Individual Tax Updates for year 2007
TOPICS: all updated for 2007 returns
Tax Refund Scam Energy Credit Alternative Motor Vehicle Credit Standard Mileage Rates Split Refund Among Multiple Bank Accounts IRA Contributions NEW–Mortgage Insurance Premiums Treated as Home Mortgage Interest	Health Savings Account Contributions AMT (Alternative Minimum Tax) Patch NEW–IRA Rollover to Health Savings Account Military: Active Duty Reservists Military: Excludable Combat Pay Expiring Tax Benefits Charitable Contributions NEW Limit–Foreign Earned Income Exclusion
Tax Refund Scams Various e-mail scams have surfaced in 2007. E-mails claiming to come from the Internal Revenue Service advise individuals that they are eligible for a tax refund. Sometimes clicking a provided link will re-direct the user to the actual IRS website, briefly, and then re-direct them to a bogus website, with an official look. Other times the link will direct the user directly to a bogus website. One scam claims to come from the Taxpayer Advocate Service (a genuine IRS service); another solicits contributions for California wildfire victims. Others say that the taxpayer's "fiscal activity" has been monitored and that they are due a refund, and yet another that the taxpayer is the subject of an "investigation" by the IRS' "Fraud Department" and requests the completion of a "fraud survey". The fact to know is that the IRS does not initiate contact with taxpayers via e-mail. Initial contact from the IRS is by correspondence. The point of these e-mails is to get financial information (bank account numbers, passwords, etc.) in order to accomplish theft of money or identity, commonly known as "phishing". The IRS advises that taxpayers should not follow any links provided on these e-mails. The IRS actively seeks the perpetrators of these scams for follow-up in hopes of eventual prosecution.
Energy Credit Some years ago the IRS allowed tax credits for energy-saving home improvements. For 2006 and 2007 tax returns, energy credits are back. The maximum credit (for all years combined) is $500. The credit is calculated as 10% of the cost of qualified energy efficiency improvements, and qualified residential energy property purchased and used in 2006 and 2007. Qualifying items include exterior windows and doors, certain oil and gas furnaces and hot water heaters, insulation material and systems, heat pumps, and some metal roofs. Since the items must meet technical energy standards, manufacturers may provide a certification to show that the property meets the requirements to qualify for the credit (for example an “Energy Star” label on windows and doors will indicate that property as qualifying). The property or improvement must be in a home owned and used by the taxpayer as a principal residence located in the United States. A larger credit for solar panels, solar water heating systems and fuel cell technology will also be available, calculated as 30% of cost to a maximum credit of $2,000 for each. No part of either system can be used to heat a hot tub or pool. This larger credit continues into 2008 tax returns.
Alternative Motor Vehicle Credit This is a tax credit for the purchase of a qualifying vehicle, such as a "hybrid" motor vehicle, a "fuel cell" motor vehicle, an "advance lean-burn technology" motor vehicle or an "alternative fuel" motor vehicle in 2007. It is available to the original purchaser of the vehicle. A vehicle leased by the taxpayer does not qualify for the credit. Toyota has sold its 60,000th hybrid by June 30, 2006 and so the credit for qualifying Toyota vehicles begins to phase out for purchases as of October 1, 2006 and will be completely eliminated for qualifying Toyota purchases after September 30, 2007. Qualifying Lexus vehicles are also subject to a phase out of the credit. The credit for other manufacturers of hybrid and alternative fuel vehicles will begin to phase out in the second calendar quarter after their 60,000th sale of such vehicles.
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 Moving Expense mileage. For 2007, the standard mileage rate for the cost of traveling in your car for medical to obtain medical treatment, 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.
IRA Contributions The maximum allowable contribution to an Individual Retirement Arrangement or Account for 2007 (Roth and Traditional) remains at $4,000, the same as it was for 2006. Those fortunate enough to be 50 years of age or older in 2007 are allowed an additional catch-up contribution of $1,000 for a total maximum contribution of $5,000 for them. The contribution for 2007 may be made until midnight of April 15, 2008. For the year 2008 the limit is increased to $5,000 with an additional $1,000 allowable contribution for those 50 years of age or older in 2008. .
NEW–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% (.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). 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). Mortgage insurance premiums you paid or accrued after December 31, 2007, or that is properly allocable to any period after December 31, 2007, is not deductible as home mortgage interest.
