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Tax Law Changes for Individuals
Topics — Tax Year 2007
2007 Tax Rate Schedules
Adoption
Alternative Minimum Tax
Archer MSA Limits Increased
Capital Asset Treatment for Self-Created Musical Works
Charitable Contributions
Credit for Prior Year Minimum Tax
DC First-Time Homebuyer
Earned Income for Additional Child Tax Credit
Earned Income Credit Amounts Increase
Education Savings Bonds
Expired Tax Benefits
Hope and Lifetime Learning Credits
Long-Term Care and Accelerated Death Benefits
Mortgage Insurance Premiums
Social Security and Medicare Taxes
Standard Mileage Rate
Whistleblower Fees
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2007 Tax Rate Schedules
The 2007 tax rate schedules are provided so that you can compute your estimated
tax for 2007.
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Adoption
Adoption credit. Beginning in 2007, the credit allowed for an adoption of a
child with special needs is $11,390 and the maximum credit allowed for other
adoptions is the amount of qualified adoption expenses up to $11,390. The credit
begins to phase out if you have modified adjusted gross income of $170,820 or
more and is completely phased out if you have modified adjusted gross income of
$210,820 or more.
Adoption assistance program. Beginning in 2007, you may be able to exclude up to
$11,390 from your gross income for qualified adoption expenses paid or incurred
by your employer under a qualified adoption assistance program in connection
with your adoption of an eligible child. This income exclusion starts to phase
out if your modified adjusted gross income is $170,820 or more and is completely
phased out if your modified adjusted gross income is $210,820 or more.
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Alternative Minimum Tax
The following changes to the AMT went into effect for 2007.
AMT exemption amount increased. The AMT exemption amount has increased to
$44,350 ($66,250 if married filing jointly or qualifying widow(er); $33,125 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.
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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).
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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.
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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. For more information, see Publication 526, Charitable
Contributions.
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. 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).
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Credit for Prior Year Minimum Tax
If you have any unused minimum tax credit carryforward 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. That means, if the refundable part of the credit is more
than your tax, you can get a refund of the difference.
To figure the refundable amount of your minimum tax credit, and the AMT
refundable credit amount, apply the rules that follow under Long-term unused
minimum tax credit, AMT refundable credit amount, and Credit refundable.
Long-term unused minimum tax credit. To figure the refundable amount of your
minimum tax credit, you must first determine whether you have any "long-term
unused minimum tax credit." Your long-term unused minimum tax credit is the
amount of your minimum tax credit carryforward from 2003 (2003 Form 8801, line
26), reduced by the amount of any minimum tax credits you claimed for 2004,
2005, and 2006 (line 25 of your 2004, 2005, and 2006 Forms 8801).
AMT refundable credit amount. After you figure your long-term unused minimum tax
credit, you then must figure your "AMT refundable credit amount." Your AMT
refundable credit amount is the greater of:
20% (.20) of your long-term unused minimum tax credit, or
The lesser of:
$5,000, or
Your long-term unused minimum tax credit.
The AMT refundable credit amount is reduced if your adjusted gross income (AGI)
exceeds certain threshold amounts based on your filing status. The AGI threshold
amounts for 2007 are in the table that follows.
Your AMT refundable credit amount is reduced by 2% (.02) for every $2,500
($1,250 if your filing status is married filing separately) that your AGI
exceeds the threshold amount. Use your 2006 tax return and AGI (2006 Forms 1040,
line 38, and 1040NR, line 36) as a guide in estimating your 2007 AGI.
If you are filing Form 2555, 2555-EZ, or 4563, or you are excluding income from
sources within Puerto Rico, you must refigure your AGI by adding back any
foreign earned income and housing exclusion (2006 Form 2555, line 45, or 2006
Form 2555-EZ, line 18), foreign housing deduction (2006 Form 2555, line 50),
income from American Samoa that you are excluding (2006 Form 4563, line 15), and
income from Puerto Rico that you are excluding.
