Articles Posted in AMT

As I’m sure you’re aware, on Oct. 3, 2008, the President signed into law the Emergency Economic Stabilization Act of 2008 (P.L. 110-343). Although virtually all of the press coverage of this law has concentrated on its hotly debated $700 billion financial industry bailout plan, the legislation also contains scores of tax changes, mostly beneficial, for individuals and businesses alike.

Here’s a brief review of the tax provisions individuals need to know about right now.

AMT relief: In general terms, to find out if you owe alternative minimum tax (AMT), you start with regular taxable income, modify it with various adjustments and preferences (such as addbacks for property and income tax deductions and dependency exemptions), and then subtract an exemption amount (which phases out at higher levels of income). The result is multiplied by an AMT tax rate of 26% or 28% to arrive at the tentative minimum tax. You pay the AMT only if the tentative minimum tax exceeds your regular tax bill. Although it was originally enacted to make sure that wealthy individuals did not escape paying taxes, the AMT has wound up ensnaring many middle-income taxpayers. One reason is that many of the tax figures (such as the tax brackets, standard deductions, and personal exemptions) used to arrive at your regular tax bill are adjusted for inflation, but the tax figures used to arrive at the AMT are not.

For 2008 only, the new law provides some relief. It increases the maximum AMT exemption amount over its 2007 level by $3,700 for married taxpayers filing joint returns, and by $1,850 for unmarried individuals and married persons filing separately. However, after 2008 the maximum AMT exemption amount will drop precipitously to where it was in the year 2000 unless Congress provides yet another fix.

Another provision in the new law provides AMT relief for those individuals claiming certain “nonrefundable” personal tax credits (such as the credit for dependent care and the Scholarship and Lifetime Learning credits). For 2008, these credits may offset an individual’s regular tax and AMT. After 2008, unless Congress acts, these credits will be allowed only to the extent that an individual has regular income tax liability in excess of the tentative minimum tax.

The new law also liberalized the AMT refundable credit amount that was first enacted in 2006 to help taxpayers who were stung by the AMT as a result of exercising incentive stock options (ISOs). The changes are highly technical but their essence is that for tax years beginning after 2007: (1) eligible individuals may claim this credit more rapidly (i.e., over fewer years) than would have been the case without the change; and (2) the AMT refundable credit amount no longer phases out at higher levels of adjusted gross income (AGI). In addition, the new law wipes out any tax underpayments (plus interest & penalties) outstanding on Oct. 3, 2008, that are attributable to pre-2008 phantom ISO income under the AMT rules.

Retroactively resuscitated and extended tax breaks: All of the following tax breaks had expired at the end of last year. The new law retroactively resuscitates them so that they apply for 2008, and also extends them for one year so that they will apply for 2009 as well:

  • The option to claim an itemized deduction for state and local general sales taxes instead of the itemized deduction for state and local income taxes.
  • The above-the-line deduction for qualified tuition and related expenses for higher education paid during the tax year.
  • The up-to-$250 eligible educator’s above-the-line deduction for books, supplies, computer equipment, etc., used by him or her in the classroom.
  • The up-to-$100,000 annual exclusion from gross income for taxpayers age 70 1/2 or older who make direct transfers of otherwise taxable individual retirement account (IRA) distributions to qualified charitable organizations.

The new law also extends for one year the nonitemizers’ additional standard deduction for State and local property taxes paid. The deduction can’t exceed the lesser of state and local property taxes actually paid or $500 ($1,000 for joint return filers). This deduction was supposed to have been available only for 2008, but the new law makes it available for 2009 as well.

Deductions for energy saving home improvements extended and expanded: Two tax credits are available for taxpayers who make energy saving improvements to residences. They’ve both been extended by the new law and expanded as well:

(1) A generous tax credit is available to individuals who add solar energy equipment or fuel-cell equipment (new technology that converts fuel into electricity using electromechanical methods, and meets other detailed requirements) to their residences. The new law extends this credit through 2016. It also liberalizes the credit in an important way: For 2008, you can claim a tax credit of 30% of the cost of equipment that uses solar energy to generate electricity (photovoltaic property), up to a $2,000 maximum tax credit. After 2008, there’s no dollar limitation on the credit. For example, suppose you spend $8,000 buying and installing solar heating panels on your residence. If you make the improvement this year, you may claim a maximum credit of $2,000, but if you make the improvement next year, you may claim a credit of $2,400 (30% of $8,000).

