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Current Issues

Hot Topics for 2007

Below are some of the law changes and issues that have arisen in 2007 that will affect many of our clients.

 

bulletAt the eleventh hour congress has extended the higher exemption amount applied to the Alternative Minimum Tax computation for one year.  The exemption amount for 2007 is $66,250(Married Filing Jointly) and $44,350(Single).  However, in spite of this “fix” we are finding that more clients are subject to this unpleasant surprise each year.

 

bulletLong term capital gains continue generally to be taxed at a maximum rate of 15%.  With a presidential election looming the future of this hotly debated political item is uncertain.  The rate could well climb in the near future.

 

bulletWith increased write-downs of mortgage and credit card debt expected certain individuals may find themselves in receipt of taxable income from cancellation of debt.  Legislation was enacted in 2007 to provide some relief for this problem.  However, in some circumstances, it will be taxable.

 

bulletRemember that, effective with 2006, the “Kiddie Tax” under which a child’s unearned (i.e. investment) income is taxed at the parents’ highest rate, applies to children under age 18.  In 2008 this tax will apply to children under 19 (24 if they are a full-time student.)

 

bulletThe home mortgage interest deduction is not unlimited.  It is, in fact, limited to interest paid on debt of up to $1 million in connection with the acquisition of a maximum of two residences.  In addition a deduction can be taken for interest paid on up to $100,000 of home equity loans in excess of the acquisition debt.  There are considerable complexities in this area that require analysis in individual circumstances.

 

bulletTo be allowed a deduction for the business use of a personal auto an auto log must be maintained.

 

bulletThe IRS continues to scrutinize arrangements where compensation for services is treated as paid to independent contractors (reported on Form 1099-MISC) as opposed to employees (reported on Form W-2)  It is advisable to exert great care to understand and apply the rules.

 

·        The IRS has also begun to target S Corporations in certain circumstances.  When an S Corporation (1) shows a profit, (2) pays no salary to its owners, but (3) does pay distributions to the owners, IRS has promised that it will seek social security and medicare tax on “reasonable” compensation.  It is highly likely that a business owner’s definition of “reasonable” will considerably differ from that of IRS!

 

·        Legislation passed in 2006 impacts the deduction for charitable contributions.  The elements are reviewed here:

 

CASH – No deduction will be allowed for any contribution of cash, check or other monetary gifts unless the donor can show a bank record or a written communication from the charity.  This eliminates any deduction for cash dropped into the Salvation Army stations or put into the collection plate at church.

 

NONCASH – No deduction will be allowed for clothing and household items unless the items are in “good or better condition.”  As usual the burden is on the taxpayer to document the condition of the goods.

 

bulletThe deduction for state sales tax has been extended through 2007.

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