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Before departing for the year, Congress passed a couple of new tax laws that affect numerous individual and business taxpayers. Here is a summary of the changes.
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What Congress Didn't Pass
When lawmakers return in January, they have plenty of unfinished business. Although they passed the numerous tax provisions outlined in this article in December, Congress didn't take action on:
- A package of tax breaks expiring at the end of 2007 that are often called the "extenders" because Congress periodically extends them. They include the research credit and work opportunity credit for businesses, the state and local sales tax deduction, the qualified tuition deduction and the deduction for teacher's out-of-pocket expenses for supplies.
- The Farm, Nutrition and Bioenergy Act, which includes several farm-related tax breaks.
- The Defenders of Freedom Tax Relief Act, which contains tax incentives for military personnel.
Stay tuned. We'll keep you posted on these and other tax laws that pass in 2008. |
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New Limit on Tax Disclosures to Partners, S Corp Shareholders, Estate and Trust Beneficiaries
The new Mortgage Relief Act contains provisions that are not specifically related to real estate, but involve disclosures on tax returns.
Background: Under the tax law, disclosures of federal tax returns, as well as information on tax returns, can be made to certain persons who are "materially affected." Here are the basics:
For a partnership return, disclosures can be made to any person who was a member of the partnership during periods covered.
For a corporate return, disclosures can be made to any:
1. Person designated by resolution of the board of directors or other similar governing body;
2. Officer or employee upon written request signed by any principal officer and attested to by the secretary or other officer;
3. Shareholder that owns at least 1 percent of the outstanding stock;
4. Person who was an S corporation shareholder; or
5. Person authorized by applicable state law to act for a dissolved corporation or materially affected by information in the return.
For an estate return, disclosures can be made to the estate administrator, executor, or trustee and to any heir at law, next of kin, or beneficiary under the will of the decedent who is materially affected by information in the return.
For a trust return, disclosures can be made to the trustee(s) and any beneficiary who is materially affected.
To protect taxpayers, the Mortgage Relief Act puts some new limitations on such disclosures. Specifically, for inspections or disclosures relating to partnership, S corporation, trust, or estate tax returns, the information inspected or disclosed cannot include any supporting schedules, attachments, or lists that include taxpayer identity information. This change is effective on December 20, 2007. | Patching the AMT Problem
An estimated 20-plus million taxpayers received some much-needed relief from the alternative minimum tax (AMT). The Tax Increase Prevention Act of 2007 increases the exemption amounts for tax filers across-the-board and allows them to use personal tax credits to offset AMT liabilities.
Unfortunately, the last-minute measure only postpones the inevitable. The latest "AMT patch" approved by Congress is only good for the 2007 tax year. Click here for the AMT details from our previous article.
Tax Provisions in a New Mortgage Law
President Bush signed the Mortgage Forgiveness Debt Relief Act of 2007 into law on December 20, 2007. The most important tax change involves a three-year income exclusion for qualifying discharges of principal residence debt.
As you will see, the law includes six other significant tax changes too.
1. Exclusion for Principal Residence Mortgage Debt Discharges - The new exclusion helps homeowners caught in the sub-prime mortgage crisis. It does so by wiping out the tax bill that many homeowners owe if a lender eliminates some of their liability under the cancellation of debt rules.
For federal income tax purposes, cancellation of debt (COD) income is taxable unless a specific exclusion makes it tax-free. The Mortgage Relief Act creates a retroactive new exclusion for qualifying discharges of home mortgage debt in 2007 through 2009.
Under the exclusion, a homeowner can have up to $2 million of federal-income-tax-free COD income from "qualified principal residence indebtedness," which means debt that was used to acquire, build, or improve the taxpayer's principal residence and that is secured by that residence. The basis of the taxpayer's principal residence is reduced by the excluded amount.
 Tax Caution: This exclusion only applies to COD income from debt used to acquire, build, or improve a principal residence. Cancellation of debt income from discharges of home equity loans used for other purposes does not qualify for the exclusion, nor will COD income from discharges of vacation home loans. (However, other exclusions may apply in these circumstances.)
Also, the new exclusion is not available to a taxpayer who is in a Title 11 bankruptcy case.
2. Surviving Spouses May Now Be Eligible for $500,000 Home Sale Exclusion - An unmarried individual can potentially exclude from taxation up to $250,000 of gain from selling a principal residence. Married joint filers can potentially exclude up to $500,000. However, if you are an unmarried surviving spouse, you are not allowed to file a joint return for years after the year in which your spouse dies (unless you remarry).
