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JAMES GRAHAM CPA, MST
Tax Partner

As anticipated, a couple of new taxpayer friendly laws were enacted before the end of the year.  One important change will prevent many middle-income taxpayers from paying the alternative minimum tax (AMT) for 2007.  Although the AMT was originally enacted to make sure that wealthy individuals paid their fair share of taxes, it has unintentionally impacted millions of taxpayers in recent years.  This situation was projecting to get much worse prior to the change, since the AMT exemption amounts were not indexed for inflation.  

The new law provides some relief, albeit only a temporary fix for 2007.  It increases the maximum AMT exemption amount over its 2006 level by $3,700 for married taxpayers filing joint returns, and by $1,850 for unmarried individuals and married persons filing separately.  (However, after 2007, the maximum AMT exemption amount will go back down to where it was in the year 2000).

Another temporary AMT provision in the new law provides relief for those individuals claiming certain “nonrefundable” personal tax credits such as the credit for dependent care and the Scholarship and Lifetime Learning credits. For 2007, these credits may offset an individual's regular tax liability and AMT liability. (However, after 2007, these credits will be allowed only to the extent that an individual has a regular income tax liability in excess of the tentative minimum tax liability, which has the effect of disallowing these credits against AMT).
There was another highly publicized law change that was put into place to help address tax issues with the sub-prime lending crisis.  The law provides tax relief for homeowners whose mortgage debt is forgiven.  Prior to the enactment of this law, a homeowner could be taxed on the amount of forgiven mortgage debt. For example, before this law, an individual with a $500,000 mortgage whose lender foreclosed on the home and sold it for $450,000 would have had to report $50,000 of income from the cancellation of debt. The result would have been the same if the lender restructured the loan and reduced the principal amount to $450,000. Under the new law, a taxpayer does not have to pay federal income tax on up to $2 million of debt forgiven for a qualifying loan secured by a qualified principal residence (used buy or renovate a residence). The change applies to qualifying debts discharged from Jan. 1, 2007 to Dec. 31, 2009.

Finally, the mortgage insurance deduction was extended for three years.  Originally, this deduction was available only for 2007. It now applies through 2010. Basically, it allows taxpayers to treat amounts paid during the year for qualified mortgage insurance as home mortgage interest and thus deductible (although phased out at higher levels of adjusted gross income). The insurance must be in connection with home acquisition debt, the insurance contract must have been issued after 2006, and the taxpayer must pay the premiums for coverage in effect during the year.