The new law now allows some homeowners to deduct a common insurance cost. A last-minute compromise on Capitol Hill granted millions of taxpayers a reprieve from the costly alternative minimum tax. And while one law made it easier for some to give to their favorite charities, another will have some philanthropic filers scrambling to find receipts. Check bellow some real facts that can help homeowners and folks following the social and go green concept helping the others and the planet. For last a couple of law changes passed last year took effect Jan. 1 and could affect your 2008 tax planning.
The year 2007 was dominated by housing woes. Many individuals who took out adjustable-rate mortgages to buy homes discovered that those loan terms, a changing economy and slumping housing market combined into a perfect homeownership storm. Many individuals lost their houses to foreclosure; others were able to renegotiate more manageable payment terms. But in both cases, many of those homeowners soon discovered that they also owed unexpected taxes related to their real estate transactions.
Tax laws consider debt that a lender forgives as taxable income. In a homeowner’s case, for example, if the bank reworks a loan so that the principal is less and writes off that excess, the amount is taxable cancellation of debt income. The same is true in certain situations where a mortgage lender forecloses on a home and sells it for less than the owner’s loan principal. For example, if a bank forecloses when the borrower owes $400,000 on a home and then sells the property for $310,000 in full satisfaction of the debt, the borrower will usually owe tax on $90,000. Although the taxability of debt forgiveness amounts has long been on the tax books, it came as a huge surprise to many homeowners.
Apparently, politicians thought so, too. Under the Mortgage Debt Forgiveness Act of 2007, some homeowners granted forgiveness of mortgage debt won’t have to pay taxes on that amount. But there are some restrictions:
A) There is a limit on the forgiven debt: up to $2 million or $1 million for a married person filing a separate return.
B) The tax break also has a time limit. It only applies to mortgage debt discharged by a lender in 2007, 2008 or 2009.
C) The loan also must have been taken out to buy or build a primary residence, not a second or vacation home. If debt is forgiven on those additional properties, the owner will owe cancellation of debt income as usual.
Donation Proof Demanded
The IRS got tougher on donation documentation in 2007. Previously, you had to get a receipt or other acknowledgement from a charity if you gave $250 or more. Now, for a monetary gift of any amount, must be able to produce “a bank record or a written communication” from the charity detailing the group’s name and the date and amount of the gift. A canceled check is fine. If you charge a contribution, your credit card statement should be sufficient. Many charities also already provide a receipt for all monetary gifts, regardless of the amount.
You don’t have to send the receipts for your smaller financial gifts with your 1040, but you will need them if the IRS questions your deductions. Without them, the agency will automatically disallow the write-off. And don’t forget about the good-or-better requirement that took effect in August 2006 for noncash gifts. Under this law, if the IRS determines you donated clothing or household items that didn’t meet the standard, it can disallow your deduction. So don’t even think about dumping worthless items in a charity’s donation bin and then deducting the so-called gift.
Older Philanthropist Options
One tax-law change, however, made last year’s charitable giving by older philanthropists easier. Individuals 70½ or older were able to transfer money directly from an IRA to a charitable organization. The option is available to either Roth or traditional IRA owners, but it is most beneficial when the money comes from a traditional account, because much of that cash is eventually taxed. This was the case for taxpayers who had to take required minimum distributions from a traditional IRA. By sending the withdrawal directly to a charity, the donated amount wasn’t included in the giver’s taxable income, thereby lowering the filer’s tax bill a bit.
If you took advantage of this option, remember that you can’t double dip by claiming a deduction for the contribution. For this reason, the rollover method appeals to taxpayers who otherwise wouldn’t get a tax deduction, such as those who take the standard deduction instead of itemizing. The direct to charity rollover expired at the end of 2007. However, it should be renewed for the 2008 tax year. The House approved a one-year extension as part of its alternative minimum tax measure, but the charitable provisions were dropped by the Senate and never made it into the final AMT patch. Look for lawmakers to act early in 2008 to reauthorize this donation option so that older IRA account holders can plan accordingly.