Additionally, starting with 2008, the new law makes the credit available for more-exotic energy generating/retaining equipment: wind turbines; and geothermal heat pumps.

(2) For equipment installed before 2008, you could claim a credit for the cost of buying an assortment of energy saving improvements and installing them in your main home. The credit depends on the type of improvement (e.g., 10% of the cost of energy efficient building envelope components, such as insulation and windows, and an up to $150 credit for a natural gas, propane, or oil furnace or hot water boiler) and there’s an overall $500 lifetime dollar limit for all improvements.

The new law does not extend this credit for qualifying equipment bought and installed in 2008, but it does make it available once again for qualifying equipment bought and installed in 2009. Also, for 2009, the new law makes the credit available for certain types of energy efficient biomass fuel stoves and certain types of energy saving asphalt roofs.

New tax relief for victims of Presidentially declared disasters: Individuals may deduct personal casualty losses (e.g., unreimbursed damage to a car due to a storm) or personal theft losses only if they exceed a $100 limit per casualty or theft and only to the extent these losses in the aggregate exceed 10% of adjusted gross income (AGI). If the disaster occurs in a Presidentially declared disaster area, an individual may elect to take into account the casualty loss in the year immediately preceding the year in which the disaster occurs. Before 2008, only itemizers could deduct casualty losses.

The new law waives the 10%-of-AGI limit for victims of disasters declared to be federal disasters in 2008 and 2009, plus, for these years, permits nonitemizers to claim a deduction for federal disaster losses. However, for 2009 only, the new law boosts the $100 per casualty limit to $500 (which will have the effect of reducing deductions).

The new law also gives a number of extra tax breaks to victims of the storms and hurricanes that pummeled ten Midwest states during 2008.

More detailed reporting of securities transactions – after 2010: Stock brokers must file an information return (Form 1099-B) for securities transactions they handle. Currently, brokers report the name and address of the customer, when the sale took place, what was sold, and the gross proceeds of the sale. Starting with stocks (as well as bonds and several other financial instruments) bought after 2010 (a later date applies to some specialized securities), brokers will have to report the customer’s adjusted basis (essentially cost for tax purposes) and whether a gain or loss on the transaction was short- or long-term.

This new information reporting requirement is designed to boost IRS’s compliance efforts (e.g., help assure taxpayers properly report their gains and losses).

Please keep in mind that I’ve described only the highlights of how the new law affects you. If you would like more details, please call me at your convenience.

House passes AMT relief with bipartisan majority President threatens veto

On June 25, the House by a vote of 233 to 189 approved H.R.6275, the “Alternative Minimum Tax Relief Act of 2008.” The bill will be sent to the Senate for consideration.

The bill would patch the alternative minimum tax (AMT) problem for 2008 by extending for one year AMT relief for nonrefundable personal credits and increasing AMT exemption amounts to $69,950 for joint filers and $46,200 for individuals. The one-year AMT patch would be fully offset with a variety of revenue raising measures, including taxing certain carried interests as ordinary income, barring large integrated oil companies from claiming the Code Sec. 199 domestic production activity deduction, freezing the Code Sec. 199 deduction at the 6% level for other producers of oil and natural gas, and requiring information returns for merchant payment card reimbursements.

On June 24, in a Statement of Administration Policy, President Bush indicated that he would veto the bill because of his strong opposition to provisions raising taxes on certain partners in partnerships and taxes on payments by U.S. subsidiaries to foreign affiliates and limiting the availability of the domestic production deduction for certain oil companies.

