# Presentation: 224745

## Overview of 2007 Income Tax Law Changes

***Presented by:***
**IRS Small Business Self-Employed**
**Stakeholder Liaison*****	***
**Earline Brown**
**Stakeholder Liaison**

**Notes:**
Good morning.  My name is Earline Brown and this is Sharon Evans.  We are here on behalf of the IRS Small Business Self Employed Division.  Thank you for inviting us today.  I am a Stakeholder Liaison and Sharon is a Senior Stakeholder Liaison here in the New Orleans District Office.  
Today, I want to spend the next few minutes discussing some of the changes which will be taking place this filing season for tax year 2007.  
Please note that this presentation is designed to cover some of the more important changes or changes that impact significant numbers of taxpayers.  It is not designed to cover all the changes which are taking place.  

## Alternative  Minimum Tax (AMT)

- What is AMT?
- AMT and Filing Season 2008

**Notes:**
The AMT was designed to ensure that everyone who benefits from statutory tax advantages (credits, deductions, etc.) pays at least some tax.  When originally imposed in the Tax Reform Act of 1969, AMT primarily affected wealthier taxpayers.  Through the years, inflation has begun to push people with moderate income towards the AMT threshold.

In 2001 the alternative minimum exemption amount was increased by Congress but with that increase came an automatic expiration provision.  In 2005 the exemption amount was set to expire and revert back to the exemption amount that was in effect in 2000.  However, Congress not only extended the expiration but also increased the exemption amount as well.  The expiration was extended until the end of 2006.  

At the end of December 2007, Congress raised the AMT exemption amounts.  

While the vast majority of taxpayers can file as usual, about 13.5 million who file any of five tax forms affected by the recent tax law changes related to the AMT will have to wait until February 11, 2008 to file their returns.     

Some of the most frequently asked questions have been:

Who is affected by delays related to late passage of the AMT in December?
 Refer to AMT and Filing Season 2008 Q&A.

More information on this important subject, including a list of affected forms and questions and answers can be found on our website, www.irs.gov.

## IRA Deduction

-  Modified AGI phase-out range for taxpayers covered by a retirement plan increased to:
-  **$83,000-$103,000** for MFJ (if both are covered) and qualifying widow(er)s.
**$156,000-$166,000** for MFJ (if one is covered).
-  **$52,000-$62,000** for Single and HH.
**$0-$10,000** for MFS.

**Notes:**
Participants in traditional IRAs who are considered active participants in an employer retirement plan have income limits and phase-out provisions which reduce or eliminate the IRA deduction at specified income levels shown.  
Taxpayers who receive social security benefits should complete worksheets in Publication 590 to determine if the phase-out will effect them.
Modified Adjusted Gross Income (MAGI) is computed by refiguring Adjusted Gross Income without taking into account any of the following amounts:
-IRA Deduction
-Student Loan Interest Deduction
-Tuition and fees deduction
-Domestic production activities deduction
-Foreign earned income exclusion
-Foreign Housing exclusion or deduction
-Exclusion of qualified savings bond interest shown on Form 8815
-Exclusion of employer-provided adoption benefits shown on Form 8839
Worksheet 1-1 in Publication 590 is a good tool to be used in computing MAGI.  Basically it starts with AGI from the return and adds the 8 items listed above to arrive at MAGI.

## IRA Deduction

- 	New catch-up contributions of up to $3,000 allowed to an IRA for certain 401(k) plan participants whose employer filed for bankruptcy.

**Notes:**
Taxpayers who participated in a 401(k) plan maintained by an employer who filed for bankruptcy, may be able to contribute an additional $3,000 to their IRA if certain conditions are met.
The employer must have matched at least 50% of employee contributions to the plan with stock of the company.
The employee must have been a participant in the 401(k) plan for 6 months before the employer filed for bankruptcy.
The employer (or a controlling corporation) must have been a debtor in a bankruptcy case in an earlier year.
The employer (or any other  person) must have been subject to indictment or conviction based on business transactions related to the bankruptcy.

