Wealth Building Lessons

Its tax season again, and there have been quite a few new rules added to our million-plus lines of IRS code.

1. Forgiven home debt is now non-taxable.

But there are a few restrictions:

1. There is a limit on the forgiven debt: up to $2 million or $1 million for a married person filing a separate return.
2. The tax break also has a time limit. It only applies to mortgage debt discharged by a lender in 2007, 2008 or 2009.
3. The loan also must have been taken out to buy or build a primary residence, not a second or vacation home. If debt is forgiven on those additional properties, the owner will owe cancellation of debt income as usual.

2. You can now write off Private Mortgage Insurance

Again there are a few restrictions:
1. It is phased out for taxpayers with adjusted gross incomes exceeding $100,000 ($50,000, if married filing separately).
2. The deduction also applies only to PMI policies issued in 2007, 2008, 2009 or 2010.
3. The mortgage for which the insurance payments are made must have been to buy or build a first or second home.

3. Marginal AMT relief

Originally conceived as a way to get the richest people in America to pay some form of tax, AMT now ensnares million of average families. Just having too many kids is reported to trigger the AMT (or so I’ve heard). Congress thinks it’ll come up with a strategy to fix the AMT problem in 2008. Till then, they’re going to provide a temporary relief for many tax payers by raising the exemption limits a teeny weeny bit.

For 2007 only, the exemption limits are:
1. $66,250 for married, joint return filers.
2. $44,350 for single or head of household taxpayers.
3. $33,125 for married couples who file separate returns.

4. More stringent donation documentation

Previously, upto $250 worth of charitable donations would go unchallenged. Now the IRS says you need to provide proof for any and all donations. No more cheating!

5. Making charitable giving easier for retirees

If someone who’s 70.5 years old makes a donation directly from a mandatory minimum withdrawal from a taxable retirement account, they don’t have to include it in their taxable income. This allows them to lower their taxes a little bit.

6. Victims of embezzled 401k’s allowed to catch-up

Dubbed as the Enron IRA catch-up provision, if you participated in a 401(k) plan and your employer went into bankruptcy in a prior year, you may be able to contribute up to $7,000 (instead of the general $4,000 or $5,000 limits) to your IRA.

Your employer must have been indicted or convicted in connection with business transactions related to the company’s bankruptcy that wiped out employee accounts. The law also requires that:

1. You were a participant in a 401(k) plan under which the employer matched at least 50 percent of your contributions to the plan with stock of the company.
2. You were a participant in the 401(k) plan six months before the employer filed for bankruptcy.
3. The employer (or a controlling corporation) must have been a debtor in a bankruptcy case in an earlier year.

If you are eligible for and use the Enron IRA option, which will be in effect through 2009, you can’t also use the 50-or-older add-on; that is, you can’t put an extra $1,000 into your account on top of the $7,000.

7. Claim credits for making your home energy efficient

The Energy Tax Incentives Act of 2005 offers you a tax credit for making energy-efficient home improvements. Credits, which reduce your tax bill dollar for dollar, range from $50 for the installation of a whole-house circulating fan to $2,000 for conversion to a solar water-heating system.

Even simple upgrades, such as replacing drafty windows and doors, adding insulation and replacing an old heating or air conditioning unit can save you several hundred dollars on your tax bill. I wonder if they require stringent documentation for this tax break?

8. Tax savings for purchasing hybrid vehicles

You get a tax credit worth between several hundred and a few thousand dollars for buying a hybrid vehicle. However, one very important and often unknown caveat is that its limited to the first 60,000 vehicles sold by the car manufacturer!!! So if you bought your Toyota Prius after October 1st, you’re screwed.

9. The deductions that staged a come-back

Some come-back deductions that are valid through the end of 2007 are state sales taxes, college tuition and fees, and classroom expenses.

10. No capital gains in 2008 for some investors

Starting in 2008 and continuing until 2010, taxpayers in the 10% and 15% tax brackets will have zero long-term capital gains tax!
To qualify for the zero rate in 2008, a married couple must make less than $65,100 in taxable income; single filers earning less than $32,550 will pay no tax on their sales of assets they’ve owned for more than a year.

Source: Yahoo Finance.

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