age 70½ up to $100,000 per year.

Enhanced deductions for gifts of “apparently wholesome” food.

Enhanced deduction for gifts of book inventories and computers.

Favorable basis rules on gifts of appreciated property by S corporations.

Expense deduction for elementary and secondary school teachers.

Deduction for qualified tuition-related expenses.