Quick Facts
A number of favorable provisions were extended for 2007-
· The deduction for State Sales Taxes in lieu of State Income Taxes
· The $250 deduction for teacher’s supplies
· The deduction for Tuition and Fees for lower income taxpayers
Increase in credit and phaseout limits
· The Adoption Tax Credit increases to $11,390 and the credit begins to phase out at an AGI of $170,820.
· The Hope credit is equal to 100 percent of the qualified expenses up to the base amount and 50 percent of the qualified expenses in excess of the base amount, up to twice the base amount. For 2007, the base will remain at $1,100. As a result, the maximum Hope Scholarship credit in 2007 will be $1,650 (100 percent of the first $1,100 of qualifying expenses and 50 percent of the next $1,100). Phase out of the Hope Scholarship Credit and Lifetime Learning Credit begins at taxable income of $94,000 for joint filers, $47,000 for singles. That means more individuals can benefit from these two important education credits.
· The above-the-line deduction for student-loan interest is limited to $2,500, but the deduction is phased out beginning at an AGI of $110,000 for married filing jointly, and $55,000 for other taxpayers, completely phased out at $140,000 and $70,000 respectively.
Standard Mileage Rates
· Business-related mileage. For 2007, the standard mileage rate for the cost of operating your car for business use is 48 ½ cents per mile.
· Medical- and move-related mileage. For 2007, the standard mileage rate for the cost of operating your car for medical reasons or as part of a deductible move is 20 cents per mile.
· Charitable-related mileage. For 2007, the standard mileage rate for the cost of operating your car for charitable purposes remains 14 cents per mile.
Charitable Contributions
Effective for contributions made on or after August 17, 2006 you cannot take a charitable contribution deduction for donations of clothing or household items unless the item is in “good used condition or better.” The law does not define “good condition” so you will need to be a little more discriminating with the items you are donating and you may want to take photos of large items to help verify their condition.
Mortgage Insurance Premiums
Treated as Home Mortgage Interest
Premiums that you pay or accrue for “qualified mortgage insurance” during 2007 in connection with home acquisition debt on your qualified home are deductible as home mortgage interest. The amount you can deduct is reduced by 10{eb914d8c00d6b744d02a9a8064b0bfd5c559be7136358887c29ad495da2b8d17} (.10) for every $1,000 ($500 if your filing status is married filing separately) by which your adjusted gross income exceeds $100,000 ($50,000 if your filing status is married filing separately).
Kiddie Tax
Beginning in 2008, the age threshold to escape the ‘Kiddie Tax” increases to 19. That means 2007 is the last year an 18 year old can use the individual tax brackets for investment income, unless at least 50 percent of their future income will be “earned income.” So for those of you in business with children approaching these age limits, who have significant investment income and plan to continue their education, you should consider arranging employment for the child in order to avoid higher taxes on the investment income.
Parents may avoid the necessity of filing a tax return for the child by including the child’s income on their return, but only if the income consists solely of dividends and interest and the amount is between $850 and $8,500.
Health Related Payments
Long Term-Care Premiums:
Deductible long-term-care premiums for taxpayers 71 and older increase to $3,680 per year and the maximum tax free benefit increases to $260 per day. Other long-term-care limits increase as well
Health Savings Plan:
In 2007, a high-deductible health plan is one with an annual deductible of at least $1,100 for individual coverage ($2,200 for family coverage) and maximum out-of-pocket expenses of $5,500 for individual coverage ($11,000 for family coverage).
You can deduct up to $2,850 for individuals, $5,650 for families. The dollar amount of your tax deduction no longer will be restricted to the amount of your insurance deductible. People age 55 and older can make an extra catch-up contribution of $800 in 2007.
A one time transfer of funds from an IRA or a Flexible spending account to a health savings account is permitted for 2007 up the maximum annual HSA limit.
AMT
AMT Exemption Increased for One Year
For tax-year 2007, Congress raised the alternative minimum tax exemption to $66,250 for a married couple filing a joint return, up from $62,550 in 2006. The exemption rises to $33,125 for a married person filing separately, up from $31,275, and it rises to $44,350 for singles and heads of household, up from $42,500.
Retirement Plans
Defined-benefit plans
The maximum defined-benefit plan will increase to $180,000($185,000 for 2008).
Defined-contribution plans
The maximum annual addition to a defined-contribution plan will increase to $45,000 ($46,000 for 2008).