The most important IRS Tax Development in Q1 2008

Mike Habib, EA

myIRSTaxRelief.com

While the Economic Stimulus Act of 2008 was the most significant development in the first quarter of 2008, many other tax developments may affect you, your family, and your livelihood. The new law changes and other key developments are summarized below. Please contact us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

Economic Stimulus Act. On Feb. 13, President Bush signed the “Economic Stimulus Act of 2008″ (Stimulus Act) into law. The centerpiece of the Stimulus Act, which was designed to bolster the sagging economy, was a provision that puts extra cash into the hands of most Americans. Most will receive a rebate check in 2008 from the IRS based on the filing status and income stated on their 2007 return (which is filed in 2008). Some will get a tax credit in 2009 when they file their returns for tax year 2008, and still others (depending largely on income in tax years 2007 and 2008) may receive a combination of a rebate check in 2008 and an income tax credit in 2009. To receive the cash rebate, taxpayers, including many who wouldn’t ordinarily have to file a return, must file a return for tax year 2007. Key provisions in the Stimulus Act include:

  • Most taxpayers are to receive cash rebate payments, which typically will equal the amount of tax liability on the 2007 return, up to a maximum amount of $600 for individuals ($1,200 for taxpayers who file a joint return) and a minimum of $300 for individuals ($600 for taxpayers who file a joint return). There is also an additional $300 for each qualifying child. The rebates are reduced by 5% of adjusted gross income (AGI) in excess of $75,000 for individuals and $150,000 for those who are married and file jointly. Those individuals who have little or no tax liability may also qualify for a minimum payment of $300 ($600 if filing a joint return) if they file a tax return that reflects $3,000 or more in qualifying income (which includes Social Security benefits, railroad retirement benefits, and certain disability or survivors’ benefits from the Veterans Administration).
  • Expensingis made much more attractive. The amount that a taxpayer could otherwise expense, $128,000, has been increased to $250,000 for tax years that begin in 2008. And, the $510,000 overall investment limit (beyond which there’s a phaseout of current expensing) has been increased to $800,000.
  • In addition to the usual depreciation allowed for business property, taxpayers may take an extra “bonus” depreciation deduction for the first year certain property is placed in service. A bonus first-year depreciation deduction of 50% of adjusted basis is allowed for qualified property (most new personal property and software) acquired and placed in service after Dec. 31, 2007, and before Jan. 1, 2009. (The liberalized rules for writing off business autos are covered below.)

Zero tax on long-term capital gain and dividend income. Beginning this year and continuing through 2010, a zero tax rate applies to most long-term capital gain and dividend income that would otherwise be taxed at the regular 15% rate and/or the regular 10% rate (last year, a 5% rate applied to such income). This low rate has an impact not only on lower-bracket individuals but also, surprisingly, on some whose top dollars are taxed well in excess of 15%. The amount of income taxed at 0% depends on the interplay between an individual’s filing status, his taxable income, and how much of that taxable income consists of long-term capital gain and qualifying dividend income.

$1 million deduction limit. Generally, a publicly held corporation’s deduction for compensation paid during a tax year to its chief executive officer or any of its four highest paid officers is limited to $1 million. The IRS has formally ruled that compensation paid to an executive is not excepted from this limit as qualified performance-based compensation if the plan or contract under which it’s paid also provides for payment to the executive on: (1) termination without cause or for the executive’s resignation for good reason or (2) voluntary retirement. In a concession to taxpayers, the IRS will only apply this new interpretation of the rules prospectively.

Quicker deduction for payroll tax on bonuses and vacation pay. The IRS has allowed employers who use the accrual method of accounting and incur payroll taxes (Federal Insurance Contributions Act (FICA) tax and Federal Unemployment Tax Act (FUTA) tax) to take a deduction for bonuses and vacation pay in an earlier year than the year in which the amounts are paid in many cases. The IRS now allows these employers to use the recurring item accounting exception. In general, under this exception taxpayers may be able to currently deduct certain recurring liabilities that they pay on or before the earlier of when they must file their returns (including extensions), or the 15th day of the ninth calendar month after the close of the tax year.

