Posted on 01/05/2007 10:28:50 AM PST by BenLurkin
This year is going to be a happy one -- at least for some taxpayers.
Among the many changes that became effective on New Year's Day are higher contribution limits for 401(k) plans, a decline in the top federal estate-tax rate and a new deduction for many people who buy mortgage insurance.
The standard mileage rate rose. So did the personal exemption, income brackets and dozens of other tax items adjusted for inflation every year.
While these and other changes will bring relief to millions of taxpayers, many will be hit by higher taxes. About 11 million workers will have to pay higher Social Security taxes, for example.
And unless Congress overhauls the law, more than 23 million people will be ensnared by the alternative minimum tax this year, up from 3.5 million in 2006, according to estimates by the Tax Policy Center. Uncertainty about what Congress will do, if anything, about the AMT is likely to make tax planning especially difficult for many people.
Several other issues are being decided in the courts.
One that's attracting attention among many municipal-bond investors: Can Kentucky tax interest received by a Kentucky couple on their out-of-state bonds while exempting interest on their in-state bonds? The couple won a case in state court last year challenging this system, and Kentucky has asked the U.S. Supreme Court to review it. Many states have similar laws.
Separately, a federal appeals court is reviewing the issue of whether a $70,000 award a woman received from her former employer for emotional distress and loss of reputation is taxable.
Here are the major changes and how they might affect you:
Retirement Savings
For 2007, the maximum amount you can contribute to a 401(k) plan increases to $15,500 from $15,000 in 2006. If you're 50 or older by the end of the year, you can stash away an additional $5,000, for a total of $20,500.
The maximum contribution limits for individual retirement accounts remain the same: $4,000 if under age 50, and $5,000 if you're 50 or older this year.
Among other changes, the income limits rose for making contributions to a Roth IRA. For joint filers, the amount you can contribute phases out if your income is between $156,000 and $166,000, up from $150,000 to $160,000 in 2006. For most singles in 2007, the range has increased to $99,000 to $114,000. For 2006, it was $95,000 to $110,000.
Separately, a new law will benefit many people who inherit money from an employer-sponsored retirement plan, such as a 401(k), from someone who wasn't their spouse. Until this year, inheriting money in a retirement plan from someone who wasn't your spouse could often lead to an unexpectedly big tax bill.
Under the new law, a child or any other non-spouse who inherits money in a qualified retirement plan can transfer it directly into an IRA. That allows the heir to stretch out distributions over numerous years -- and can ease the tax bite.
This "very important" change will help many people who have "significant others" or want to leave assets to children, says Sidney Kess, a New York lawyer and accountant.
Estate Tax
The top federal estate-tax rate declined to 45 percent for estates of people who die in 2007 from 46 percent in 2006. That will ease the tax bite for many heirs, especially those inheriting very large fortunes.
Based on current law, the basic federal estate-tax exclusion will remain $2 million in 2007 and 2008, although transfers to a spouse typically are free from the tax. This exclusion is scheduled to rise to $3.5 million in 2009. Then, in 2010, the federal estate tax disappears entirely, but only for that one year. It returns again in 2011, with an exclusion of only $1 million.
Many members of Congress want to make major changes effective before then -- such as raising the exclusion level and lowering the top tax rate.
Mileage Rate
Millions of people who use their cars for business will benefit from an increase in the Internal Revenue Service's standard optional mileage rate. (Drivers have a choice of deducting their actual costs or using the IRS's standard mileage rate.)
This year, the rate for calculating deductible costs of using your car for business is 48.5 cents a mile, up from 44.5 cents last year. The rate is 20 cents a mile for medical and moving purposes, up from 18 cents in 2006.
Mortgage Insurance
President Bush recently signed a law carving out a new deduction for 2007 for some people who buy and pay for mortgage insurance this year.
This new deduction begins to phase out once your adjusted gross income exceeds $100,000 (or $50,000 for married people filing separately), and it doesn't apply to mortgage-insurance contracts issued earlier than this year.
Analysts at RIA, a unit of Thomson Tax & Accounting in New York, calculate that you don't qualify for any deduction if your income exceeds $109,000 (or $54,500 for married people filing separately).
Social Security Taxes
The maximum amount of earnings subject to the Social Security tax rose to $97,500 in 2007 from $94,200.
That means the maximum additional tax that would be collected from an employee earning above the 2006 wage base will be $204.60, according to analysts at tax publisher CCH, a unit of Wolters Kluwer. Self-employed workers might owe as much as $409.20 more this year, but they can recoup part of it through a federal deduction. Charitable Giving
Do you donate cash to charity? If so, you now need a "bank record," such as a canceled check, or a receipt from the charity in order to deduct the donation, no matter how small.
If you want to deduct your gift, write a check -- or make a pledge and get a receipt, says Bill Fleming of PricewaterhouseCoopers in Hartford, Conn.
Income Brackets
The IRS is required by law to adjust its tax tables and many other numbers each year for inflation. How much these changes will affect you depends on your income and other details.
A hypothetical married couple, filing jointly, with total taxable income of $100,000 will probably pay about $268 less in federal income tax this year than on the same income for 2006, CCH estimates. Higher-income taxpayers are likely to benefit the most. In most cases, for example, taxable income of more than $349,700 will be taxed this year at the top 35 percent federal rate. That's up from $336,550 for 2006.
Alternative Minimum Tax
What, if anything, will Congress do to prevent this tax from hitting more than six times as many people as last year?
Temporarily higher exemption levels expired at the end of 2006. Congressional leaders have vowed to take action.
Separately, Congress recently approved a change that will benefit some people who exercised incentive stock options during the high-tech boom and then were hit by the AMT even as their investments fell in value. Warning: Even tax geeks agree this is very complex.
IRA Transfers
Consider taking advantage of a tax break scheduled to expire at the end of 2007. If you're 70 1/2 or older, you can transfer as much as $100,000 directly from your IRA to a qualified charity without being taxed on that money, says Greg Rosica of Ernst & Young in Tampa, Fla.
The transfer counts toward your required minimum distribution. This provision also applied in 2006. It's possible Congress will extend it beyond this year, but it's too early to know.
Other Changes
Paying the IRS on an installment plan is now more costly for some taxpayers.
The IRS's "user fee" jumped to $105 this year from $43 last year for someone who agrees to an installment plan without direct debit. The fee for a direct-debit installment agreement rose to $52 from $43. But the fee won't change for many poor people who make agreements this year.
Charities and other tax-exempt organizations continue to proliferate.
Nonprofit charitable organizations filed more than 263,000 returns for 2003, up nearly 5 percent from the previous year, the IRS said. These "501(c)(3)" organizations held nearly $1.9 trillion in assets, up 10 percent. Total revenue rose 12 percent to $1.07 trillion.
These numbers exclude private foundations, most groups with receipts of less than $25,000, and most churches and certain other types of religious organizations.
Who's News: Mark Matthews, formerly IRS deputy commissioner for services and enforcement, is now a partner at Morgan Lewis & Bockius in Washington. His successor at the IRS, Kevin Brown, formerly headed the small business and self-employed division.
Well there goes my day. Now I'll be thinking about paying taxes all weekend.
It's never too early to think about it, for those of us who don't just start looking around for the forms on April 15.
Gonna have to schedule my death for sometime in 2010 to take full advantage of the government's generous estate tax holiday.
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