Therefore, before the Mortgage Relief Act, you could not take advantage of the larger $500,000 home sale gain exclusion if you sold your home in a year after the year when your spouse died. You were limited to the smaller $250,000 exclusion.
Thankfully, the new law addresses this problem -- effective for sales after December 31, 2007. Under the new provision, an unmarried surviving spouse can claim the larger $500,000 gain exclusion for a principal residence sale that occurs within two years after the spouse's death, assuming all the other requirements for the $500,000 exclusion were met immediately before that person died.
Tax Caution: The two-year eligibility period for the larger exclusion begins on the date of the deceased spouse's death. Therefore, a sale that occurs in the calendar year following the year of death, but more than 24 months after the deceased spouse's date of death, does not qualify for the larger $500,000 gain exclusion.
3. Mortgage Insurance Premium Write-off Extended for Three More Years - Premiums for qualified mortgage insurance on debt to acquire, construct, or improve your first or second residence can potentially be treated as deductible mortgage interest.
Before the Mortgage Relief Act, this break was only available for premium amounts paid during 2007. The new law extends the break for three more years, through 2010.
Tax Caution: Unfortunately, due to an income phaseout rule, you may be unable to claim the write-off.
Here's how the rules works. If your adjusted gross income (AGI) exceeds $100,000, the deduction is phased out by 10 percent for each $1,000 of AGI (or any fraction thereof) in excess of $100,000 (the write-off is fully phased out when your AGI reaches $109,001). If you use married filing separate status, and your AGI exceeds $50,000, the deduction is phased out by 10 percent for each $500 of AGI (or any fraction thereof) in excess of $50,000. The write-off is fully phased out when AGI reaches $54,501.
4. Liberalized Qualification Rules for Residential Co-ops - If you are a tenant-stockholder of a cooperative housing corporation (or co-op), the tax law potentially allows you to deduct amounts paid or accrued by the corporation to the extent they represent your share of real estate taxes and interest.
However, this beneficial rule is only available for buildings that meet the tax-law definition of a residential co-op. The Mortgage Relief Act adds two new ways for buildings to qualify as co-ops, which means more taxpayers will qualify for the favorable co-op tax rule. This helpful change applies to tax years ending after December 20, 2007.
5. Temporary New Break for Firefighters and Emergency Responders - Another taxpayer-friendly new provision in the Mortgage Relief Act creates a temporary exclusion from taxable income for members of qualified volunteer emergency response organizations. For 2008 to 2010, the exclusion applies to:
A qualified state or local tax benefit is any reduction or rebate of state or local income, real property, or personal property taxes on account of services performed as a member of a qualified volunteer emergency response organization. Amounts treated as tax-free under this rule must be subtracted from any itemized deductions for state and local taxes.
A qualified payment is a payment or reimbursement provided by a state or political subdivision on account of the performance of services as a member of a qualified volunteer emergency response organization. However, the taxable income exclusion for these payments is limited to $30 multiplied by the number of months during the year that you perform such services. So the maximum exclusion is only $360.
6. More Student Housing Eligible for Low-Income Housing Credit - In a tax break for real estate investors, the Mortgage Relief Act includes a provision that allows certain full-time students who are single parents and their children to be eligible residents for purposes of claiming the low-income housing tax credit, which is based on the cost of qualified low-income buildings. This favorable change is effective on December 20, 2007.
Revenue Raisers: How Congress Paid for the New Provisions
Those are the favorable provisions. Now for the bad news. The Mortgage Relief Act also includes new revenue raisers ... better known as tax increases, such as:
Failure to File Partnership Returns Will Be More Costly. The new law extends the period for charging the monthly partnership return failure-to-file-penalty from 5 to 12 months and increases the monthly per-partner penalty from $50 to $85. This change applies to partnership tax returns due after December 20, 2007. (Another unrelated new law increases this monthly penalty $1 to $86 per partner.)
Failure to File S Corporation Returns Will Also Be More Expensive. The new law imposes a monthly penalty for failing to file an S corporation return or failing to provide information required to be shown on the return. The penalty amount is $85 per shareholder per month up to a maximum of 12 months. This change applies to S corporation tax returns due after December 20, 2007.
© Copyright 2008
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