Home Energy and Tax Savings
A carryover tax break from 2006 might be able to help cut your 2007 tax bill, too. The Energy Tax Incentives Act of 2005 offers taxpayers a tax credit for making energy-efficient home improvements. Credits, which reduce your tax bill dollar for dollar, range from $50 for the installation of a whole-house circulating fan to $2,000 for conversion to a solar water-heating system. Relatively simple upgrades, such as replacing drafty windows and doors, adding insulation and replacing an old heating or air conditioning unit will allow you to shave several hundred dollars off your tax bill. The one drawback to this tax break, which expired at the end of 2007, is that any energy-efficient home improvements you made last year must be combined with any you made in 2006. And the two-year total allowed is only $500. You can, however, claim more generous credits if you added solar water, heat or power systems to your house last year. And solar-related credits continue for 2008.
Fuel-Efficient Auto Tax Savings
Another continuing credit for energy conscious taxpayers is the one allowed for hybrid vehicles. Tax credits, depending on the make and model of the vehicle, range from a couple hundred dollars to several thousand. However, the credit phases out for the fuel-efficient vehicles once a carmaker sells 60,000 hybrids; eventually the credits are completely eliminated. That happened to Toyota in 2007, meaning you’ll need to pay attention to when you bought your vehicle to determine your precise tax savings. If you purchased a Toyota or one of its Lexus model hybrids after Oct. 1, 2007, you get no tax credit. The tax break for qualifying automakers continues through 2010, but the credit amounts will be reduced for some vehicles. Honda credits, for example, were cut in half Jan. 1.
General Significant 2008 Tax Law Changes
While they won’t affect your 2007 return due this April, you might find them useful as you devise your 2008 tax strategies.
1) Expansion of the home-sale exclusion for surviving spouses.
2) More changes to the kiddie tax.
3) Zero percent capital gains taxes for some investors.
Under prior tax law, a married couple could exclude up to $500,000 profit from taxation when they sold their home as long as they met certain conditions. After a spouse’s death, the surviving spouse also could claim that exclusion amount if the home was sold in the year his other spouse passed away. In that situation, the widow or widower would be able to file a tax return using the married filing jointly status.
However, if the widow or widower sold the residence the next year or later, the sale exclusion was cut in half. Because many widows and widowers delay making such major decisions after losing a husband or wife, they were penalized by the tax code when they finally did sell their house. But thanks to a provision in the Mortgage Debt Forgiveness Act, bereaved home sellers get some tax relief. Now a surviving spouse has two years in which to sell a home that was jointly owned and take the $500,000 gain exclusion.
Parents also need to pay attention to the Jan. 1 changes to the kiddie tax. In order to save for their child’s college costs, some parents open accounts in the child’s name. Not only does this designate the fund for the youngster’s use, but it also had the tax advantage of having the earnings taxed at the youth’s usually lower rate. However, when a child’s account earns a certain amount ($1,700 in 2007, $1,800 in 2008), the kiddie tax kicks in. In essence, the kiddie tax requires that excess earnings be taxed at the parents’ highest marginal tax rate (which could be as high as 35 percent) until the child reaches a certain age, at which time the child’s lower rates (typically 10 percent to15 percent) then apply. In 2007, a child’s tax rates took effect when the youth turned 18. For 2008, the parents’ higher rates will be collected on investment earnings until the child turns 19 or 24 if the youngster is a full-time student.
Now about that new no taxes due law. Taxpayers in the 10 percent and 15 percent tax brackets can sell long-term assets this year through 2010 and not owe any capital gains on the profits. To qualify for the zero rate in 2008, a married couple must make less than $65,100 in taxable income; single filers earning less than $32,550 will pay no tax on their sales of assets they’ve owned for more than a year.
While the kiddie tax might keep many young investors from taking advantage of this law change, it could be a viable strategy for others such as retirees whose income will allow them to take advantage of the zero capital gains break. Finally, in addition to the new 2007 tax code changes and prior year carryovers, many pre-existing laws have new dollar amounts this filing year, thanks to inflation adjustments.
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