Year-End Tax Legislation Has Many Benefits

Year-End Tax Legislation Has Many Benefits

31 January, 2008

Congress passed several tax measures in December thatcould affect you this year and for years to come. The following is a brief overview of this legislation.

The so-called “AMT patch” was extended for one year, along with the ability to use certain nonrefundable, personal credits to offset the AMT. As a result, 2007 exemption amounts have increased to $66,250 for joint filers, $44,350 for individuals and $33,125 for married individuals filing separately.

“While the exemption amounts were increased,” said Christopher Axene, CPA, principal, Dublin office, “the phase out of the exemption amounts has not changed.”

And since the legislation was passed so late in the year, taxpayers who are due a refund may be negatively affected. “If you are filing returns containing AMT forms, you should expect processing delays by the IRS,” said Axene.

In response to the housing market crisis, Congress passed legislation to assist taxpayers who may otherwise have faced large tax bills due to mortgage loan modifications or outright foreclosures. In addition, a handful of other real estate-related benefits were included in this legislation.

FORECLOSURE RELIEF.

Taxpayers who have had their houses foreclosed and/or loans written down can have up to $2 million of qualifying debt secured by a principal residence excluded from taxation. The relief is available through December 31, 2009, and is retroactive to January 1, 2007.

“In order to be excluded, the debt must have been incurred in the acquisition, construction or substantial improvement of the taxpayer’s principal residence. Vacation and other secondary homes are not eligible,” said Axene. “Home equity debt is also not included, while refinances are eligible up to the amount of the original loan.”

If a taxpayer incurred a taxable gain when the principal residence was foreclosed, this gain may be excluded from income if certain other requirements are met.

MORTGAGE INSURANCE DEDUCTION.

The itemized deduction for qualified mortgage insurance premiums has been extended. To be eligible, the contract must have been entered into after December 31, 2006, and prior to January 1, 2011. Premiums must be paid or accrued for qualified mortgage insurance obtained in connection with the purchase of a qualified residence. The deduction phases out at 10 percent for each $1,000 of adjusted gross income over $100,000.

Beginning January 1 of this year, the sale of a residence that is jointly owned by a surviving and deceased spouse and occupied by the surviving spouse is eligible for the $500,000 gain exclusion, only if the sale occurs less than two years after the date of death.

“Previously, a surviving spouse was entitled to the $500,000 exclusion only when he or she could file a joint return with the deceased spouse’s estate,” Axene said. “The law extends the surviving spouse’s ability to use the joint principal residence gain exclusion amount.”

Congress has provided a limited exclusion of “qualifying state and local tax benefits” from gross income for volunteer firefighters and emergency response personnel. These benefits include any reduction or rebate of a state or local real property tax, personal property or income tax, which vary by state.

Volunteers may also exclude from income, payments or reimbursements they receive from a state or local government for the expenses of performing volunteer services. This exclusion is limited to $360 per year and is dependent upon the number of months the volunteer performs the services.

The new law is effective for benefits received beginning January 1, 2008, through the end of 2010 as long as the volunteer is a member of a qualified volunteer emergency response organization.