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Summary of Tax Law Changes

Military.com

Many of the tax breaks in recent tax-relief bills were designed to be phased in over a number of years or are indexed to inflation. To help you determine how these tax laws affect your long-term plans, this article explains the changes that come into effect through 2011.

Pick a year from the list below to learn what tax changes affect that year’s returns. We include changes for 2007 because they affect tax returns you’ll be working on in the spring of 2008.

  1. 2007
  2. 2008
  3. 2009
  4. 2010
  5. 2011

Starting in 2007

Relief for Taxpayers Who Lose Their Homes Due to Foreclosure. For foreclosures in 2007, 2008, and 2009, debt forgiven in connection with a foreclosure, short sale, or loan restructuring will not be treated as income.

  • This relief applies only to principal residences, that is, the home you live in. If a lender forgives debt after a foreclosure, short sale, or loan restructuring for a vacation home or investment property, for example, the general rule still applies: The amount of debt canceled is considered taxable income to you (unless you are in bankruptcy or insolvent).
  • No more than $2 million of forgiven debt can be excluded from income.
  • To be eligible for the break, the loan must be secured by your principal residence and the money must have been used to buy, build, or substantially improve the property. If part of the forgiven debt was a home equity loan or cash-out refinancing used for other purposes, that part would be considered taxable income.
  • The tax basis of the home is reduced by the amount of canceled debt excluded from income.

Higher Income Limits for Deductible IRAs and for Roth IRAs. If you are covered by a retirement plan at work, you can take a full IRA deduction if your modified adjusted gross income is less than $83,000 (married filing jointly) or $52,000 (single or head of household). A partial deduction is allowed until your adjusted gross income reaches $103,000 if you are married filing jointly or $72,000 if you are single or a head of household. Also, the opportunity to contribute to a Roth IRA is now phased out as your modified adjusted gross income rises between $156,000 and $166,000 if you are married filing jointly or $99,000 to $114,000 if you are single or a head of household.

Indexed Tax Brackets. Thanks to higher inflation in the past year, the 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent tax brackets all kick in at a bit more than 4 percent higher levels of income than in 2006.

Larger Personal Exemptions. For 2007, each personal exemption you can claim is worth $3,400, up by $100 from 2006.

Higher Standard Deductions. For 2007, the standard deduction for married filing jointly rises to $10,700, up by $400 from 2006. For single filers, the amount increases to $5,350 in 2007, up by $200 over 2006. And heads of household can claim $7,850 in 2007, a jump of $300 from 2006.

Reduction in Itemized Deductions and Personal Exemptions for High-Income Taxpayers. Currently, itemized deductions and personal exemptions are phased out (reduced) as your income rises. In 2007, the reduction of itemized deductions occurs once your adjusted gross income exceeds $156,400, regardless of your filing status. Your itemized deductions are reduced by 2% of the amount by which your AGI exceeds $156,400, but you can never lose more than 80% of your itemized deductions. Also, your medical expenses, investment interest deduction, deductible gambling losses and any casualty and theft losses are not subject to the cut. Personal exemptions are reduced by 2% for each $2,500 of adjusted gross income over $234,600 for marrieds filing jointly, $195,500 for heads of households and $156,400 for singles, but the reduction cannot exceed $2,200 per exemption.

Increased Section 179 Expense Deduction. Thanks to a new law, the maximum amount of equipment placed in service in 2007 that businesses can expense increases to $125,000, a $17,000 increase from 2006. The annual investment limit increases to $500,000 for 2007, up from $450,000 the year before. Thus, you won’t lose the benefit of expensing until you place more than $500,000 of assets in service in 2007.

Tax-free Parking for Employees. Starting in 2007, employees are not taxed on up to $215 a month of employer-paid parking, up $10 per month from 2006. The cap on tax-free transit passes their employers can give rises to $110 a month, up $5 a month from 2006.

Increased Contribution Limit for 401(k) Plans. The maximum employee contribution rises to $15,500 from $15,000 for these and similar workplace retirement plans including 403(b)s and the federal Thrift Savings Plan. The limit for workers age 50 and older rises to $20,500, also a $500 increase from 2006.