It is important to note that if the taxpayer chooses to make these catch-up contributions, the higher contribution and deduction limits for individuals who are age 50 or older do not apply.

## New Mortgage Insurance Premium Deduction

-   Premiums paid or accrued for mortgage insurance during 2007 in connection with home acquisition debt on a home are an itemized deduction.
-   Deduction phases out based on AGI.
-   Qualified mortgage insurance is mortgage insurance provided by the Veterans Administration, Federal Housing Administration, or Rural Housing Administration, and private mortgage insurance.
-   This provision only applies to mortgage insurance contracts issued during 2007.  The premiums must be paid or accrued in 2007 and cannot be allocable to any period after 2007.

**Notes:**
There is a new tax deduction for individuals who purchase a principal or second personal residence and buy qualified mortgage insurance. The mortgage insurance premium is treated as qualified residence interest for 2007.  The deduction does not apply with respect to any mortgage insurance contract issued before January 1, 2007, or after December 31, 2007.  There is a phase-out on the deduction based on the taxpayer’s AGI.

Prepaid mortgage insurance premiums are deductible only in the year allocable. Because this deemed home mortgage interest deduction is in effect only for 2007, no deduction is permitted for prepaid premiums. However, if the Veterans Administration (VA) or Rural Housing Administration (RHA) provides the mortgage insurance, and the premium is for the entire life of the loan, the entire premium is deductible if paid in 2007.

Refer to Publication 936, Home Mortgage Interest Deduction, for additional information.

## Simplified Reporting for Family Businesses

-   For tax years beginning after 2006, a husband and wife who own a business jointly can elect not to be treated as a partnership.
-   The income and deductions are divided between the spouses based on their respective interests in the business.
- Each spouse must file a separate Schedule C or F for his or her interest in the business.
-   Each spouse should account for their net income or loss in figuring net earnings from self-employment and file Schedule SE as necessary.

**Notes:**
This provision generally permits a qualified joint venture whose only members are a husband and wife filing a joint return not to be treated as a partnership for Federal tax purposes. A qualified joint venture is a joint venture involving the conduct of a trade or business, if (1) the only members of the joint venture are a husband and wife, (2) both spouses materially participate in the trade or business, and (3) both spouses elect to have the provision apply.  
Under the provision, a qualified joint venture conducted by a husband and wife who file a joint return is not treated as a partnership for Federal tax purposes. All items of income, gain, loss, deduction and credit are divided between the spouses in accordance with their respective interests in the venture. Each spouse takes into account their respective share of these items as a sole proprietor. Thus, it is anticipated that each spouse would account for their respective share on the appropriate form, such as Schedule C or F. 
For purposes of determining net earnings from self-employment, each spouse would file a separate Schedule SE on which they would report their  share of income or loss from the qualified joint venture.

## Section 179 Expense Deduction

-    Maximum increases to **$125,000** (**$160,000** for Enterprise Zone and Renewal Community businesses; **$225,000** if qualified section 179 Gulf Opportunity Zone property).
-   Phase-out begins when section 179 property exceeds **$500,000 **(**$1.1 million** if qualified section 179 Gulf Opportunity Zone property).

**Notes:**
Bullet 1 
Section 179 expense deduction increased from $108,000 in 2006 to $125,000 in 2007. IRC 179(b)(1)
179 expense for Enterprise Zones and Renewal Communities increased $160,000 in 2007.  
The 179 expense for Gulf Opportunity Zone increased to $225,000 in 2007.  

Bullet 2
There is a phase out.  Phase out begins when section 179 property exceeds $500,000. 
See IRS Publication 946, How To Depreciate and Publication 954, Tax Incentives for Empowerment Zones and Other Distressed Communities for more information on this topic.  Also helpful is Form 8844 and Instructions, Empowerment Zone and Renewal Community Employment Credit.

## Credit for FICA TaxesPaid on Certain Employee Tips

-   For tips received after December 31, 2006, the tip credit is determined based on a minimum wage of $5.15 per hour, regardless of the actual minimum wage.
-  For tax years beginning after 2006, the credit is allowed against both the regular tax and the AMT.

