| Roundup of significant tax developments for tax year 2007*
Kiddie Tax Raised - For tax years beginning in 2006 and 2007, the kiddie tax provisions apply to those under 18 years of age. The previous age limit for the kiddie tax was 14 years of age. Under the tax, if a child has unearned income above a threshold amount ($1,700 in 2006 or 2007), the child's unearned income is generally taxed at his parents' top marginal rate if that rate results in a higher tax. For 2008, the age provision changes to under age 19 and students under age 24. The unearned income limit remains the same at $1,700.
AMT patch for 2007
The Tax Increase Prevention Act of 2007 passed Congress on December 19, 2007. This act is effective January 1, 2007. The AMT exemption amounts for individuals are:
$66,250 for married individuals filing jointly and surviving spouses.
$44,350 for unmarried individuals
$33,125 for married individuals filing separately
The AMT phaseout rules have not changed. Personal nonrefundable credits may offset AMT and regular tax such as dependant care credit, child tax credit, hope and lifetime learning credits, as well as others.
This is only a temporary fix. If Congress doesn't act in 2008 the AMT exemption amounts for individuals will revert to the levels they were for 2000.
Tougher Rules for Charitable Contributions
Post August 17, 2006 contributions of clothing and household items that are not in good used condition or better can't be deducted. In addition, the IRS may deny a deduction for any contribution of clothing or a household item with minimal monetary value, such as used socks or undergarments. A deduction may be approved for clothing or a household item not in good used condition or better that has a more than $500 claimed value and is backed up by a qualified appraisal.
New substantiation rules also apply. A taxpayer won't be able to deduct a post 2006 contribution of cash, check, or other monetary gift unless he maintains as a record of the contribution a bank record or a written communication from the charity showing its name, the date of the contribution, and the amount of the contribution. Non-receipted cash contributions are no longer deductible.
Pension Protection Act makes many changes for individuals.
On August 17, 2006, the President signed the Pension Protection Act of 2006 into law. This complex 900+ page law makes a host of changes relating to pension plans and their beneficiaries. Here are some of the key changes.
1. Post 2006 cost of living increases to the income limits at which the IRA deduction phases out when an individual (or spouse) is an active participant in an employer sponsored retirement plan. This will result in more active participants being able to make deductible IRA contributions.
2. Post 2006 cost of living adjustments to the income limits at which the ability to make Roth IRA phases out. As a result, more taxpayers will be able to make Roth IRA contributions.
3. For distributions after 2006, nonspouse beneficiaries of retirement plan accounts will be able to make rollovers to inherited IRA accounts. Currently, only spouse beneficiaries of retirment plan accounts can make rollovers to IRA's. The change gives much needed flexibility to those who inherit retirment plan accounts from a non-spouse (such as a parent or uncle).
4. More rollover options for after tax contributions to retirement plans. After 2006, such contributions may be rolled over to another retirement plan or to a tax shelterd annuity, if the transfer is made via direct rollover and the receiving plan or annuity separately accounts for the after tax contributions.
5. After 2007, distributions from retirement plans, tax sheltered annuities, and governmental Code Section 457 plans can be rolled over directly into a Roth IRA, subject to the usual rules that apply to rollovers from a traditiona IRA into a Roth IRA. For example, under these rules, a rollover to a Roth IRA generally is taxable, and, until 2010, can't be made if adjusted gross income is $100,000 or more (but the $100,000 rule won't apply after 2009).
6. For distributions in plan years beginning after 2006, pension plans may make distributions once a plan participant reaches age 62, even if he or she continues working. This change will make it easier for employees to phase into retirement (assuming their employers decide to adopt the change).
7. Makes permanent many pro taxpayer retirement plan and IRA changes made by the Economic Growth and Tax Relief Reconciliation Act of 2001 that were supposed to sunset at the end of 2010. These include the ability to make "catchup" contributions to IRAs and 401(k)s after reaching age 50, increases in maximum IRA and Roth IRA contributions, and widened rollover choices.
8. A new opportunity in 2006 and 2007 for an individual age 70 1/2 or older to exclude up to $100,000 a year of distributions from IRAs (including Roth IRAs) that are paid directly by the IRA or Roth IRA trustee to a qualifying charity. If the exclusion is chosen, the donated amount can't be deducted as a charitable contribution. |
