Highlights of the New Tax Laws

Highlights of the New Tax Laws

Tax Legislation Enacted in 2007

Small Business and Work Opportunity Tax Act of 2007, enacted May 25, 2007.

Temporary Tax Relief Act of 2007 passed by the House on December 21, 2007 and signed by the President before the end of 2007.

Major Highlights of Temporary Tax Relief Act of 2007

Mortgage Forgiveness Debt Relief

The bill amends current law, which required taxpayers to include discharges of mortgage indebtedness as income and to pay tax on this income. The bill provides a permanent exclusion for discharges of up to two million dollars of indebtedness (on or after January 1, 2007) which is secured by a principal residence and which is incurred in the acquisition, construction, or substantial improvement of the principal residence. Instead of including this amount as income, the basis of the individual’s principal residence will be reduced by the amount excluded from income under this bill. This proposal is estimated to cost approximately $1.34 billion over 10 years.

Alternative Minimum Tax (AMT) Patch Approved by the House

The one-year AMT “patch” passed by Congress and signed into law by President Bush in the eleventh hour can mean a lot of different things to a lot of different people. The great news is that the situation has gone from potentially awful to pretty good. The bill effectively prevented 20 million taxpayers from feeling the dreaded bite of the AMT.

So, here’s the breakdown on the new AMT legislation (formally known as the Tax Increase Prevention Act (TIPA) of 2007).

The AMT exemption amounts are as follows:

$66,250 for married couples who file jointly (or surviving spouses)
$44,350 for single taxpayers
$33,125 for married couples who file separately

The phaseouts that were in place before the TIPA was passed remain the same:

Married filing jointly: $66,250, less 25% of AMT income exceeding $150,000 (zero exemption for $415,000 or more)
Single: $44,350 less 25% of AMT income exceeding $112,500 (zero exemption for incomes over $289,900)
Married filing separately: $33,125 less 25% of AMT income exceeding $75,000 (zero exemption for incomes over $207,500); however, AMT income for married filing separately is increased by the lesser of $33,125 or 25% of the excess of AMT income (without regard to the exemption reduction) for incomes over $207,500

The TIPA is a temporary fix:

This legislation is purely a stop gap measure. Congress chose to do as they have done in the past and simply patch the AMT, not fix it entirely. If Congress does not act in a similar fashion next year or solve the AMT issue, the exemption levels for 2008 will revert to the levels they were at in 2000.

The IRS has announced that they were able to implement the changes needed faster than originally thought, which is good for most of us. However, there are as many as 13.5 million taxpayers who use one of five AMT related forms, who will have to wait until at least February 11^th to have their returns processed.

The delay will affect filers who file any of the five forms listed below:

Form 8863: Education Credits
Form 5695: Residential Energy Credits
Form 1040A’s Schedule 2: Child and Dependent Care Expenses for Form 1040A Filers
Form 8396: Mortgage Interest Credit
Form 8859: District of Columbia First-Time Homebuyer Credit

The IRS is encouraging taxpayers to e-file their returns, especially if it would be affected by the AMT patch.

Kiddie Tax

The 2007 Small Business Tax Act raised the kiddie tax threshold from under age 18 to under age 19 (or, more relevant to the vast majority of taxpayers for whom the kiddie tax is a concern, over age 18 but under age 24 for full-time students). The expanded provision applies only to children whose earned income does not exceed one half of the amount of their support. The threshold for the kiddie tax was under age 14 for some time.

Beginning in the 2008 calendar year, for most taxpayers, the net investment income of a child will be subject to the kiddie tax under the following circumstances, respectively, assuming that he or she has a living parent and does not file a joint return:

17 years old or younger: will continue to be subject to the kiddie tax regardless of the amount of his or her own support provided with earned income
18 years old: subject to the kiddie tax unless the child provides more than half of his or her own support with earned income
19- to 23-year old students: subject to kiddie tax unless the child provides more than half of his or her own support with earned income

Energy Tax Incentives Act of 2005

President Bush signed the Energy Tax Incentives Act of 2005 (2005 Energy Act) on August 8, 2005. It contains several provisions that are geared toward individuals and small businesses.

Residential Energy Property Tax Credit

This credit rewards taxpayers for making energy-efficient improvements to their existing home. The maximum “lifetime limit” of the credit is $500 and is available only for items placed into service during 2006 and 2007. The credit consists of two elements: the Residential Energy Conservation Property Credit and the Residential Energy Property Expenditures Credit.

The residential energy conservation property credit includes the cost of windows, walls, doors, roofs and insulation. These materials must meet certain energy conservation codes. Limitations apply to the credit. The credit applies only to the taxpayer’s principal residence. The items must be new and placed in service during 2006 or 2007. The property must be reasonably expected to be in use for five years. The credit is limited to 10% of the cost up to a maximum credit of $200.

