Tax changes for individuals in tax year 2007

Alternative Minimum Tax (AMT)

The following changes to the AMT went into effect for 2007.

AMT exemption amount decreased. The AMT exemption amount has decreased to
$33,750 if single
$45,000 if married filing jointly or qualifying widow(er)
$22,500 if married filing separately.

Exemption amount for a child. The minimum exemption amount for a child under age 18 has increased to $6,300.

Hurricane Katrina additional exemption expired. The additional exemption for taxpayers who provide housing for a person displaced by Hurricane Katrina has expired. Therefore, the additional exemption amount (formerly line 6 of Form 8914) is no longer allowable for the AMT.
Certain credits no longer allowed against the AMT. The following credits:
*The credit for child and dependent care expenses,
*credit for the elderly or the disabled,
*education credits,
*residential energy credits,
*mortgage interest credit, and
*the District of Columbia first-time homebuyer credit
are no longer allowed against the AMT, and a new tax liability limit applies. This limit is your regular tax minus any tentative minimum tax (figured without any AMT foreign tax credit).

Standard Mileage Rate

Business-related mileage. For 2007, the standard mileage rate for the cost of operating your car for business use is 48.5 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.

Earned Income Credit (EITC)

The following paragraphs explain the changes to the credit for 2007.

Amount of credit increased. The maximum amount of the credit has increased. The most you can get is:
$2,853 if you have one qualifying child,
$4,716 if you have more than one qualifying child, or
$428 if you do not have a qualifying child.

Earned income amount increased. The maximum amount of income you can earn and still get the credit has increased for 2007. You may be able to take the credit of $1 to $4 if:
You have two qualifying children and you earn less than $37,783 ($39,783 if MFJ),
You have one and you earn less than $33,241 ($35,241 if MFJ), or
You do not have a qualifying child and you earn less than $12,590 ($14,590 if MFJ).

The maximum amount of adjusted gross income (AGI) you can have and still get the credit also has increased. You may be able to take the credit if your AGI is less than the amount in the above list that applies to you.

Investment income amount increased. The maximum amount of investment income you can have and still get the credit has increased to $2,900 for 2007.

Advance payment of the credit. If you get advance payments of the credit from your employer with your pay, the total advance payments you get during 2007 can be as much as $1,712.

Nontaxable combat pay election extended. You can elect to have your nontaxable combat pay included in earned income when you figure your earned income credit for 2007.

Standard Deduction Amount Increased

The standard deduction for people who do not itemize deductions on Schedule A (Form 1040) is, in most cases, higher for 2007 than it was for 2006.

Exemption Amount Increased

The amount you can deduct for each exemption has increased to $3,400 in 2007.

You lose part of the benefit of your exemptions if your adjusted gross income is above a certain amount. For 2007, the phaseout begins at:
$117,300 for married persons filing separately,
$156,400 for single individuals,
$195,500 for heads of household, and
$234,600 for MFJ or qualifying widow(er)s.

Charitable Contributions

New recordkeeping requirements for cash contributions. You cannot deduct a cash contribution, regardless of the amount, unless you keep as a record of the contribution a bank record (such as a canceled check, a bank copy of a canceled check, or a bank statement containing the name of the charity, the date, and the amount) or a written communication from the charity. The written communication must include the name of the charity, date of the contribution, and amount of the contribution.

Contributions to donor advised funds. You cannot deduct a contribution to a donor advised fund after February 13, 2007, if the sponsoring organization is a war veterans' organization, a fraternal society, or a nonprofit cemetery company. There are also other circumstances in which you cannot deduct your contribution to a donor advised fund.

Filing fee for easements on buildings in historic districts. A new $500 filing fee must be paid for each qualified conservation contribution after February 12, 2007, that is an easement on a building in a registered historic district, if the claimed deduction is more than $10,000.

Social Security and Medicare Taxes

The maximum amount of wages subject to the social security tax for 2007 is $97,500. There is no limit on the amount of wages subject to the Medicare tax.

Income Limits Increased for Student Loan Interest Deduction

For 2007, the amount of the student loan interest deduction is phased out if your MAGI is between $55,000 and $70,000 (between $110,000 and $140,000 if MFJ).

Income Limits Increased for Hope and Lifetime Learning Credits

For 2007, the amount of your Hope or lifetime learning credit is phased out (gradually reduced) if your MAGI is between $47,000 and $57,000 ($94,000 and $114,000 if you file MFJ).

Earned Income Amount for Additional Child Tax Credit

For 2007, the minimum earned income amount used to figure the additional child tax credit has increased to $11,750.

Mortgage Insurance Premium Deduction

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 an itemized deduction. The amount you can deduct is reduced by 10% (.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).

Mortgage insurance premiums you paid or accrued on any mortgage insurance contract issued before January 1, 2007, or accrued after December 31, 2007, or that are properly allocable to any period after December 31, 2007, are not deductible as an itemized deduction.

Qualified mortgage insurance. Qualified mortgage insurance is mortgage insurance provided by the Veterans Administration, the Federal Housing Administration, or the Rural Housing Administration, and private mortgage insurance.