Lifetime payouts to nonspouse IRA beneficiary. In a private letter ruling, the IRS has allowed a nonspouse beneficiary of an individual retirement account (IRA) to salvage lifetime payouts even though she failed an essential rule requiring distributions to begin by the end of the year following that of the IRA owner’s death. Generally, where an IRA owner dies before he must start taking annual required minimum distributions, the IRA must be distributed to a nonspouse beneficiary either within five years of his death, or over the life or life expectancy of the designated beneficiary. To qualify for the latter alternative, the distributions must begin no later than one year after the deceased owner’s death. However, the IRS allowed the beneficiary, who made up her missed annual required minimum distributions and paid a penalty excise tax, to avoid the tough five-year payout rule. This was an extremely favorable result for the taxpayer, allowing her to avoid quickly depleting the IRA (and by so doing, having to likely pay more taxes, sooner). The ruling illustrates the hazards of not receiving expert tax advice when dealing with post-death IRA distributions.

Trust’s investment advice fees. The Supreme Court has held that investment advisory fees paid by a trust were deductible only to the extent that they exceeded 2% of the trust’s adjusted gross income (AGI). Thus, such expenses didn’t qualify for the exception to the 2% of AGI limit in the tax law for costs paid or incurred in connection with the administration of a trust or estate that wouldn’t have been incurred if the property weren’t held in the trust or estate. However, for the sake of administrative convenience, the IRS has provided that, for tax years beginning before Jan. 1, 2008, nongrantor trusts and estates will not have to “unbundle” a fiduciary fee (i.e., separate the fee into components that are subject to the deduction limit and those that aren’t). As a result, for 2007 tax years, affected taxpayers can deduct the full amount of a bundled fiduciary fee without regard to the 2% floor.

Luxury auto depreciation limits for 2008. Under special “luxury automobile” rules, a taxpayer’s otherwise available depreciation deduction for business autos, light trucks, and minivans is subject to additional limits, which operate to extend depreciation beyond its regular period. The IRS has released the inflation-adjusted depreciation limits for business autos, light trucks and vans (including minivans) placed in service in 2008e.g., $10,960 for autos first place in service in 2008; $11,160 for light trucks or vans first place in service in 2008.

Chances of being audited.
The IRS has issued its annual data book, which provides statistical data on its fiscal year 2007 activities, including how many tax returns it examines (audits), and what categories of returns it focuses its resources on. Out of a total of 135 million individual returns filed in calendar year 2006, about 1,384,563 individual income tax returns (1.0%) were audited during fiscal year 2007, slightly more than those examined in the prior year. Of the 1.5 million individual farm returns that showed gross receipts from farming (Schedule F), only 5,705 (0.4%) were audited in 2007. For returns with total positive income of at least $200,000 and under $1 million, the audit rate was 2% for nonbusiness returns and 2.9% for business returns; for returns of $1 million or more, the audit rate was 9.3%. The audit rate for corporations with less than $10 million of assets was 0.9% (up from 0.8% in the prior year); and for corporations with $10 million or more of assets, it was 16.8% (down from 18.6%). The audit rate for
S corporations was 0.5% (up from 0.38% for the prior year); and for partnerships it was 0.4% (up from 0.36%).

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How falling interest rates and the declining stock market affect tax and estate planning

Mike Habib, EA

myIRSTaxRelief.com

Interest rates have dropped significantly in recent months and may drop even more given the state of the economy. Sagging rates can have a significant impact on many tax and estate planning strategies. Lower interest rates affect the income, estate and gift tax value of many types of transfers. In many cases, the drop in rates produces more favorable results for clients engaging in certain types of transactions. In other cases, however, the lower rates result in higher tax costs. Likewise, stock values generally have declined significantly in recent days. This article examines how falling interest rates and the declining stock market affect key tax and estate planning transactions and strategies.

