What's New for 2007

Tax benefits extended.

The following tax benefits were extended through 2007.

-Deduction for educator expenses in figuring adjusted gross income.

-Tuition and fees deduction.

-District of Columbia first-time homebuyer credit.

Alternative minimum tax (AMT) exemption amount decreased.   

The AMT exemption amount is decreased to $33,750 ($45,000 if married filing jointly or a qualifying widow(er); $22,500 if married filing separately).   

At the time these instructions went to print, Congress was expected to consider legislation that would increase the amounts above. To find out if legislation was enacted, and for more details, see the Instructions for Form 6251.

IRA deduction expanded.   

You may be able to take an IRA deduction if you were covered by a retirement plan and your 2007 modified adjusted gross income (AGI) is less than $62,000 ($103,000 if married filing jointly or qualifying widow(er)).

You may be able to deduct up to an additional $3,000 if you were a participant in a 401(k) plan and your employer was in bankruptcy in an earlier year. See the instructions for line 32 on page 27.

Standard mileage rates.   

The 2007 rate for business use of your vehicle is 48½ cents a mile. The 2007 rate for use of your vehicle to get medical care or to move is 20 cents a mile.

Earned income credit (EIC).  

You may be able to take the EIC if:

-A child lived with you and you earned less than $37,783 ($39,783 if married filing jointly), or

-A child did not live with you and you earned less than $12,590 ($14,590 if married filing jointly).

The maximum AGI you can have and still get the credit also has increased. You may be able to take the credit if your AGI is less than the amount in the above list that applies to you. The maximum investment income you can have and still get the credit has increased to $2,900. See the instructions for lines 66a and 66b that begin on page 44.

Elective salary deferrals.

The maximum amount you can defer under all plans is generally limited to $15,500 ($10,500 if you only have SIMPLE plans; $18,500 for section 403(b) plans if you qualify for the 15-year rule). See the instructions for line 7 on page 18.

Mailing your return.   

You may be mailing your return to a different address this year because the IRS has changed the filing location for several areas. If you received an envelope with your tax package, please use it. Otherwise, see Where Do You File? on the back cover.

Domestic production activities deduction.  

The deduction rate for 2007 is increased to 6%.

Unreported social security and Medicare tax on wages.   

If you are an employee and your employer did not withhold social security and Medicare tax, see Form 8919 to figure and report this tax.

Refundable credit for prior-year minimum tax.  

If you have an unused minimum tax credit carryforward from 2004, see Form 8801 to find if you can take this credit.

Health savings account (HSA) funding distributions.

You may be able to elect to exclude from income a distribution made from your IRA to your HSA. See the instructions for lines 15a and 15b on page 21.

Insurance premiums for retired public safety officers.

If you are a retired safety officer, you can elect to exclude from income distributions made directly from your eligible retirement plans to pay premiums for certain insurance. See the instructions for lines 16a and 16b on page 22.

Exemption for housing a person displaced by Hurricane Katrina expires.  

The additional exemption amount for housing a person displaced by Hurricane Katrina does not apply for 2007 or later years.

Telephone excise tax credit.  

This credit was available only on your 2006 return. If you filed but did not request it on your 2006 return, file Form 1040X using a simplified procedure explained in its instructions to amend your 2006 return. If you were not required to file a 2006 return, see the 2006 Form 1040EZ-T.

What's New for 2008

IRA deduction expanded.

You and your spouse, if filing jointly, each may be able to deduct up to $5,000 ($6,000 if age 50 or older at the end of the year). You may be able to take an IRA deduction if you were covered by a retirement plan and your 2008 modified AGI is less than $63,000 ($105,000 if married filing jointly or qualifying widow(er)).

 You may be able to deduct up to an additional $3,000 if you were a participant in a 401(k) plan and your employer was in bankruptcy in an earlier year. See the instructions for line 32 on page 27.

Earned income credit (EIC).

You may be able to take the EIC if:

-A child lived with you and you earned less than $38,646 ($41,646 if married filing jointly), or

-A child did not live with you and you earned less than $12,880 ($15,880 if married filing jointly).

The maximum AGI you can have and still get the credit also has increased. You may be able to take the credit if your AGI is less than the amount in the above list that applies to you. The maximum investment income you can have and still get the credit has increased to $2,950.

Personal exemption and itemized deduction phaseouts reduced.   

Taxpayers with adjusted gross income above a certain amount may lose part of their deduction for personal exemptions and itemized deductions. The amount by which these deductions are reduced in 2008 will be only ½ of the amount of the reduction that otherwise would have applied in 2007.

Capital gain tax rate reduced.

The 5% capital gain tax rate is reduced to zero.

Tax on children's income.  

Form 8615 will be required to figure the tax for the following children with investment income of more than $1,800.

1.     Children under age 18 at the end of 2008.

2.     The following children if their earned income is not more than half their support.

a.     Children age 18 at the end of 2008.

b.    Children over age 18 and under age 24 at the end of 2008 who are full-time students.

The election to report a child's investment income on a parent's return and the special rule for when a child must file Form 6251 will also apply to the children listed above.

Expiring tax benefits.  

The following benefits are scheduled to expire and will not apply for 2008.

-Deduction for educator expenses in figuring adjusted gross income.

-Tuition and fees deduction.

-The exclusion from income of qualified charitable distributions.

-Credit for nonbusiness energy property.

-District of Columbia first-time homebuyer credit (for homes purchased after 2007).

-The election to include nontaxable combat pay in earned income for the EIC.