CLIENT REPORT:
Congress Passes
AMT Patch And More Year-End Tax Legislation
Dear Client:
Happy New Year! For many of you, the New Year is a
little brighter now that Congress has passed an alternative minimum tax (AMT) Apatch.@ The patch and a host of other bills passed Congress
just before lawmakers left Washington, D.C. in late December for their holiday
recess.
AMT patch
The patch is a temporary fix to a big problem. Nearly
40 years ago, Congress created the AMT so that a handful of very wealthy
taxpayers would not avoid taxation. The idea worked well at the beginning but
over time inflation has eroded the value of the dollar. That handful of very
wealthy taxpayers has grown to be many millions. Even more taxpayers,
especially taxpayers with household incomes of between $75,000 and $100,000,
would have been liable for the AMT this year but for the patch. The Treasury
Department predicted that without the patch, up to 25 million taxpayers would
face an average tax increase of $2,000 for the 2007 tax year.
The patch prevents the AMT from spreading by giving
taxpayers higher exemption amounts and allowing them to use most nonrefundable
personal credits to offset AMT liability for the 2007 tax year. The 2007 AMT
exemption amounts are $44,350 for single taxpayers and heads of household;
$66,250 for married couples filing jointly; and $33,125 for married couples
filing separately. These amounts are slightly higher than the 2006 exemption
amounts, which is also good news for many taxpayers.
The new law allows taxpayers to use most nonrefundable
personal credits to offset AMT liability. These include the HOPE and Lifetime
Learning credits and the District of Columbia first-time homebuyers= credit. The adoption, child and saver=s credits were already allowed under prior law to the
full extent of a taxpayer=s regular tax and AMT.
Calculating the AMT is far from simple. In fact, it is
one of the most complicated provisions in the U.S. Tax Code. The patch is also
very complex. Our office is ready to help you. If you have any questions about
the patch and AMT liability, please give us a call today.
2008 filing season
The IRS needs time to reprogram its computer systems
for the patch. According to top IRS officials, the agency could need as many as
seven to 10 weeks to reprogram its systems for the patch. The start of the 2008
filing season is already less than seven to 10 weeks away. Consequently, return
processing and refunds could be delayed. The IRS has promised to get its
computer systems reprogrammed as quickly as possible and to ensure that they
process returns with 100 percent accuracy.
Some filers may have to wait until February 11, 2008
to file their returns, the IRS has indicated. Everyone else, according to the
IRS, should not experience delays. I=ll
monitor the latest news from the IRS and keep you updated. The IRS has already
revised many of the 2007 tax forms that are impacted by the AMT patch.
According to the IRS, taxpayers filing the following
forms may experience delays. The forms are Form 8863, Education Credits; Form
5695, Residential Energy Credits; Form 1040A Schedule 2, Child and Dependent
Care Expenses for Form 1040A Filers; Form 8396, Mortgage Interest Credit; and
Form 8859, District of Columbia First-Time Homebuyer Credit. Additional forms
are affected by the AMT patch but the IRS has indicated that it has
successfully reprogrammed its computer systems to begin processing those forms.
The IRS Oversight Board has estimated how long
potential delays may be and how many taxpayers will be affected. The Oversight
Board is a group of individuals that do exactly what their title says...they
oversee the agency. According to the Oversight Board, if the filing season
starts on January 28, 2008, approximately 6.7 million tax returns will be delayed
and $17 billion in refunds will not be issued. If the filing season starts on
February 4, 2008, roughly 15 million tax returns will be delayed and $39
billion in refunds will not be issued. If the filing season starts on February
18, 2008, nearly 38 million tax returns will be delayed and $87 billion in
refunds will not be issued.
Foreclosure relief
The housing boom in many areas of the country is in
danger of becoming a housing bust. Problems in the lending industry, especially
with so-called subprime mortgages, have contributed to the slide in home sales
and home values. Congress and the Bush Administration have proposed a variety
of measures to help homeowners who are caught in the mortgage meltdown. One
measure is in the recently-enacted Mortgage Forgiveness Debt Relief Act of
2007.
