Alternative Minimum Tax
In a flurry of year-end activity, Congress passed a number of measures to help middle income taxpayers, homeowners facing foreclosure, victims of the Virginia Tech tragedy and more. The most notable of these measures is the Tax Increase Prevention Act of 2007, providing AMT relief designed to keep millions of middle-income taxpayers out of reach of the AMT for the 2007 tax year.

On December 26, 2007 President Bush signed the one-year extension of the Alternative Minimum Tax (AMT) patch, effective January 1, 2007. Absent enactment of the temporary fix, the administration predicted that an estimated 25 million taxpayers would pay on average an additional $2,000 in taxes for the 2007 tax year.

The Tax Increase Prevention Act of 2007 increases the AMT exemption amount for 2007 to $44,350 for single taxpayers and heads of households, $66,250 for married couples filing jointly, and $33,125 for married couples filing separately. The new law allows taxpayers to use most nonrefundable personal tax credits to offset AMT liability. These include the dependent care, HOPE and lifetime learning education credits and the District of Columbia first-time homebuyer's credit.

The Internal Revenue Service announced that the upcoming tax season is expected to start on time for everyone except certain taxpayers potentially affected by late enactment of the Alternative Minimum Tax "patch." Following extensive work in recent weeks, the IRS expects to be able to begin processing returns for the vast majority of taxpayers in mid-January. However, as many as 13.5 million taxpayers using five forms related to the Alternative Minimum Tax (AMT) legislation will have to wait to file tax returns until the IRS completes the reprogramming of its systems for the new law.

The IRS has targeted Feb. 11^th as the potential starting date for taxpayers to begin submitting the five AMT-related returns affected by the legislation. The February date allows the IRS enough time to update and test its systems to accommodate the AMT changes without major disruptions to other operations related to the tax season. As the IRS has said previously, it will take approximately seven weeks after the AMT patch was approved to update IRS processing systems completely. Although as many as 13.5 million taxpayers will not be able to file their returns until Feb. 11^th the effect of the delay may be lessened by the fact that under previous filing patterns only between 3 million to 4 million taxpayers file returns with the five affected forms during the early weeks in the filing season.

The IRS announced in IR-2007-209 that the tax season is expected to start on time for everyone except taxpayers filing any of the following five forms:

1. Form 8863, Education Credits
2. Form 5695, Residential Energy Credits
3. Form 1040A’s, Schedule 2, Child and Dependent Care Expenses for Form 1040A Filers

NOTE: You can get your refund immediately if we file your tax return as a 1040 with Form 2441 instead of filing as a 1040A with Schedule 2.

4. Form 8396, Mortgage Interest Credit
5. Form 8859, District of Columbia First-Time Homebuyer Credit

Electronic returns involving these five forms will not be accepted until IRS systems are updated. In addition, the IRS indicates that paper filers should wait to file as well.

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, the taxpayer can elect to treat these types of property as capital assets if the taxpayer sells or exchanges them in tax years beginning after May 17, 2006, and:

• the taxpayer’s personal efforts created the property, or
• the taxpayer acquired the property under circumstances (for example, by gift) entitling the taxpayer to the basis of the person who created the property or for whom it was prepared or produced.

Charitable Contributions
New recordkeeping requirements for cash contributions. Taxpayers cannot deduct a cash contribution, regardless of the amount, unless they 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. For more information, see Publication 526, Charitable Contributions.

Contributions to donor advised funds. Taxpayers 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 taxpayers cannot deduct their contributions to a donor advised fund. Generally, a donor advised fund is a fund or account in which a donor can, because of being a donor, advise the fund how to distribute or invest amounts held in the fund. For details, see Internal Revenue Code section 170(f)(18).

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. See Form 8283-V, Payment Voucher for Filing Fee Under Section 170(f)(13).

District of Columbia First-Time Homebuyer Credit Extended
The credit for the first-time purchase of a home in the District of Columbia was extended through 2007. To claim this credit, use Form 8859.

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.

Earned Income Credit Amounts Increase
The maximum amount of the credit has increased to:

• $2,853 if the taxpayer has one qualifying child,
• $4,716 if the taxpayer has more than one qualifying child, or
• $428 if the taxpayer does not have a qualifying child.