IRS valuation tables. The value of annuities (other than commercial annuities), life estates, term interests, remainders and reversions for estate, gift and income tax purposes is determined using tables issued by IRS under Code Sec. 7520. The value in a given month under the tables may be higher or lower than the value in an earlier or later month because the interest factor under the tables changes monthly. For charitable transfers, the interest rate for the month of the transfer or for either of the two preceding months may be used. (Code Sec. 7520(a))

The Code Sec. 7520 interest rate for April 2008 is 3.4%.

    Observation: Over the past nine months from August 2007 to April 2008, the Code Sec. 7520 interest rate has ranged from a high of 6.2% (August 2007) to a low of 3.4% (April 2008). The rate hit an all-time low of 3.0% for transfers in July 2003 and has been as high as 11.6% (Apr. and May ’89).

How falling rates affect various noncharitable planning strategies. The discussion that follows explains various noncharitable financial and estate planning strategies and shows how they stack up under current falling rates.

Private annuity. Historically, private annuities have offered a number of income, gift and estate tax advantages. They also can save estate administration expenses and offer other nontax advantages as well. In the typical private annuity transaction, a parent transfers property to his child in return for that child’s unsecured promise to pay the parent a fixed, periodic income for life. If the fair market value of the property transferred equals the present value of the annuity under the Code Sec. 7520 valuation tables, there is no gift tax due.

    Observation: Historically, one huge advantage of a private annuity has been the opportunity to transfer highly appreciated property, and spread, and pay tax on, the gain over several years as annuity payments are received. Additionally, there was the prospect of being taxed on less than the entire gain if the annuitant died before the expiration of his tabular life expectancy. However, in 2006, IRS issued proposed regs that would knock out the income tax advantages of selling appreciated property in exchange for a private annuity. They would do this by causing the property seller’s gain to be recognized in the year the transaction is effected rather than as payments are received. The regs generally would apply for transactions entered into after Oct. 18, 2006. However, certain transactions effected before Apr. 19, 2007 would continue to be subject to the historical rules.

Entering into a private annuity when interest rates are lower results in a lower annual payment amount that the younger family member will have to make to the older family member to prevent a gift from arising on the transfer.

    Observation: Even though the lower interest rate results in a lower annual payment to the senior family member, that person often will prefer a lower rate so as to be able to transfer property at the lowest possible cost to the younger family member.

    illustration 1: In April 2008, Jones, age 70, transfers property worth $1 million to his daughter in exchange for a private annuity. She must make an annual payment of $96,752.97 to prevent a gift from arising on the transfer. This figure is determined by dividing $1 million by 10.3356, which is the annuity factor from Table S of IRS Publication 1457 for a 70-year old and an interest rate of 3.4%, which is the Code Sec. 7520 rate for April 2008.

    illustration 2: By way of comparison, had the transfer occurred when the interest factor was 6.2% as it was for August 2007, the annual payment to prevent a gift would have been $119,323.20.

    Observation: Those contemplating a private annuity and anticipating a further big drop in rates may want to wait before proceeding.

    Observation: A private annuity may be a good strategy for an individual with a short life expectancy who is not expected to survive for too many years. However, the mortality component of the valuation tables cannot be used to determine the present value of an annuity if the person with the measuring life is terminally ill when the gift is completed. Under Reg. § 25.7520-3(b)(3) , an individual who is known to have an incurable illness or other deteriorating physical condition is considered terminally ill if there is at least a 50% probability that he will die within one year.

    Observation: Stock values generally have been declining lately. Someone who is considering setting up a private annuity may want to fund it with stock that has undergone a steep decline in value from its high back to near its original purchase price. Such stock may be a good candidate for funding a private annuity because there would be little or no gain to report in the year of the transfer under the proposed regs if they take effect. Also, if the market turns around as it has often done in the past after steep downturns, the transaction can achieve considerable transfer tax savings. That’s because, the child will end up with a sizeable amount of property with no gift or estate tax cost imposed on the post-transfer appreciation in its value.