Domestic Production Activities Deduction. In 2007, this deduction increases to 6 percent of qualifying business net income. This deduction applies to businesses engaged in construction, engineering or architectural services, film production, or the lease, rental, or sale of equipment you manufactured.

Exemptions for the Alternative Minimum Tax. Congress increased the AMT exemptions for 2007 to prevent millions of additional taxpayers from having to pay the AMT. For 2007, the exemptions are $44,350 for single taxpayers and heads of households, $66,250 for married couples filing joint returns, and $33,125 for married couples filing separately. Unless Congress acts in 2008, the exemption levels will drop to $45,000 for married filing jointly, $33,750 for singles and heads of household, and $22,500 for married couples filing separately.

Income Earned Abroad. The maximum foreign earned income exclusion is increased to $85,700 this year (up from $82,400).

Starting in 2008

A Tougher Kiddie Tax. Beginning in 2008, Congress gave the kiddie tax more bite. In 2007, a child’s unearned income over $1,700, such as gains and dividends, was taxed at the parents’ marginal rate until the year the child is 18. Although the threshold increases to $1,800 in 2008, the age is raised to 19 and, for full-time students whose earned income is less than half their support, increased to 24 after this year. This way, families can’t shift appreciated assets to their kids to take advantage of the 0% rate on capital gains, which is discussed below.

Reduction in Capital Gains Tax Rates. Prior to 2008, long-term capital gains from the sale of assets held longer than one year were taxed at a maximum rate of five percent to the extent the seller was in the 10 or 15 percent tax brackets. In 2008, the five percent maximum rate drops to zero percent through 2010. The 15 percent maximum tax rate on other long-term capital gains stays the same.

Reduction in Dividend Tax Rates. Similarly, in 2008, the special five percent maximum rate on dividends of taxpayers in the 10 and 15 percent tax brackets drops to zero percent through 2010.

Increased IRA Contribution Limits. In 2008, the maximum IRA (traditional or Roth) contribution increases from $4,000 to $5,000. Filers who reach age 50 before the end of 2008 can contribute another $1,000.

Higher Income Limits for Deductible IRAs and for Roth IRAs. If you are covered by a retirement plan at work, you can take a full IRA deduction if your modified adjusted gross income is less than $85,000 (married filing jointly) or $53,000 (single or head of household). A partial deduction is allowed until your adjusted gross income reaches $105,000 if you are married filing jointly or $73,000 if you are single or a head of household. Also, the opportunity to contribute to a Roth IRA is now phased out as your modified adjusted gross income rises between $159,000 and $169,000 if you are married filing jointly or $101,000 to $116,000 if you are single or a head of household.

Indexed Tax Brackets. Thanks to higher inflation in the past year, the 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent tax brackets all kick in at a bit more than 2 percent higher levels of income than in 2007.

Larger Personal Exemptions. For 2008, each personal exemption you can claim is worth $3,500, up by $100 from 2007.

Higher Standard Deductions. For 2008, the standard deduction for marrieds filing a joint return rises to $10,950, up by $250 from 2007. For single filers, the amount increases to $5,450 in 2007, up by $100 over 2007. And heads of household can claim $8,050 in 2007, a jump of $200 from 2006.

Reduction in Itemized Deductions and Personal Exemptions for High-Income Taxpayers. As we noted earlier, itemized deductions and personal exemptions are phased out (reduced) as your income rises. In 2008, the reductions are less painful. The cutback in itemized deductions occurs once your adjusted gross income exceeds $159,950, regardless of your filing status. Your itemized deductions are reduced by 1% of the amount by which your AGI exceeds $159,950, but you can never lose more than 80% of your itemized deductions. Also, your medical expenses, investment interest deduction, deductible gambling losses and any casualty and theft losses are not subject to the cut. Personal exemptions are reduced by 2% for each $2,500 of adjusted gross income over $239,950 for married filing jointly, $199,950 for heads of households and $159,950 for singles, but the reduction cannot exceed $1,167 per exemption.