The residential energy property expenditure credit consists of three types of qualifying property. Certain furnaces may be eligible for credits up to $150. Advanced main circulating fans qualify for credits up to $50. Energy-efficient building property such as electric and geothermal heat pumps and central air conditioners may qualify for credits up to $300. To qualify the property must meet performance and quality standards adopted by the IRS. All qualifying property must be installed for use in the taxpayer’s principal residence and must be new when placed in service. Labor costs are included in the calculation of this portion of the credit up to the $500 lifetime maximum amount.

Residential Alternative Energy Expenditure Credit

This credit is available to individual taxpayers who install certain alternative energy-producing property in their homes. Solar hot water, photovoltaic (solar-powered, electricity-producing property), and fuel cell property are eligible for the credit of up to 30% of cost, including labor and installation. The maximum credit for a solar hot water system and/or a solar electricity system is $2,000, limited to one credit per system type. No part of either system may be used to heat a pool or a hot tub. The credit for fuel cell property is $500 for each 0.5 kilowatt capacity of the fuel cell and is unlimited. These credits apply to any property, including vacation homes, used as a residence by the taxpayer. The solar property must meet certification standards to qualify for the credit.

Energy-Efficient New Home Production Credit

A special credit is available for contractors who build new homes. One contractor, i.e. the general contractor, may claim a credit of up to $2,000 for each home built that qualifies as energy efficient. A similar credit, up to $1,000, is available for manufactured homes that meet a 30% energy consumption reduction standard. The homes must meet certification guidelines adopted by the IRS and the Energy Department.

Energy-Efficient Commercial Building Deduction

Businesses can also take advantage of these new energy conservation incentives. Businesses, except for homebuilders, are entitled to a deduction, rather than a credit. The deduction reduces taxable income rather than directly reducing the tax liability. The deduction is an immediate write-off of the full cost of the expenditure, rather than depreciating over time. The maximum deduction allowed is $1.80 per square foot and is available only for property placed in service during 2006 and 2007. To qualify for the full deduction, the overall cost-reducing plan must target all three building systems−the interior lighting system, the heating, ventilation, air conditioning (HVAC) or hot water systems, and the building envelope, which includes everything that separates the interior of the building from the outdoor environment. The cost-reducing plan must aim to reduce the building’s energy consumption cost by at least 50% in comparison to a “reference building”, or a hypothetical building standardized by the IRS.

Alternative “Green” Vehicles

Businesses and individuals are eligible for tax incentives for the purchase of environmentally friendly “green” vehicles. This credit applies to hybrids, advanced lean-burn technology vehicles, vehicles powered by fuel cells, and alternative fuel vehicles. Electric cars are not included.

For hybrid and lean-burn vehicles the amount of the credit may be up to $3,400. These vehicles have drive trains powered by both an internal combustion engine and a rechargeable battery. Many currently available hybrid vehicles may qualify for the tax credit. This credit begins to phase out during the second calendar quarter after the quarter that the manufacturer records its sale of the 60,000^th hybrid and/or advanced lean-burn technology vehicle. The credit expires after the fifth calendar quarter after the manufacturer’s sale of the 60,000^th hybrid vehicle. The credit will be phasing out and expiring at different times for each manufacturer.

For fuel cell powered cars and light trucks the credit can be as high as $12,000. Higher credits are available for heavier vehicles. This credit expires December 31, 2014.

Alternative fuel vehicles may be eligible for a maximum credit of $3,000 for cars and light trucks, based on the cost of the vehicle. Vehicles included in this class are powered by compressed natural gas, liquefied natural gas, liquefied petroleum gas and liquid fuels that are 85% ethanol, but do not include hybrid or fuel-cell vehicles. Higher credits are available for heavier vehicles. This credit ends December 31, 2010.

As always, Koerner, Koerner, Galati & Oriel, P.A. will be able to help guide you through the New Tax Legislation and allow you to make informed choices about your financial future.

New Jersey Tax Notes

Homestead Credit Program

P.L. 2007, c. 62, enacted on April 3, 2007, establishes a system of homestead credits for homeowners and residential tenants, replacing the current homestead rebate program. The credit program provides taxpayers with benefits calculated as a percentage of the property tax (up to a maximum of $10,000) that they paid during the previous year. The percentages used to calculate this benefit are based on income levels, with higher percentage benefits allowed for the lower income levels, and with no benefit allowed for those whose income exceeds $250,000. The act also imposes a 4% property tax levy cap on school districts and county and local governments, subject to limited exception and adjustments. The tax levy cap provisions will apply to budget years beginning on and after July 1, 2007, but not to years beginning after June 30, 2012. The homestead credit provisions will begin to apply to claims for rebates and credits for property tax paid for tax year 2007.

Eligibility

You are eligible for a 2007 New Jersey homestead credit or rebate if your domicile (or permanent legal residence) is in New Jersey and you meet the following conditions:

Own and occupy a home in New Jersey that was your principal residence on October 1, 2007;
Have gross income for 2007 of $250,000 or less; (Do not include income that is not subject to New Jersey gross income tax such as Social Security, Railroad Retirement benefits, or unemployment compensation.)
The home must be subject to local property taxes, and 2007 property taxes must have been paid.