Limit on Itemized Deductions Increased

If your adjusted gross income is above a certain amount, you may lose part of your itemized deductions. In 2007, this amount is increased to $156,400 ($78,200 if MFS).

Health Savings Accounts (HSAs)

High deductible health plan (HDHP). For HSA purposes, the minimum annual deductible of an HDHP increases to $1,100 ($2,200 for family coverage) and the maximum annual deductible and other out-of-pocket expenses limit increases to $5,500 ($11,000 for family coverage).

Deductible limitation on contributions. The annual deductible limitation for contributions to your HSA based on the amount of your health insurance deductible is repealed. For 2007, the maximum HSA deduction increases to $2,850 ($5,650 for family coverage) regardless of the amount of your health insurance deductible. The maximum additional deduction for individuals age 55 or older increases to $800.

Transfers from an individual retirement account (IRA) to an HSA. You can elect to make a one-time direct trustee-to-trustee transfer from your IRA (other than a Simple IRA or a SEP IRA) to your HSA. The maximum amount you can transfer is the maximum HSA contribution limitation for the year. The amount transferred is not included in your income, is not deductible, and reduces your HSA contribution limitation for the year.

Adoption Benefits Increased

For 2007, the maximum adoption credit has increased to $11,390. Also, the maximum exclusion from income for benefits under your employer's adoption assistance program has increased to $11,390.

These amounts are phased out if your MAGI is between $170,820 and $210,820.

Income Limits Increased for Reduction of Education Savings Bond Exclusion

For 2007, the amount of your interest exclusion is phased out (gradually reduced) if your filing status is MFJ or qualifying widow(er) and your MAGI is between $98,400 and $128,400.

For all other filing statuses, your interest exclusion is phased out if your MAGI is between $65,600 and $80,600.

Credit for Prior Year Minimum Tax

If you have any unused minimum tax credit carry forward from 2003 or earlier years, your minimum tax credit allowable for 2007 is not less than the “AMT refundable credit amount.” In addition, a portion of the credit may be refundable in 2007.

Increase in Deductible Limit for Long-Term Care Premiums

For 2007, the maximum amount of qualified long-term care premiums you can include as medical expenses has increased. You can include qualified long-term care premiums, up to the amounts shown below, as medical expenses on Schedule A (Form 1040).
*Age 40 or under - $290.
*Age 41 to 50 - $550.
*Age 51 to 60 - $1,110.
*Age 61 to 70 - $2,950.
*Age 71 or over - $3,680.
Note. The limit is for each person.

Increase in Limit on Long-Term Care and Accelerated Death Benefits Exclusion

The limit on the exclusion for payments made on a per diem or other periodic basis under a long-term care insurance contract increases for 2007 to $260 per day.

The limit applies to the total of these payments and any accelerated death benefits made
on a per diem or other periodic basis under a life insurance contract because the insured is chronically ill.

Archer MSA Limits Increased

For Archer MSA purposes for 2007, the minimum annual deductible of a high deductible health plan increases to $1,900 ($3,750 for family coverage).

The maximum annual deductible of a high deductible health plan increases to $2,850 ($5,650 for family coverage).

The maximum out-of-pocket expenses limit increases to $3,750 ($6,900 for family coverage).

Capital Asset Treatment for Self-Created Musical Works

Musical compositions and copyrights in musical works are generally not capital assets. However, you can elect to treat these types of property as capital assets if you sell or exchange them in tax years beginning after May 17, 2006, and:
Your personal efforts created the property, or
You acquired the property under circumstances (for example, by gift) entitling you to the basis of the person who created the property or for whom it was prepared or produced.

Whistleblower Fees

If you receive an award from the IRS for information provided after December 19, 2006, that substantially contributes to the detection of violations of tax laws by the IRS, you may be able to deduct attorney fees and court costs paid by you in connection with the award, up to the amount of the award includible in your gross income on account of the award, as an adjustment to income.

Frivolous Tax Submissions

For returns filed after March 15, 2007, the penalty for filing a frivolous tax return is increased to $5,000. The $5,000 penalty also applies to other specified frivolous submissions made and issues raised after March 15, 2007.

Notice 2007-30, which will be published in Internal Revenue Bulletin 2007-14, contains a list of frivolous positions that will trigger the increased penalty amount. The penalty is in addition to any other penalty provided by law.

Expired Tax Benefits

Relief granted for Hurricanes Katrina, Rita, and Wilma. The following tax benefits have expired and will not apply for 2007.
*Tax-favored treatment of qualified hurricane distributions from eligible retirement plans.
*Increased limits and delayed repayment on loans from qualified employer plans.
*Special rules so a temporary relocation did not affect whether you provided more than half of an individual's support, whether you furnished more than half the cost of keeping up a household, and whether you could treat an individual as a student.
*Increased limits and an expanded definition of qualified education expenses for the Hope and lifetime learning credits.
*Additional exemption for housing individuals displaced by Hurricane Katrina.
*Exclusion from income for discharge of nonbusiness debt by reason of Hurricane Katrina.

Qualified electric vehicle credit. You cannot claim this credit for any vehicle you placed in service after 2006.