New Laws Include Tax Changes

In December, Congress passed three laws that include significant tax changes. These include a one-year AMT patch, mortgage and housing related tax changes, and an extension of the surcharge on employee wages under the Federal Unemployment Tax Act.

Tax Increase Prevention Act of 2007

This legislation provides a one-year alternative minimum tax (AMT) patch for 2007. The AMT exemption amounts were increased for 2007 and, as in prior years, you are allowed to use personal tax credits to offset your 2007 AMT bill. The new law will keep the number of taxpayers subject to AMT about the same as last year.

Mortgage Forgiveness Debt Relief Act of 2007

The centerpiece of this legislation, also known as the Mortgage Relief Act, is a temporary taxable income exclusion for qualifying discharges of home mortgage debt (when a lender lets a borrower off the hook for some or all of a loan balance). The Mortgage Relief Act creates a retroactive new exception for qualifying discharges of home mortgage debt that occur in 2007Ð2009, up to $2 million of debt discharge income from "qualified principal residence indebtedness" -- debt that was used to acquire, construct, or improve the taxpayer's principal residence and is secured by that residence. The basis of the taxpayer's principal residence is reduced by the excluded amount, but not below zero.

This law also liberalizes the home sale gain exclusion for surviving spouses. You can have a federal-income-tax-free home sale gain of up to $250,000 if you are unmarried, or up to $500,000 if you file jointly with your spouse. Effective for sales after 12/31/07, the Mortgage Relief Act allows an unmarried surviving spouse to take advantage of the larger $500,000 exclusion if the home sale occurs within two years after the spouse's death.

Subject to limitations, premiums for qualified mortgage insurance to acquire a qualified personal residence are treated as deductible home mortgage interest. Before the Mortgage Relief Act, this favorable rule only applied to premiums paid during 2007. The new law extends the mortgage insurance premium deduction for three years to cover premiums paid through the end of 2010. However, a phase-out rule applies for those with adjusted gross income above $100,000 -- the deduction is phased out by 10% for each $1,000 over $100,000.
The Mortgage Relief Act includes the following new tax increases.

• Increase in Failure-to-file partnership return penalty. The period for charging the monthly partnership return failure-to-file-penalty is extended from five to 12 months and the monthly per-partner penalty goes from $50 to $85.
• New Failure-to-file Penalty for S Corporations. The new monthly penalty for failing to file an S corporation return or failing to provide information required to be shown on the return is $85 per shareholder per month up to a maximum of 12 months.

Please contact us if you have questions or want more information about any of these tax changes.