**Notes:**
Employers are allowed to pay tipped employees less than minimum wage if the combination of tips and hourly wages equals or exceeds the minimum wage.  Employee tip income is treated as employer–provided wages for purposes of FICA. Employees are required to report the amount of tips received to their employer.
A business tax credit is provided equal to an employer’s FICA taxes paid on tips in excess of the minimum wage amount.  The credit applies only with respect to FICA taxes paid on tips received from customers in connection with the providing, delivering, or serving of food or beverages for consumption if the tipping of employees delivering or serving food or beverages by customers is customary.   
The change to the law provides that the amount of the tip credit is based on the amount of tips in excess of those treated as wages for purposes of the FLSA as in effect on January 1, 2007.  That is, under the provision, the tip credit is determined based on a minimum wage of $5.15 per hour.  This will avoid a reduction in the credit due to an increase in the minimum wage.

## Other Tax Provisions

- For returns filed after March 15, 2007, the penalty for filing a frivolous tax return is increased to $5,000.  The penalty also applies to other specified frivolous submissions made and issues raised after that date.
- For returns filed after May 25, 2007, erroneous refund claims are subject to a penalty of 20% of the disallowed portion of the claim.
- For returns filed after May 25, 2007, preparer penalties have been expanded to include taxes other than income tax and penalty amounts have been increased.

**Notes:**
Previously the IRC section 6702 provided that an individual who filed a frivolous income tax return was subject to a penalty of $500.  The “Tax Relief and Health Care Act of 2006,”  amended section 6702 to increase the amount of the penalty for frivolous tax returns from $500 to $5,000 and to impose a penalty of $5,000 on any person who submits a “specified frivolous submission.”  “Specified frivolous submissions” include requests for a collection due process hearing or an application for an installment agreement, offer-in-compromise, or Taxpayer Assistance Order.  New section 6702 (c) requires the Secretary of the Treasury to publish a list of positions identified as frivolous.  Notice 2007-30, 2007-14 I.R.B., published April 2, 2007, contains that list.  The published list contains 40 positions which are considered frivolous.  The Act also modifies section 6702 to apply it to all taxpayers and to all types of Federal taxes.  
New IRC section 8247 imposes a penalty for erroneous refund claims equal to 20% of the disallowed portion of the claim for refund or credit for which there is no reasonable basis for the claimed tax treatment.  
New IRC section 8246 broadens the scope of the present law tax return preparer penalties to include preparers of estate and gift tax, employment tax, and excise tax returns, and returns of exempt organizations.  The provision increases the first tier penalty from $250 to the greater of $1,000 or 50% of the income derived by the preparer from the preparation of a return or claim with respect to which the penalty is imposed.  The provision increases the second tier penalty from $1,000 to the greater of $5,000 or 50% of the income derived by the preparer.

## Other Tax Provisions

- Charitable Contributions
- Misclassified Workers
- 2007 Standard Mileage Rate

**Notes:**
Bullet 1
To deduct any charitable donation of money, taxpayers must have a bank record or a written communication from the recipient showing the name of the organization and the date and amount of the contribution.  Though taxpayers are already required to keep records to support their contribution deductions, this new provision is designed to provide greater certainty, both to taxpayers and to government, in determining what may be deducted as a charitable contribution.  See Publication 526.

Bullet 2
Workers who believe they are misclassified as independent contractors can file Form SS-8 with the IRS and request a determination of their worker classification.  For employees, the Social Security tax rate is 6.2 percent and the Medicare tax rate is 1.45 percent.  Normally, employers withhold these taxes from workers’ pay, match these amounts and turn over the combined amounts to the IRS.  Workers, properly classified as independent contractors, should not use Form 8919 but instead, continue to use Schedule SE.  IRS Publication 1779 has further details on employee versus independent contractor status. 