    Observation: Even individuals who lack the means to set up a private annuity should consider that now may be a good time to transfer stock to a junior family member. With prices as depressed as they are, in many cases blocks of stock can be transferred completely free of gift tax under the umbrella of the $12,000 annual exclusion. For example, 300 shares of stock that was previously worth, for example, $100 per share and that is now trading for $40 per share can be transferred to a single individual at no gift tax cost by virtue of the $12,000 annual exclusion. Here, too, if the stock bounces back to its earlier highs or beyond, the post-transfer appreciation will escape transfer tax costs.

Grantor retained annuity trust (GRAT). An individual can save transfer tax by setting up a GRAT. The individual retains an annuity interest for a specified term at the expiration of which the trust property goes to a child or other individual named at the outset. Gift tax is payable but only on the present value of the remainder interest, which is the value of the property transferred to the trust less the value of the retained annuity interest. A lower interest rate increases the value of the annuity retained by the grantor and thus reduces the value of the gift of the remainder in a GRAT.

The post-transfer appreciation in the value of the trust assets will escape transfer tax. However, this is so only if the grantor survives the trust term. If the grantor dies during the trust term, the trust property will be included in his gross estate under Code Sec. 2036(a) , which provides that property transferred by an individual during his lifetime is includible in his estate if he retains an interest for any period that does not in fact end before his death. But an individual who sets up a GRAT and dies before the end of the term would be no worse off than if he had not entered into the transaction except that he will have incurred the costs of setting up and administering the trust.

    illustration 3: In April 2008, Smith transfers $1 million to a trust, which is to pay him an annual annuity of $80,000 for 10 years. At the end of the 10 years, the trust property is to go to Smith’s daughter. The value of Smith’s retained annuity is $668,696. This figure is determined by multiplying $80,000 by 8.3587, which is the annuity factor from Table B of IRS Publication 1457 for a 10-year term and an interest rate of 3.4%. The value of the gift of the remainder to Smith’s daughter is $331,304.

    Observation: Because a GRAT requires the grantor’s survival of the term to be effective to reduce estate tax, it may not be suitable for use by an individual with a short life expectancy as a hedge against failing to survive until greater estate tax relief is phased in. However, such an individual may be able to realize some estate tax savings by establishing a GRAT with a relatively short term that he can be expected to survive.

    illustration 4: By way of comparison, had Smith made the transfer when the interest factor was 6.2%, the value of the gift would have been $416,736.

    observation: If interest rates decline more, gift tax costs of setting up a GRAT could be lowered. On the other hand, if they rise, gift tax costs could be increased.

Grantor retained income trust (GRIT). A GRIT is like a GRAT except that the grantor retains an income interest instead of an annuity interest. Code Sec. 2702 generally treats the grantor as making a gift of the full value of the property. However, the value of the gift of the remainder is determined under the valuation tables where the trust is funded with a personal residence of the grantor or the remainder goes to someone falling outside of the definition of family member, such as a nephew or niece. A lower interest rate results in a lower value for the retained interest and a higher value for the gift of remainder interest in a residence GRIT or other GRIT excepted from the Code Sec. 2702 rules.

    illustration 5: Bailey establishes a personal residence GRIT in April 2008, retaining a ten-year term interest. At the end of the 10-year period, the residence is to go to his son. The value of the residence at the time of the initial transfer to the trust is $400,000. The remainder factor from Table B of IRS Publication 1457 is .715805 at the current interest factor of 3.4%, making the value of the gift $284,195.

    illustration 6: Had Bailey engaged in the same transaction when the interest factor was 6.2%, the value of the gift would have been $219,187.

    Observation: Thus, higher rates actually produce a better result for this strategy than when interest rates are lower. So one may want to wait until interest rates rise before engaging in this type of transaction. It should be noted, however, that lower home values also make this a good time to establish a personal residence gift because the gift tax cost will be lowered by the decline in the home’s value relative to where it was during the housing boom. Thus, in holding out for a higher interest rate, taxpayers should consider how real estate values affect the decision of when to proceed with this strategy.

Grantor retained unitrust (GRUT). The interest factor does not affect the value of a gift of a remainder interest in a GRUT because the retained unitrust interest is the right to receive a fixed percentage of the trust’s assets and changes in rates inure uniformly to the benefit of the unitrust holder and the remainderperson.

