2007 tax law changes – Some good, some not
As in most years, numerous changes in U.S. income tax laws have recently gone into effect, and some of these changes could directly impact you. Knowing which changes affect you will help you begin your 2007 income tax planning, and the earlier you begin, the better. Some changes that may affect you include:
401(k) Plan Contribution Limits
The annual contribution limits for 401(k) and 403(b) employer retirement plans have been increased to $15,500 for people below age 50 and $20,500 for people age 50 and older. Note that IRA contribution limits remain the same: $4,000 for people under 50, $5,000 for people 50 and older.
Roth IRA Income Limits
Once your Adjusted Gross Income (AGI) reaches a certain threshold, you may not contribute to a Roth IRA. These income thresholds have increased for 2007; for most single filers the contribution limit phases out if AGI is between $99,000 and $114,000, and for joint filers the income phase-out is between $156,000 and $166,000.
Inheritances from Employer-Sponsored Retirement Plans.
If you are the beneficiary of a non-spouse’s employer-sponsored retirement plan you may now roll over the entire balance directly into an IRA. Doing so may allow you to lower income taxes each year by distributing the funds over your lifetime. Previously, non-spouse heirs were required to recognize and pay taxes on the entire distribution at once.
Charitable Contribution Recordkeeping
If you itemize your deductions on your tax return and your deductions include cash or check donations to charities, you must be prepared to support all such donations – no matter how small – with a dated bank record (such as cancelled check) or dated receipt. This will affect taxpayers who deduct cash they put into the collection plate at church.
Mortgage Insurance Deduction
People who pay for mortgage insurance can deduct premiums if their AGI is below $100,000 ($50,000 if married and filing separately), with the deductible portion phasing out rapidly once AGI reaches the limit(s).
However, there are some caveats to this potential benefit. For one thing, you must itemize yourdeductions.Second, this new law applies only to mortgage insurance contracts issued this year. Finally, unless Congress extends this break, it will be in effect only for tax year 2007.
Mileage Rates
The optional standard mileage rates have been increased to 48.5 cents per mile for business usage and 20 cents per mile for medical or moving purposes. The rate for charitable purposes remains at 14 cents per mile.
Alternative Minimum Tax
The AMT was first imposed in 1969 on the wealthy to ensure that they paid some tax, but now threatens millions of non-wealthy taxpayers because the exemption levels were never indexed for inflation.
Congress temporarily increased the exemption levels for 2006, but has not yet made such changes for 2007. The uncertainty of whether changes will be made to AMT laws will make income tax planning difficult for many.
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