New Developments for 2007: Small business tax breaks, new preparer and taxpayer penalties, AMT relief and more

 

The Small Business and Work Opportunity Tax Act of 2007 was passed in May. As its name implies, the bill had several provisions affecting small businesses, such as:

 

• Extending and enhancing the work opportunity tax credit rules for hiring disabled veterans and workers in rural renewal counties.
• Extending and expanding the election to deduct capital assets under Section 179. For 2007, up to $125,000 of qualifying property can be deducted (increases to $128,000 in 2008).
• Simplifying tax filings for small businesses owned by a husband and wife.
• Liberalizing various S corporation rules.

 

To pay for all these tax breaks, the following revenue offsets were passed:

 

• Raising the “kiddie tax” age from 18 to 19 (age 24 for a full-time student).
• Extending (from 18 to 36 months) the period of time that the IRS must notify taxpayers of their tax liability before they are required to suspend the accrual of penalties and interest with respect to those liabilities.
• Eliminating the requirement that the IRS must hold a collection due process hearing before levying for delinquent employment taxes.
• Expanding and increasing preparer penalties for all types of returns (income, payroll, estate, gift, exempt organization), as well as raising the bar for taking positions on income tax returns (from “realistic possibility of success” under audit to “more likely than not” to be sustained under audit).
• Increasing the penalty for bad checks and money orders.
• Creating a new penalty for erroneous refund claims.

If you're planning to convert a traditional IRA to a Roth IRA, you may want to hold off a few years. Through 2009, taxpayers with adjusted gross income of more than $100,000 are not eligible to do a Roth IRA conversion. However, starting in 2010 this AGI limitation no longer applies. Also, taxpayers who do make Roth IRA conversions in 2010 can report the income (and pay the tax) in 2011 and 2012.

If you claim charitable contributions, make sure you have your receipts. Starting this year, taxpayers must have documentation of all cash donations, regardless of amount. Simply throwing cash in the collection basket at church won’t work – use a check instead. Electronic withdrawals from your bank account are fine since your statement will show the date and the name of the donee organization.

For non-cash donations, the items donated must be in "good used condition or better." Since this requirement is very subjective, take a picture of the items donated when you drop them off and keep a detailed list in case the deduction is challenged.

 

As expected, Congress finally passed the Tax Increase Prevention Act of 2007. The main feature of this bill was a one-year extension of the alternative minimum tax (AMT) exemption amounts. For 2007, these exemption amounts are:

 

• $66,250 for married individuals filing jointly and surviving spouses.
• $44,350 for unmarried individuals.
• $33,125 for married individuals filing separately.

 

The Act also allows various nonrefundable tax credits (child and dependent care, education, residential energy, etc.) to offset the AMT.

 

Congress also passed the Mortgage Forgiveness Debt Relief Act of 2007. The main feature of this bill is a new exclusion of up to $2 million of mortgage forgiveness debt on a principal residence. The exclusion applies to debt discharged in 2007, 2008 or 2009. The Act also makes a number of other important changes:

 

• Creating a new exclusion for certain state benefits and payments to members of qualified volunteer emergency response organizations.
• Extending the deductibility of mortgage insurance premiums through 2010.
• Liberalizing the home sale exclusion rule for surviving spouses.

 

Despite all this last minute tax legislation, there are still several tax provisions set to expire after December 31, 2007:

·        Tuition deduction of up to $2,000 or $4,000 (depending on income).

·        Option to deduct state and local sales tax instead of state and local income taxes.

·        Election to include combat pay as earned income for earned income credit.

·        15-year depreciation for qualified leasehold improvements and qualified restaurant property.

·        Educator deduction of up to $250 for classroom supplies.

·        Credit for manufacture of qualifying energy-efficient appliances.

·        Availability of Archer MSAs.

·        Qualified charitable transfers of up to $100,000 from an IRA to charity.

·        Enhanced deductions for donating food and certain books to charity.

·        Enhanced deduction for charitable donations of real property for conservation.

·        The research and experimentation tax credit.

·        Expensing of brownfields environmental remediation costs.

·        Qualified zone academy bonds credit.