Increased Section 179 Expense Deduction. The maximum amount of equipment placed in service in 2008 that businesses can expense increases to $128,000, a $3,000 increase from 2007. The annual investment limit increases to $510,000 for 2008, up from $500,000 the year before. Thus, you won’t lose the benefit of expensing until you place more than $510,000 of assets in service in 2008.

Tax-free Parking for Employees. Starting in 2008, employees are not taxed on up to $220 a month of employer-paid parking, up $5 per month from 2007. The cap on tax-free transit passes their employers can give rises to $115 a month, up $5 a month from 2007.

State and Local Sales Tax Deduction. The opportunity for itemizers to choose to deduct their state sales tax payments instead of deducting their state and local income taxes expired at the end of 2007. We expect Congress to revive it for 2008.

Educators’ Deduction. This deduction for up to $250 of teachers’ classroom supplies expired after 2007, but we expect Congress to reinstate it.

Nontaxable Combat Pay Allowed for Earned Income Credit. The election to include nontaxable combat pay in the calculation of earned income for the earned income credit expired after 2007, and we expect it to be reinstated.

Tuition and Fees Deduction. The deduction for up to $4,000 of college tuition and fees expired for tax years after 2007. We think Congress will reinstitute the deduction.

Direct Donations of IRAs to Charity. Starting in 2008, IRA owners who direct that all or part of their IRAs be given to charity once again have to report the withdrawal as income and deduct the donation as a charitable contribution. As a result, their deductions may be limited by the adjusted gross income cap on charitable contributions and the itemized deduction phaseout. Fortunately, Congress is likely to eliminate this potential roadblock for 2008 returns.

Starting in 2009

Estate Tax Exemption. In 2009, the $2,000,000 federal estate tax exemption rises to $3,500,000.

Credit for Residential Energy-efficient Property. The $2,000 maximum credit for the installation of solar water heating equipment, photovoltaic or fuel cell equipment in your primary residence or a second home expires after 2008.

Starting in 2010

Estate Tax Repealed. The federal estate tax is eliminated for estates of individuals dying in 2010.

Roth IRA Conversions. Starting in 2010, individuals with more than $100,000 of modified adjusted gross income are free to switch an IRA to a Roth IRA. For conversions in 2010, taxpayers can spread the tax due over two years. Half the tax will be due in 2011, and the remaining half will be payable in 2012.

Domestic Production Activities Deduction. In 2010, this deduction increases to nine percent of qualifying business net income. This deduction applies to businesses engaged in construction, engineering or architectural services, film production, or the lease, rental or sale of equipment you manufactured.

Tax Relief for Taxpayers Who Lose Their Homes Due to Foreclosure Expires. Starting in 2010, debt forgiven in connection with the foreclosure of a principal residence will once again be considered taxable income (unless you are in bankruptcy or insolvent).

Starting in 2011

Estate Tax Revived. For individuals dying after 2010, the federal estate tax returns with a $1,000,000 exemption and a 50 percent maximum rate.

Increase in Capital Gains and Dividend Tax Rates. The tax rate reductions for long-term capital gains and dividends expire this year.

  • In 2011, the maximum long-term capital gains tax rate goes back up to 20 percent from 15 percent. A lower 10 percent tax rate is used by individuals to the extent that they are in the 10 percent and 15 percent tax brackets. Their long-term capital gains had been tax free since 2008.
  • In 2011, dividend income (other than capital gain distributions from mutual funds) is taxed as ordinary income at the taxpayer’s highest marginal tax rate.

Child Tax Credit. The credit of $1,000 per eligible child reverts to $500 after 2010.

Decreased Section 179 Expense Deduction. Taxpayers who purchase qualifying business property may elect to deduct the cost of the property (new or used) in the year that it is placed in service. This is referred to as a Section 179 deduction. In the tax years through 2010, the maximum amount of property that may be taken as a Section 179 deduction is $125,000, as indexed for inflation. In 2011 and future years, the maximum deduction drops to $25,000.

Mortgage Insurance Premiums. The special itemized deduction for mortgage insurance premiums paid on mortgages taken out after 2006 expires after 2010.

Back to “GovCentral’s Ultimate Tax Guide.”


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