Elective deferrals
The maximum elective deferral an individual may make to all plans permitting a deferral increases to $15,500. While this limit also applies to §401(k) arrangements, however, a SIMPLE plan limits the elective deferrals to $10,500. The catch-up contribution remains at $5,000 for most of these plans; in the case of a SIMPLE §401(k) or SIMPLE plan, the maximum catch-up is $2,500.
Compensation
The compensation that may be taken into account in determining benefits and contributions goes up to $225,000($230,000 for 2008).
Increase in contribution Limits
Limits on contributions to retirement plans are all increased for 2007 . . .
IRA contribution can be $4,000 plus $1,000 for persons over 50. Whether deductible or not, it’s wise to make that IRA contribution as early as possible to begin earning a tax free return.
The phaseout range when Adjusted Gross Income begins to limit a deductible IRA contribution by an “active participant” in an employer plan increases to $83,000 for a couple and $52,000 for a single person and completely phased out at $103,000 and $62,000 resp.
Roth IRA contributions of singles are limited when Adjusted Gross Income exceeds $99,000, marrieds filing jointly are limited when AGI exceeds $156,000.
Rollover of inherited IRA
Some non-spousal heirs may be able to roll inherited amounts from qualified plans into IRA accounts, thereby avoiding current income tax or a 5 year distribution scheme. After 2006, you may be able to roll over tax free all or a portion of a distribution you receive from an eligible retirement plan of a deceased employee. You must be the designated beneficiary of the employee, but you cannot be the surviving spouse. The distribution must be a direct trustee-to-trustee transfer to your IRA that was set up to receive the distribution. The transfer will be treated as an eligible rollover distribution and the receiving plan will be treated as an inherited IRA.
Retirement Savings Contribution credit
Modified AGI Limit for Retirement Savings Contribution Credit Increased
For 2007, you may be able to claim the retirement savings contribution credit if your modified adjusted gross income is not more than:
•$52,000 (up from $50,000) if your filing status is married filing jointly,
•$39,000 (up from $37,500) if your filing status is head of household, or
•$26,000 (up from $25,000) if your filing status is single, married filing separately, or qualifying widow(er).
Your credit rate can be as low as 10{eb914d8c00d6b744d02a9a8064b0bfd5c559be7136358887c29ad495da2b8d17} or as high as 50{eb914d8c00d6b744d02a9a8064b0bfd5c559be7136358887c29ad495da2b8d17}, depending on your adjusted gross income. The lower your income, the higher the credit rate; your credit rate also depends on your filing status.
Earned Income Credit
The maximum earned income tax credit is $4,716 for taxpayers with two or more qualifying children, $2,853 for those with one child and $428 for people with no children. Last year’s maximums were $4,536, $2,747 and $412, respectively.
Available to low and moderate income workers and working families, the EITC helps taxpayers whose incomes are below certain income thresholds, which in 2007 rise to $39,783 for those with two or more children, $35,241 for people with one child and $14,590 for those with no children.
EITC, unlike most tax breaks, is refundable, meaning that people can get it even if they owe no tax and even if no tax is taken out of their paychecks.
Forgiven Debt
Taxpayers can exclude up to $2 million of debt forgiven on their principal residence. The limit is $1 million for a married person filing a separate return. This provision applies to debt forgiven in 2007, 2008 or 2009. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure qualify for this relief.
Gift Tax
Annual Exclusion for Gifts for 2007
For calendar year 2007, the first $12,000 of gifts to any person (other than gifts of future interests in property) are not included in the total amount of taxable gifts made during that year.
For calendar year 2007, the first $125,000 of gifts to a spouse who is not a citizen of the United States (other than gifts of future interests in property) are not included in the total amount of taxable gifts made during that year.
Estate Tax
An estate tax return for a U.S. citizen or resident needs to be filed only if the gross estate exceeds the applicable exclusion amount which is $2,000,000 for 2007 & 2008 and is $3,500,000 for 2009.
Social Security Benefits
Earnings test
The earnings test for those reaching full retirement age during 2007 will be $2,870 per month for all months prior to attaining that age; amounts in excess cause a $1 reduction in benefit for each $3 of excess. For all other beneficiaries who have not reached full retirement age in 2007, the $1 reduction for each $2 of excess earnings begins for monthly earnings in excess of $1,080.
Full retirement age
The full retirement age for persons born in 1941 remains 65 years 8 months, while those born in 1942 may receive full retirement benefits beginning at age 65 years 10 months.
Maximum monthly Social Security benefits
An individual may receive at full retirement age up to $2,116.