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Like the weather, our tax laws are subject to frequent changes. Unfortunately, there continue to be many traps for the unwary and uninformed taxpayer.
Here are some highlights of changes in effect for 2007:
Personal exemption amount. This amount has increased to $3,400 per person for 2007.
Standard deductions. Standard deduction amounts have increased for 2007 as follows: singles and married filing separately, $5,350; heads of household, $7,850; married filing jointly, $10,700.
AMT exemption amount increased. The AMT exemption amount was increased in 2007 to $44,350 for singles, $66,250 if married filing jointly or a qualified widow(er), and $33,125 for married people filing separate returns.
Reporting children's income. Starting with the 2006 filing season, children under 18 and their parents face new filing requirements. Also, the "kiddie tax" rules are now much less favorable to minor children with investment income and their families.
Standard mileage rate. The standard mileage rate for determining your deduction for the business use of a car has increased to 48.5 cents per mile in 2007. Those using their car for charitable purposes in 2007 can deduct 14 cents per mile. Cars used for deductible medical travel or moving can deduct 20 cents per mile in 2007.
Residential energy credits. Beginning in 2006 and through 2007, you may be able to take a residential energy credit for the costs of having qualified energy saving items installed in your main home. The credit is subject to a lifetime limitation of $500 and no more than $200 of the credit can be used towards the purchase of energy efficient windows.
There is also a new tax credit available to help individual taxpayers pay for residential alternative energy equipment. The credit is 30 percent of the cost of eligible solar water heaters, solar electricity equipment and fuel cell plants. The maximum credit is $2,000 per tax year for each category of solar equipment, and $500 for each half kilowatt of capacity of fuel cell plants installed per tax year.
Adoption tax credit. In 2007, the maximum credit allowed for an adoption of a special needs child or other adoption is $11,390. The credit begins to phase out for taxpayers with modified adjusted gross income over $170,820 and is completely phased out at $210,820.
IRA deduction. The maximum IRA deduction allowed per person continues to be $4,000 in 2007. However, those who are at least 50 years old can now make an additional catch-up contribution of $1,000 to their IRA in each of those years.
Retirement plan elective deferral limits. An employee's maximum salary deferral to a 401(k) plan, a tax-sheltered 403(b) annuity, a salary reduction simplified employee pension (SEP) plan, or a government-sponsored 457 plan increases to $15,500 in 2007. Those 50 years or older can make additional catch-up contributions to their plans of $5,000 in 2007.
Elective deferrals to a SIMPLE plan increase to $10,500 in 2007. SIMPLE plan participants who are age 50 and over can make additional catch-up contributions of $2,500 in 2007.
Where to mail your return. The IRS has changed the mailing addresses (again) for filing an income tax return in several areas, so make sure that your return gets to its proper filing location.
Estate taxes. The amounts that can be excluded from an estate for estate tax purposes is set at $2 million in 2007 and 2008.
Expired tax provisions. A number of tax benefits expired in 2007. For individual taxpayers, these include the telephone excise tax refund and the special personal exemption for housing Hurricane Katrina victims. For business taxpayers, a number of Hurricane Katrina-related tax benefits have expired. In addition, the Work Opportunity Tax Credit and Welfare-to-Work incentives have been combined to create one unified tax benefit for hiring disadvantaged employees.
Changes Beyond 2007
It would easily take an entire book just to explain the many tax law changes enacted in 2001 through 2005 that will be phased in through 2010. The following, however, are some of the highlights you can look forward to in the years to come:
Personal exemption amount. This amount has increased to $3,500 per person in 2008.
Standard deductions. Standard deduction amounts have increased for 2008 as follows: singles and married filing separately, $5,450; heads of household, $8,000; married filing jointly, $10,900.
Standard mileage rate. The standard mileage rate for determining your deduction for the business use of a car has increased to 50.5 cents per mile in 2008. Those using their car for charitable purposes in 2007 can deduct 14 cents per mile. Cars used for deductible medical travel or moving can deduct 19 cents per mile in 2008.
Equipment expensing election. For 2008, the expensing limit is $128,000 and investment limitation is the $510,000.
Adoption tax credit. In 2008, the maximum credit allowed for an adoption of a special needs child or other adoption is $11,650. The credit begins to phase out for taxpayers with modified adjusted gross income over $174,730 and is completely phased out at $214,730.
Retirement plan elective deferral limits. An employee's maximum salary deferral to a 401(k) plan, a tax-sheltered 403(b) annuity, a salary reduction simplified employee pension (SEP) plan, or a government-sponsored 457 plan will remain $15,500 in 2008. Those 50 years or older can make additional catch-up contributions to their plans of $5,000 in 2008.
Elective deferrals to a SIMPLE plan remain $10,500 in 2008. SIMPLE plan participants who are age 50 and over can make additional catch-up contributions of $2,500 in 2008.
Estate taxes. The amounts that can be excluded from an estate for estate tax purposes increase to $3.5 million in 2009. Estate taxes will be repealed for those dying in 2010, but may return unless Congress acts to make the repeal permanent.
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