For 2007, the AMT refundable credit amount is reduced if your AGI is more than
the applicable amount in the second column of the following table and is
eliminated if your AGI is more than the applicable amount in the third column.
Filing Status:
AGI That Reduces Credit
AGI That Eliminates Credit
Single
$156,400
$278,900
Married filing jointly or qualifying widow(er)
$234,600
$357,100
Married filing separately
$117,300
$178,550
Head of household
$195,500
$318,000
Credit refundable. The refundable amount of your credit is the amount by which
your minimum tax credit for the year exceeds the amount your minimum tax credit
would be without regard to the above rules.
Form 8801. To claim the refundable and nonrefundable parts of this credit, use
the 2007 Form 8801, Credit for Prior Year Minimum Tax--Individuals, Estates, and
Trusts.
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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.
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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.
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Earned Income Credit Amounts Increase
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
if:
You have more than one qualifying child and you earn less than $37,783 ($39,783
if married filing jointly),
You have one qualifying child and you earn less than $33,241 ($35,241 if married
filing jointly), or
You do not have a qualifying child and you earn less than $12,590 ($14,590 if
married filing jointly).
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. 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.
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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 married filing jointly or qualifying widow(er) and your
modified adjusted gross income (MAGI) is between $98,400 and $128,400. You
cannot take the deduction if your MAGI is $128,400 or more. For 2006, the
exclusion phased out between $94,700 and $124,700.
For all other filing statuses, your interest exclusion is phased out if your
MAGI is between $65,600 and $80,600. You cannot take a deduction if your MAGI is
$80,600 or more. For 2006, the exclusion phased out between $63,100 and $78,100.
For more information, see chapter 9 in Publication 970, Tax Benefits for
Education.
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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 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.
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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.
Deductible contributions for part-year coverage. For HSA purposes, you can be
treated as an eligible individual for each month in your tax year if you are an
eligible individual during the last month of your tax year. This applies to each
month for which you would not otherwise qualify as an eligible individual. For
these months, you are treated as enrolled in the same HDHP that you were
enrolled in for the last month of your tax year. However, if you are not an
eligible individual, for any reason other than death or becoming disabled, for
the 12 months following the end of your tax year, any contribution attributable
to these months is included in your income and is subject to an additional 10%
tax. The income and additional 10% tax are reported for the tax year in which
you cease to be an eligible individual.
Transfers from a health reimbursement arrangement (HRA) or health flexible
spending arrangement (FSA) to an HSA. Your employer can make a one-time direct
transfer of the balance in your HRA or health FSA to your 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 your gross income, is not taken into
account in applying the HSA contribution limitation, and is not deductible.
However, if you are 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 your income and is subject to an additional
10% tax. The income and additional 10% tax are reported for the tax year in
which you cease 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, you are not an eligible individual for an HSA if you have 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 you for qualified expenses incurred during that
period does not disqualify you from being an eligible individual. The coverage
does not disqualify you 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
your 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.
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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 modified adjusted gross income (MAGI) is between $47,000 and
$57,000 ($94,000 and $114,000 if you file a joint return). You cannot claim an
education credit if your MAGI is $57,000 or more ($114,000 or more if you file 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.
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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.
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).
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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).
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 you 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). You can deduct mortgage insurance premiums you paid or
accrued during 2007 on Line 13 of the 2007 Schedule A (Form 1040).
Mortgage insurance premiums you paid or accrued on any mortgage insurance
contract issued before January 1, 2007, are not deductible as home mortgage
interest.
Mortgage insurance premiums you 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.
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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.
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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.
Car expenses and use of the standard mileage rate are explained in chapter 4 of
Publication 463, Travel, Entertainment, Gift, and Car Expenses.
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. See Transportation under What Medical Expenses Are
Includable in Publication 502 or Travel by car under Deductible Moving Expenses
in Publication 521.
Charitable-related mileage. For 2007, the standard mileage rate for the cost of
operating your car for charitable purposes remains 14 cents per mile.
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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.
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