Tax Time: Changes for 2007 Tax Year

Information for this report was complied from the IRS Web site. Additional updates can be found here.

Adoption | AMT | Archer Medical Savings | Charitable Contributions | Direct Deposit of Refund | Earned Income Credit | Education Savings Bond Exclusion | Long Term Care and Death Benefits | Exemption Amount Increase | Foreign Earned Income Tax | Health Savings Account Deductions | Hope and Lifetime Learning Credits |Social Security and Medicare | Standard Deductions | Mileage Rates

Earned Income for Additional Child Tax Credit

For 2007, the minimum earned income amount used to figure the additional child tax credit has increased to $11,750.

Adoption

Beginning in 2007, the credit allowed for an adoption of a child with special needs is $11,390 and the maximum credit allowed for other adoptions is the amount of qualified adoption expenses up to $11,390. The credit begins to phase out if you have modified adjusted gross income of $170,820 or more and is completely phased out if you have modified adjusted gross income of $210,820 or more.

Beginning in 2007, you may be able to exclude up to $11,390 from your gross income for qualified adoption expenses paid or incurred by your employer under a qualified adoption assistance program in connection with your adoption of an eligible child. This income exclusion starts to phase out if your modified adjusted gross income is $170,820 or more and is completely phased out if your modified adjusted gross income is $210,820 or more.

Alternative Minimum Tax

The Alternative Minimum Tax (AMT) underwent the following changes in 2007:

The AMT exemption increased to to $33,125 for a married person filing separately; to $66,250 for a married couple filing a joint return; and to $44,350 for singles and heads of household.

To claim the foreign earned income exclusion or the housing exclusion, filers must determine the tax on their nonexcluded income using the tax rates that would have applied without the exclusion. If you filed Form 2555 or 2555-EZ, you must use the Foreign Earned Income Tax Worksheet in the Form 6251 instructions to figure the amount to enter on Form 6251, line 31.

The minimum exemption amount for a child under age 18 has increased to $6,300.

The additional exemption for taxpayers who provide housing for a person displaced by Hurricane Katrina has expired. Therefore, the additional exemption amount (formerly line 6 of Form 8914) is no longer allowable for the AMT.

Archer Medical Savings Accounts

For Archer MSA purposes for 2007, the minimum annual deductible of a high deductible health plan increases to $1,900 ($3,750 for family coverage). The maximum annual deductible of a high deductible health plan increases to $2,850 ($5,650 for family coverage). The maximum out-of-pocket expenses limit increases to $3,750 ($6,900 for family coverage).

Charitable Contributions

You cannot deduct a cash contribution, regardless of the amount, unless you keep as a record of the contribution a bank record (such as a canceled check, a bank copy of a canceled check, or a bank statement containing the name of the charity, the date, and the amount) or a written communication from the charity. The written communication must include the name of the charity, date of the contribution, and amount of the contribution. See Publication 526 for more information.

You cannot deduct a contribution to a donor advised fund after February 13, 2007, if the sponsoring organization is a war veterans' organization, a fraternal society, or a nonprofit cemetery company. There are also other circumstances in which you cannot deduct your contribution to a donor advised fund. Generally, a donor advised fund is a fund or account in which a donor can, because of being a donor, advise the fund how to distribute or invest amounts held in the fund. For details, see Internal Revenue Code section 170(f)(18).

A new $500 filing fee must be paid for each qualified conservation contribution after February 12, 2007, that is an easement on a building in a registered historic district, if the claimed deduction is more than $10,000. See Form 8283-V, Payment Voucher for Filing Fee Under Section 170(f)(13).

Direct Deposit of Refund

If you receive your refund by direct deposit, you can have it split among up to three accounts. These accounts must be in your name and may be savings, checking or other accounts -- including individual retirement arrangements (IRAs) -- that have valid routing and account numbers.

To have your refund split among multiple accounts, you must file Form 8888. You do not need to file this form to have your refund deposited into only one account. You cannot split your refund into multiple accounts if you file Form 1040EZ-T or Form 8379.