When a lender forecloses on property, sells the home
for less than the borrower=s outstanding mortgage and forgives all or part of the
mortgage debt, the Tax Code treats the cancelled debt as taxable income to the
taxpayer. The new law temporarily excludes from taxation discharges involving
up to $2 million of indebtedness ($1 million for a married taxpayer filing a
separate return) secured by a principal residence and incurred in the
acquisition, construction or substantial improvement of the residence.
Let=s take a look at an example. Cara=s principal residence is subject to a $300,000
mortgage debt. Cara=s creditor forecloses in 2008. The residence is sold
for $240,000 in satisfaction of the debt later that year. Cara has $60,000 in
income from the discharge of indebtedness. Before the new law, the $60,000
would have been includible in Cara=s gross
income. Now, it is exempt.
The new law also addresses mortgage workouts.
Sometimes, a mortgage workout or renegotiation may result in forgiveness of
indebtedness income that would be taxable. The new law helps these taxpayers by
giving them a full exclusion, too.
The exclusion in the new law is only temporary.
Taxpayers have three years, until December 31, 2009, to take advantage of the
change. The exclusion is also retroactive to January 1, 2007.
If you have any questions about foreclosure relief,
give my office a call. I=ll explain the fine points of the new law and explore
if it can benefit you. I=ll also keep an eye on further developments to help
taxpayers facing foreclosure and reforms for the lending industry when Congress
returns to work after its holiday recess.
Mortgage insurance deduction
In addition to foreclosure help, Congress also
extended the itemized mortgage insurance deduction for three years. If you=re unsure if your mortgage insurance qualifies, give
my office a call. I=ll let you know.
Survivor's home sale exclusion
The new law may also help some recently-widowed
individuals. The new law extends the time in which a surviving spouse may use
the joint-filers= $500,000 home sale gain exclusion before being
treated as a single individual who is entitled to the $250,000 home sale
exclusion. As of January 1, 2008, the sale of a residence that had been jointly
owned and occupied by the surviving spouse and the deceased spouse is entitled
to the $500,000 exclusion if the sale occurs no later than two years after the
death of the individual=s spouse. Some special rules about use and occupancy
also apply.
Tax acts
As if the AMT patch and foreclosure help weren=t enough last-minute tax legislation, Congress also
passed a package of technical corrections to past tax laws, tax relief for
volunteer emergency responders, an energy bill with some tax-related provisions,
legislation to clarify the term of the IRS Commissioner, a bill to exclude
memorial fund payments from gross income for the victims of the 2007 Virginia
Tech tragedy, and an IRS budget for FY 2008.
Congress gave the IRS more money for enforcement in the
agency=s FY 2008 budget. The IRS is under great pressure from
Congress to close the tax gap. That=s the
difference between what taxpayers owe and what they actually pay. The IRS
estimates that the tax gap is roughly $300 billion. One of the IRS= most controversial initiatives to help close the tax
gap is outsourcing tax collection. The IRS has contracted with several private
collection agencies to work on what it calls minor cases, but it may expand the
program to more substantial cases. The House voted to end outsourcing when it
passed an IRS appropriations bill. However, the final appropriations bill does
not eliminate the program.
Looking ahead
Lawmakers still have a lot of tax legislation on their
agenda when they return from their holiday recess. The House and the Senate
have passed different versions of a military tax relief package. They also have
passed different versions of a farm bill, which includes many farm-related tax
breaks. Lawmakers are expected to iron-out the differences in both of these
bills in early 2008.Congress also may pass a package of extenders. These are
popular but temporary tax breaks, such as the state and local sales tax
deduction, the higher education tuition deduction and the teacher=s classroom expense deduction. Congress could also
revisit some of the consumer tax incentives that were dropped from the final
energy bill, including extending some tax breaks for energy-efficient
improvements to your home. There=s also
talk on Capitol Hill of holding hearings on abolishing the AMT. I=ll be sure to keep you posted of all the important tax
legislative developments in 2008.
As always, please do not hesitate to contact me if you
have any questions about these new tax laws or pending bills. Meanwhile, I=ll be watching for more developments to help you plan
a tax strategy that meets your needs.
Sincerely yours,
Julie M. Straw, CPA
Reproduced with permission from CCH=s Client Letter, published and copyrighted by CCH
Incorporated, 2700 Lake Cook Road, Riverwoods, IL 60015.