Earned income amount increased. The maximum amount of income the taxpayer can earn and still get the credit has increased for 2007. The taxpayer may be able to receive the credit if:

• The taxpayer has more than one qualifying child and the taxpayer earns less than $37,783 ($39,783 if married filing jointly),
• The taxpayer has one qualifying child and the taxpayer earns less than $33,241 ($35,241 if married filing jointly), or
• The taxpayer does not have a qualifying child and the taxpayer earns less than $12,590 ($14,590 if married filing jointly).

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

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

Nontaxable combat pay election extended. The taxpayer can elect to have his nontaxable combat pay included in earned income when figuring his earned income credit for 2007. This election was previously due to expire at the end of 2006 but has been extended through 2007. For more information about the election, see Publication 596.

Education Savings Bond Exclusion Income (Reduction of) Limits Increased
For 2007, the amount of the taxpayer’s interest exclusion is phased out (gradually reduced) if the taxpayer’s filing status is married filing jointly or qualifying widow(er) and the taxpayer’s modified adjusted gross income (MAGI) is between $98,400 and $128,400. The taxpayer cannot take the deduction if his MAGI is $128,400 or more.

For all other filing statuses, the taxpayer’s interest exclusion is phased out if his MAGI is between $65,600 and $80,600. The taxpayer cannot take a deduction if his MAGI is $80,600 or more. For more information, see chapter 9 in Publication 970, Tax Benefits for Education.

Exemption Amount Increased
The amount the taxpayer can deduct for each exemption has increased from $3,300 in 2006 to $3,400 in 2007. The taxpayer may lose part of the benefit of his exemptions if his adjusted gross income is above a certain amount. The amount at which the phaseout begins depends on his filing status. 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 married persons filing jointly or qualifying widow(er)s.

Expired Tax Benefits
The following tax benefits have expired and will not apply for 2007:

• Relief granted for Hurricanes Katrina, Rita, and Wilma.
• 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 the taxpayer provided more than half of an individual's support, whether the taxpayer furnished more than half the cost of keeping up a household, and whether the taxpayer 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. The taxpayer cannot claim this credit for any vehicle you placed in service after 2006.

Foreign Earned Income Exclusion
For tax years beginning after 2005, the maximum foreign earned income exclusion is indexed for inflation. For 2007 the maximum exclusion is $85,700.

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 the taxpayer’s HSA based on the amount of his 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 the taxpayer’s health insurance deductible. The maximum additional deduction for individuals age 55 or older increases to $800.

Deductible contributions for part-year coverage. For HSA purposes, the taxpayer can be treated as an eligible individual for each month in his tax year if he is an eligible individual during the last month of his tax year. This applies to each month for which the taxpayer would not otherwise qualify as an eligible individual. For these months, the taxpayer is treated as enrolled in the same HDHP that he was enrolled in for the last month of his tax year. However, if the taxpayer is not an eligible individual, for any reason other than death or becoming disabled, for the 12 months following the end of his tax year, any contribution attributable to these months is included in his income and is subject to an additional 10% tax. The income and additional 10% tax are reported for the tax year in which the taxpayer ceased to be an eligible individual.

Transfers from a health reimbursement arrangement (HRA) or health flexible spending arrangement (FSA) to an HSA. The taxpayer’s employer can make a one-time direct transfer of the balance in his HRA or health FSA to his HSA without violating the requirements for those arrangements. The maximum allowable transfer is the lesser of the HRA or health FSA balance on September 21, 2006, or on the date of transfer.

The amount transferred is not included in the taxpayer’s gross income, is not taken into account in applying the HSA contribution limitation, and is not deductible. However, if the taxpayer is not an eligible individual, for any reason other than death or becoming disabled, for the 12 months following the month of the transfer, the amount transferred is included in his income and is subject to an additional 10% tax. The income and additional 10% tax are reported for the tax year in which the taxpayer ceased to be an eligible individual.

If the employer makes a transfer available to any employee, all employees who are covered under an HDHP of the employer must be allowed to make a transfer. Otherwise, the employer is subject to an excise tax.

Generally, the taxpayer is not an eligible individual for an HSA if he has health coverage other than an HDHP. For tax years beginning after 2006, coverage under a health FSA for the period immediately following the health FSA's plan year during which unused benefits or contributions remaining at the end of the year may be paid or reimbursed to the taxpayer for qualified expenses incurred during that period does not disqualify the taxpayer from being an eligible individual. The coverage does not disqualify the taxpayer if the balance in the health FSA at the end of the plan year is zero or the entire remaining balance in the health FSA is transferred to his HSA as described above.