New Jersey residents are not eligible for a homestead credit or rebate if no property taxes are paid on their dwellings. This includes:

Homeowners completely exempt from paying property taxes on their principal residence. This can include certain disabled veterans and their unmarried surviving spouses/surviving civil union partners/surviving domestic partners who may claim a 100% exemption from local property taxes under certain conditions.
Homeowners who made P.I.L.O.T. (Payments-in-Lieu-of-Tax) payments to their municipality. These payments are not considered property taxes for purposes of the homestead credit/rebate.

How to File

Applications are expected to be mailed at the beginning of May to homeowners who were 65 years of age or older or disabled on December 31, 2007. Applications are scheduled to be mailed to all other homeowners in July.

NOTE: Homeowners do not file their homestead rebate applications with the New Jersey income tax return. Only tenants use Form TR-1040 in the resident income tax return packet and only tenants file their homestead rebate applications electronically at the same time they file their New Jersey tax returns.

Credit/Rebate Amount

The Division of Taxation calculates the amount of the credit or rebate based on the information provided in the application. The amount is determined by income, property taxes paid, and whether the applicant was age 65 or older or eligible to claim an exemption as blind or disabled for tax year 2007.

NJ-1040

New Jersey Tax Rate Schedule

(For use in calculating your NJ personal income tax)

2007 Quick Tax Method - For Taxable Income of:
Single, Married Filing Single	$ 0	-	20,000	x	1.400%	minus	$ 0.00	=	Tax
	20,001	-	35,000	x	1.750%	minus	70.00	=	Tax
	35,001	-	40,000	x	3.500%	minus	682.50	=	Tax
	40,001	-	75,000	x	5.525%	minus	1,492.50	=	Tax
	75,001	-	500,000	x	6.370%	minus	2,126.25	=	Tax
	500,001		and over	x	8.970%	minus	15,126.25	=	Tax

Married Filing Jointly, Head of Household, Qualifying Widow	$ 0	-	20,000	x	1.400%	minus	$ 0.00	=	Tax
	20,001	-	50,000	x	1.750%	minus	70.00	=	Tax
	50,001	-	70,000	x	2.450%	minus	420.00	=	Tax
	70,001	-	80,000	x	3.500%	minus	1,154.50	=	Tax
	80,001	-	150,000	x	5.525%	minus	2,775.00	=	Tax
	150,001	-	500,000	x	6.370%	minus	4,042.50	=	Tax
	500,001		and over	x	8.970%	minus	17,042.50	=	Tax

Federal Income Tax Quick Reference Guide

Auto Standard Mileage

USE	AMOUNT
	2007 2008
Business	48.5¢ per mile	50.5¢ per mile
Charitable	14¢ per mile	14¢ per mile
Medical	20¢ per mile	19¢ per mile
Moving	20¢ per mile	19¢ per mile

2007 Retirement Plan Contribution Limits

2007 Contribution Limits
Plan Type	Under Age 50	Age 50+
401(k)/403(b)/457/Salary Reduction SEP	$15,500	$20,500
SIMPLE	$10,500	$13,000
IRA (Traditional/Roth)	$4,000	$5,000
Employer-sponsored plans may have additional contribution limits. Not all employer plans allow the higher contribution amounts for those aged 50 and older. The SIMPLE plan limit is subject to inflation adjustment for 2007. The IRA limitation caps a person’s combined contributions to traditional and Roth IRAs for the year.

2007 Section 179 Deduction

Maximum Expense Election	$125,000
Phase-out Threshold	$500,000

2007 Federal Income Tax Table

2007 Federal Income Tax Table
If taxable income is:
Over	But Not Over	The Tax Is	Of The Amount Over
Married Filing Jointly or Qualifying Widow:
$0	$15,650	$0 + 10%	$0
$15,650	$63,700	$1,565 + 15%	$15,650
$63,700	$128,500	$8,773 + 25%	$63,700
$128,500	$195,850	$24,973 + 28%	$128,500
$195,850	$349,700	$43,831 + 33%	$195,850
$349,700	And Over	$94,601 + 35%	$349,700
Single:
$0	$7,825	$0 + 10%	$0
$7,825	$31,850	$788 + 15%	$7,825
$31,850	$77,100	$4,386 + 25%	$31,850
$77,100	$160,850	$15,699 + 28%	$77,100
$160,850	$349,700	$39,149 + 33%	$160,850
$349,700	And Over	$101,469 + 35%	$349,700
Estates and Trusts:
$0	$2,150	$0 + 15%	$0
$2,150	$5,000	$323 + 25%	$2,150
$5,000	$7,650	$1,035 + 28%	$5,000
$7,650	$10,450	$1,777 + 33%	$7,650
$10,450	And Over	$2,701 + 35%	$10,450
Married Filing Separately:
$0	$7,825	$0 + 10%	$0
$7,825	$31,850	$782.50 + 15%	$7,825
$31,850	$64,250	$4,386.25 + 25%	$31,850
$64,250	$97,925