Earned Income Credit Amounts Increase

You may be able to take the earned income credit if you have more than one qualifying child and less than $37,783 or $39,783 if married filing jointly; you have one qualifying child and earn less than $33,241 or $35,241 if married filing jointly, or you do not have a qualifying child and earn less than $12,590 or $14,590 if married filing jointly. You also may be able to take the credit if your adjusted gross income (AGI) is less than the above amount that applies to you. The maximum amount of investment income you can have for this credit in 2007 increased to $2,900.

Income Limits Increased for Reduction of Education Savings Bond Exclusion

Your interest exclusion is gradually reduced if you are married filing jointly or a qualifying widow(er) and your modified adjusted gross income (MAGI) is more than $98,400 but less than $128,400. For all other filing statuses, your interest exclusion is phased out if your MAGI is more than $65,600 but less than $80,600. For more information, Publication 970.

Exemption Amount Increased

The amount you can deduct for each exemption has increased to $3,400. You may lose part of the benefit of your exemptions if your adjusted gross income is above $117,300 for married persons filing separately; $156,400 for single individuals; $195,500 for heads of household; and $234,600 for married persons filing jointly or qualifying widow(er)s. If your adjusted gross income is above the amount shown for your filing status, use the Deduction for Exemptions Worksheet in Form 1040 instructions to figure the amount you can deduct.

Foreign Earned Income Tax Worksheet

If you claim the foreign earned income exclusion or the foreign housing exclusion on Form 2555 or Form 2555-EZ, your must figure your tax using the worksheet in the Instructions for Form 1040 (pdf).

Health Savings Account Deduction Limits Increased

For 2007, the maximum Health Savings Account deduction increased to $2,850, or $5,650 for family coverage. The maximum additional deduction for individuals age 55 or older increased to $800. For HSA, the minimum annual deductible of a high deductible health plan increased to $1,100, or $2,200 for family coverage. The maximum annual deductible and other out-of-pocket expenses limit increased to $5,500, or $11,000 for family coverage. For more information, see Publication 969.

Income Limits Increased for Hope and Lifetime Learning Credits

The amount of your Hope or lifetime learning credit is gradually reduced if your modified adjusted gross income (MAGI) is between $47,000 and $57,000, or $94,000 and $114,000 if you file a joint return. You cannot claim an education credit if your MAGI is $57,000 or more, or $114,000 or more if you file a joint return). For more information, see chapters 2 and 3 in Publication 970.

Increase in Limit on Long-Term Care and Accelerated Death Benefits Exclusion

The limit on the exclusion for payments made on a daily or other periodic basis under a long-term care insurance contract increased to $260 per day. The limit applies to the total of these payments and any accelerated death benefits made on a per diem or other periodic basis under a life insurance contract because the insured is chronically ill.

The excludable amount for any period is determined by subtracting reimbursements received from insurance or otherwise for the cost of qualified long-term care services during the period from the greater of these amounts.

The cost of qualified long-term care services during the period.

The dollar amount for the period, or $260 per day for any period in 2007.

See Section C of Form 8853

Social Security and Medicare Taxes

For 2007, the maximum amount wages subject to the Social Security tax has increased to $97,500.

Standard Deduction Amount Increased

The standard deduction for taxpayers who do not itemize deductions on Schedule A of Form 1040 is higher in most cases. The amount depends on your filing status, whether you are 65 or older or blind, and whether an exemption can be claimed for you by another taxpayer.

The basic standard deduction amounts for 2007 are $7,850 for head of household; $10,700 for married taxpayers filing jointly and qualifying widow(er)s; $5,350 for married taxpayers filing separately; and $5,350 for taxpayers filing as single. The standard deduction amount for someone who may be claimed as a dependent may not exceed the greater of $850 or the sum of $300 and the individual's earned income.

Standard Mileage Rates

For 2006, the allowable deductions for the standard mileage rate are as follows:

Business miles: 48.5 cents a mile for all business miles driven.

Charitable services: 14 cents a mile when you use your car to provide charitable services to a charitable organization.

Medical reasons: 20 cents a mile for use of your car for medical reasons.