Bullet 3
The standard mileage rate for business use of a car, van or pick-up is 48.5 cents a mile.
The standard mileage rate for the cost of operating a vehicle for medical reasons or as part of a deductible move is 20 cents a mile.
The standard mileage rate for using a car to provide services to charitable organizations is set by law and remains at 14 cents a mile.

## New 2007 Income Tax Forms

**Form 8917, ***Tuition and Fees Deduction*** **
**Form 8919, ***Uncollected Social Security and Medicare Tax on Wages*** **
* ***Form 8453, ***Us Individual Income Tax Transmittal for an IRS e-file Return*

**Notes:**
New Form 8917 has been introduced to replace worksheets that were included in the instructions for Forms 1040, and 1040A in prior years.  This form will assist taxpayers in computing the deduction for tuition and fees for their own or their dependents college education.  A taxpayer cannot take both the education credit and the tuition and fees deduction for the same student in the same year.   The tuition and fees deduction is scheduled to expire at the end of 2007.
New Form 8919 is for use by individuals whose employment status is in dispute or who have been determined to be employees by the IRS to figure their share of the Social Security and Medicare tax on the income that has been determined to be wages.  Prior to this, individuals had to alter Form 4137, Social Security and Medicare Tax on Unreported Tip Income, in order to use it to figure the tax.  This new form should simplify this situation and allow affected taxpayers to file electronically.
Form 8453 has been redesigned making it a Transmittal rather than a Declaration.  This corresponds to the change to the signature process for e-filed returns requiring electronic signatures.  Form 8453 will now be a transmittal form for 12 forms or worksheets which can not yet be e-filed.  Last year nearly 90% of e-filed returns used electronic signatures.  This is the next step to truly paperless filing.

## Obsolete 2007 Income Tax Forms

**Form 1120-A, ***U.S. Corporation Short-Form Income Tax Return*
** ****Form 8913,*** Credit for Federal Telephone Excise Tax*
** ****Form 8914,*** Exemption Amount for Taxpayers Housing Individuals Displaced by Hurricane Katrina *

**Notes:**
Form 1120A has been discontinued.  The form was not enabled for electronic filing and use has steadily declined in recent years.  The number of Form 1120-A filers has decreased from approximately 212,000 in 1998 to 177,000 in 2002.

Form 8913 used to claim the one year credit for refund of Federal Telephone Excise Tax is obsolete.  The refund of the Federal Telephone Excise Tax was a one year event so the form is no longer necessary.  However, it is not too late to request this one-time refund on a 2006 return.  Most telephone customers, including most cell-phone users, qualify for the refund.  Eligible telephone customers who filed a 2006 tax return but overlooked this special excise tax refund can file an amended return using Form 1040X.  Those who never filed for tax year 2006 can request it when they file their 2006 return.  Phone customers who do not need to file a regular income-tax return, including many low-income people and senior citizens, can use a special short form, Form 1040EZ-T, to request the refund.

Form 8914 has been discontinued because the Hurricane Katrina relief provision allowing an additional exemption amount of $500 for providing housing in the taxpayers main home for individuals displaced by Hurricane Katrina has expired.

## Additional Resources

**  ****Draft 2007 forms:**
- www.irs.gov/taxpros/lists/0,,id=97784,00.html
**  ****Final 2007 forms: **www.irs.gov/formspubs/lists/0,,id=97817,00.html
**  ****What's Hot In Tax Forms, Publications, and Other Tax Products:**
- _[www.irs.gov/formspubs/article/0,,id=97397,00.html](http://www.irs.gov/formspubs/article/0,,id=97397,00.html)_
**IRS Web Site Help Site:**
- _www.irs.gov.website.helpdesk@speedymail.com__ or call 800-876-1715_** **

**Notes:**
These sites are sources of additional information on changes to the tax law.

## Disaster Resource

- http://www.irs.gov/businesses/small/article/0,,id=171218,00.html

**Notes:**
Many of the answers to your questions regarding Hurricane Katrina, Casualty Losses and the Taxability of Grant Proceeds can be found at this website.

## Questions?

**Notes:**
Does anyone have any questions?