Comparable contributions by an employer. An employer that makes contributions to the HSAs of employees must make comparable contributions to all comparable participating employees' HSAs. For tax years beginning after 2006, for purposes of making contributions to the HSA of an employee who is not highly compensated, a comparable participating employee does not include a highly compensated employee.

Hope and Lifetime Learning Credits Income Limits Increased
For 2007, the amount of the taxpayer’s Hope or Lifetime Learning Credit is phased out (gradually reduced) if the taxpayer’s modified adjusted gross income (MAGI) is between $47,000 and $57,000 ($94,000 and $114,000 if the taxpayer files a joint return). The taxpayer cannot claim an education credit if his MAGI is $57,000 or more ($114,000 or more if the taxpayer files a joint return). This is an increase from the 2006 limits of $45,000 and $55,000 ($90,000 and $110,000 if filing a joint return). For more information, see chapters 2 and 3 in Publication 970, Tax Benefits for Education.

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

Under this limit, the excludable amount for any period is figured by subtracting any reimbursement received (through insurance or otherwise) for the cost of qualified long-term care services during the period from the larger of the following amounts:

• The cost of qualified long-term care services during the period.
• The dollar amount for the period ($260 per day for any period in 2007).

Mortgage Insurance Premiums Treated as Home Mortgage Interest
Premiums that the taxpayer pays or accrues for "qualified mortgage insurance" during 2007 in connection with home acquisition debt on his qualified home are deductible as home mortgage interest. The amount the taxpayer can deduct is reduced by 10% for every $1,000 ($500 if the taxpayer’s filing status is married filing separately) by which his adjusted gross income exceeds $100,000 ($50,000 if the taxpayer’s filing status is married filing separately).

For the definitions of home acquisition debt and qualified home, see Publication 936, Home Mortgage Interest 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 (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006).

Special rules for prepaid mortgage insurance. If the taxpayer paid premiums for qualified mortgage insurance that are properly allocable to periods after the close of the taxable year, such premiums are treated as paid in the period to which they are allocated. No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term (except in the case of qualified mortgage insurance provided by the Department of Veterans Affairs or Rural Housing Administration).

Schedule A (Form 1040). The taxpayer can deduct mortgage insurance premiums paid or accrued during 2007 on Line 13 of the 2007 Schedule A (Form 1040).

Mortgage insurance premiums the taxpayer paid or accrued on any mortgage insurance contract issued before January 1, 2007, are not deductible as home mortgage interest.

Mortgage insurance premiums the taxpayer paid or accrued after December 31, 2007, or that are properly allocable to any period after December 31, 2007, are not deductible as home mortgage interest.

Section 179 Limits Increased
The maximum Section 179 deduction for qualified property placed in service in 2007 is increased to $125,000. This limit is reduced by the amount by which the cost of the Section 179 property exceeds $500,000.

Social Security and Medicare Taxes
For 2007, the employer and employee continued to pay:

• 6.2% each for Social Security tax (old-age, survivors, and disability insurance), and
• 1.45% each for Medicare tax (hospital insurance).

Wage limits. For Social Security tax, the maximum amount of 2007 wages subject to the tax increased from $94,200 to $97,500. For Medicare tax, all covered 2007 wages are subject to the tax.

Self-Employment Tax. The rate remains at 15.3% (12.4% Social Security tax and 2.9% for Medicare tax). Net earnings subject to the Social Security tax increased from $94,200 to $97,500. For Medicare tax, all 2007 net earnings were subject to the tax.

Standard Deduction Amount Increased
The standard deduction for taxpayers who do not itemize deductions on Schedule A of Form 1040 is, in most cases, higher for 2007 than it was for 2006. The amount depends on the taxpayer’s filing status, whether the taxpayer is 65 or older or blind, and whether an exemption can be claimed for him by another taxpayer.The basic standard deduction amounts for 2007 are:

• Head of household — $7,850
• Married taxpayers filing jointly and qualifying widow(er)s — $10,700
• Married taxpayers filing separately — $5,350
• Single — $5,350

The standard deduction amount for an individual who may be claimed as a dependent by another taxpayer may not exceed the greater of $850, or the individual's earned income plus $300.

Standard Mileage Rates for 2007

• Business Mileage Rate – 48.5 cents per mile.
• Charitable Mileage Rate - 14 cents per mile.
• Medical Mileage Rate - 20 cents per mile.
• Moving Mileage Rate - 20 cents per mile.

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