How declining rates affect various charitable planning strategies. The discussion that follows explains various charitable planning strategies and shows how they stack up under current declining rates.

Charitable remainder annuity trust (CRAT). With a charitable remainder annuity trust, the donor retains an annuity interest for himself or someone else such as a family member and names a charity to receive the remainder at the end of the annuity term. The donor gets a current income tax deduction for the present value of the charity’s remainder interest. Now may not be a good time to establish a CRAT. That’s because, a lower interest rate produces smaller income, gift and estate tax charitable deductions and a higher gift tax value for a gifted annuity interest.

Charitable remainder unitrust (CRUT). A change in the rate does not affect income tax deductions for charitable remainder unitrusts or gift tax costs in connection with them.

Charitable lead unitrust. Estate and gift tax factors are essentially unaffected by changes in the rates.
Charitable lead annuity trust. A lower interest rate results in a larger gift or estate tax deduction for the annuity interest going to the charity and a smaller value for any gift of the remainder interest going to a private beneficiary. Thus, it may be a good time to establish a charitable gift annuity if the grantor is going to give the remainder interest to a family member. If rates decline further, more savings can be realized by waiting. And remember, with a charitable transfer, the interest rate for the month of the transfer or for either of the two prior months can be used. Thus, one can wait and still be afforded some protection if rates unexpectedly rise instead of dropping further.

Charitable transfer of remainder interest in residence or farm. A lower interest rate provides higher income, estate and gift tax deductions for a transfer of a remainder interest in a residence or farm. Conversely, a higher interest rate provides lower income, estate and gift tax deductions for a transfer of a remainder interest in a residence or farm.

Pooled income funds in existence for more than 3 years. Charitable income, gift and estate tax deductions for transfers to pooled income funds that have been in existence for more than 3 years are not affected by changes in interest rates because values of respective interests are determined with reference to the funds’ own rates of return. Any personal gift arising from the transfer also is not affected.

Mortgage Tax Debt Relief, AMT Relief – why you need professional tax advice

AMT relief. In general terms, to find out if you owe alternative minimum tax (AMT), you start with regular taxable income, modify it with various adjustments and preferences (such as add-backs for property and income tax deductions and dependency exemptions), and then subtract an exemption amount (which phases out at higher levels of income). The result is multiplied by an AMT tax rate of 26% or 28% to arrive at the tentative minimum tax. You pay the AMT only if the tentative minimum tax exceeds your regular tax bill..

Although it was originally enacted to make sure that wealthy individuals did not escape paying taxes, the AMT has wound up ensnaring many middle-income taxpayers. One reason is that many of the tax figures (such as the tax brackets, standard deductions, and personal exemptions) used to arrive at your regular tax bill are adjusted for inflation, but the tax figures used to arrive at the AMT are not.

For 2007 only, a new law provides some relief. It increases the maximum AMT exemption amount over its 2006 level by $3,700 for married taxpayers filing joint returns, and by $1,850 for unmarried individuals and married persons filing separately. However, after 2007, the maximum AMT exemption amount will drop precipitously to where it was in the year 2000 unless Congress provides another fix.

Another provision in the new law provides AMT relief for those individuals claiming certain “nonrefundable” personal tax credits (such as the credit for dependent care and the Scholarship and Lifetime Learning credits). For 2007, these credits may offset an individual’s regular tax and AMT. After 2007, unless Congress acts, these credits will be allowed only to the extent that an individual has regular income tax liability in excess of the tentative minimum tax, which has the effect of disallowing these credits against AMT.

Another new law also liberalized the AMT refundable credit amount that was first enacted in 2006 to help taxpayers who were stung by the AMT as a result of exercising incentive stock options. The change is highly technical but the essence of it is that eligible individuals may now claim this credit more rapidly (i.e., over fewer years) than would have been the case without the change.