Health Savings Account Contributions For HSA purposes, the minimum annual deductible of an HDHP (High Deductible Health Plan) increases to $1,100 ($2,200 for family coverage) and the maximum annual out-of-pocket expenses limit increases to $5,500 ($11,000 for family coverage). 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 the lesser of the deductible on the health insurance plan or $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.
(AMT) Alternative Minimum Tax Patch The Alternative Minimum Tax is income tax based on taxable income re-calculated after denying certain income deductions and tax credits, and adding back some otherwise "tax-sheltered" income (e.g. some municipal bond interest income). This tax calculation was originally intended to insure that taxpayers of substantial means could not escape income tax merely because of an economic ability to decrease taxable income and avoid taxation. Lately there has been a concern that because of the general increase in the average level of incomes, more taxpayers would be subject to this calculation of a higher tax, against its original intention. Congress has been wrangling over a "fix" to the Alternative Minimum Tax to offset this effect. The fix is in. Some credits have been reinstated as effective against this tax calculation and the amount of exempted income not subject to this tax calculation has been increased for all tax filing statuses. The IRS is working diligently to revise the 12 associated tax forms that are affected by this "fix", within 72 hours of its recent passage, so that return processing (and processing of tax refunds) will not be delayed.
NEW–IRA Rollover to a Health Savings Account For tax years beginning after December 31, 2006 an individual may make a tax-free rollover from an IRA to a Health Savings Account to a maximum of the allowable contribution for the year for which the contribution applies. This rollover is allowed only once in a lifetime, it reduces the allowable maximum amount for any additional contribution for that year, and it must be a trustee-to-trustee rollover. Neither Simplified Employee Pension (SEP) IRAs nor SIMPLE Plans are allowed this rollover treatment.
Military: Active Duty Reservists Ordinarily a person who makes a withdrawal from an IRA before attaining the age of 59-½ would pay a 10% tax penalty on the taxable amount withdrawn. Active-duty military reservists are relieved of this additional tax by legislation enacted in 2006. Those who were called to active duty between September 11, 2001 and December 31, 2007 for at least 179 days, or were assigned for an indefinite period, qualify for this treatment. Refunds for that tax paid for IRA withdrawals at any time during that period can be refunded through amended tax returns, even though some of those years would normally be closed for refunds of tax. The same relief applies to withdrawals from employment sponsored 401(k) and 403(b) retirement plans.
Military: Excludable Combat Pay Excludable combat pay (combat pay not included as taxable income) may be included for the purpose of claiming the Earned Income Credit, and it can also be used as the basis for an IRA (Individual Retirement Arrangement) contribution. Military personnel who received combat pay in 2004 or 2005 have until May 28, 2009 to make a contribution for those years. A refund or credit may be claimed on an amended return if filed before the end of the one year period beginning on the date the contribution is actually made.
Expiring Tax Benefits Three deductions, available to taxpayers filing Individual Income Tax Returns, were due to expire at the end of 2005: the deduction for post-secondary education tuition for taxpayers and dependents, the deduction for supplies used in the classroom purchased by certain educators, and the itemized deduction for sales taxes paid during the year. These deductions have been extended to 2007 tax returns.
Charitable Contributions Beginning for 2007 tax returns, a cash contribution of any amount, to be allowable as a deduction, must be verifiable by a bank or credit union document (statement, cancelled check) or a credit card statement, identifying the charitable organization and the date and amount of the contribution. As was true previously a single donation of $250 or more must be backed up with a receipt from the organization showing date and amount of the contribution. For donations of property, to receive a deduction the property must be in good used condition. However the donation of a single item, with a value of $500 or more, in any condition would be deductible but a qualified appraisal for the item must be attached to the return. As was true before, the donation of a vehicle with a claimed value of $500 or more, must be accompanied by a form 1098-C or other document from the charitable organization indicating the allowable value. The form or document would show the sale price if sold by them or other value to the organization.
New Limit—Foreign Earned Income Exclusion U.S. citizens who are "bona fide residents" (certain physical presence tests must be met) of a foreign country or countries may exclude from income up to $85,700 of income earned for work performed in that foreign country or those countries. For 2007 tax returns the income remaining after the exclusion, will be taxed at the marginal tax rate applicable to total taxable income as if the foreign earned income had not been excluded.