Forgiven mortgage debt tax relief. Addressing the subprime lending crisis, another late 2007 law provides tax relief for homeowners whose mortgage debt is forgiven. Prior to the enactment of this law, a homeowner could be taxed on the amount of forgiven mortgage debt. For example, before this law, an individual with a $200,000 mortgage whose lender foreclosed on the home and sold it for $180,000 would have had to report $20,000 of income from the forgiven debt. The result would have been the same if the lender restructured the loan and reduced the principal amount to $180,000. Under the new law, a taxpayer does not have to pay federal income tax on up to $2 million of debt forgiven for a qualifying loan secured by a qualified principal residence (e.g., one to buy or renovate a residence). The change applies to debts discharged from Jan. 1, 2007 to Dec. 31, 2009.

Mortgage insurance deduction extended for 3 years. Mortgage insurance premiums will continue to be deductible after 2007, thanks to another relief provision for homeowners. Originally, this deduction was available only for 2007. It now applies through 2010. Basically, it allows taxpayers to treat amounts paid during the year for qualified mortgage insurance as home mortgage interestand thus deductible in most instances. The special rule for home mortgage interest is phased out at higher levels of adjusted gross income (AGI). The insurance must be in connection with home acquisition debt, the insurance contract must have been issued after 2006, and the taxpayer must pay the premiums for coverage in effect during the year.

Homesale exclusion liberalized for surviving spouse. A qualifying taxpayer may exclude up to $250,000 ($500,000 for joint return filers) of gain from the sale or exchange of property that the taxpayer has owned and used as his or her principal residence. Married taxpayers filing jointly for the year of sale may exclude up to $500,000 of home-sale gain if (1) either spouse owned the home for at least 2 of the 5 years before the sale; (2) both spouses used the home as a principal residence for at least 2 of the 5 years before the sale; and (3) neither spouse is ineligible for the full exclusion because of the once-every-2-year limit on the exclusion.

Before the late 2007 law changes, the up-to-$500,000 exclusion was available only if a husband and wife filed a joint return for the year of sale. Thus, if the home was sold in a year after the year of a spouse’s deathit allows a surviving spouse to qualify for the up-to-$500,000 exclusion if the sale occurs not later than 2 years after the spouse’s death, provided the requirements for the $500,000 exclusion were met immediately before the spouse’s death and the survivor has not remarried as of the date of the sale.

Tax relief for volunteer responders. Tax relief is on the way for volunteer firefighters and emergency medical responders, thanks to a little publicized provision in one of the late-breaking 2007 tax laws. It creates an income tax exclusion for qualified state or local tax benefits (such as reduction or rebate of state or local income or property tax) and qualified reimbursement payments (up to $360 a year) granted to members of qualified volunteer emergency response organizations (e.g., state or local organizations whose members provide volunteer firefighting or emergency medical services (EMS)). The new exclusion applies for the 2008 through 2010 tax years.

Please keep in mind that I’ve described only the highlights of the new laws enacted late in 2007. If you would like more details on any aspect of this legislation, please contact me at your earliest convenience.

For Tax Relief & Tax Resolution services CLICK HERE.

Mike Habib, EA

http://wwwMyIRSTaxRelief.com

On December 26, 2007, President Bush signed the “Tax Increase Prevention Act of 2007,” providing a one-year “patch” to the alternative minimum tax (AMT).

Without this legislation, an estimated 25 million taxpayers would have had to pay an average of $2,000 in additional taxes for 2007.

The new law increases the 2007 AMT exemption amount to $66,250 for joint filers, to $33,125 for couples filing separately, and to $44,350 for single taxpayers and heads of household. Most nonrefundable personal tax credits will be allowed to offset AMT liability.

As a result of the late passage of this law, taxpayers using five forms related to the AMT will have to wait to file tax returns until the IRS computers are reprogrammed for the changes. The five affected forms include:

* 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 has set February 11, 2008, as the expected starting date for processing returns involving these forms. Processing of other returns is expected to begin in mid-January.

I hope you find this information useful. Mike Habib, EA

MyIRSTaxRelief.com