Highlights of the 2007 tax changes are below.   If you would like more information, there is a link to an IRS site that can tell all you want to know, and more, about this year’s tax updates.

The Good

The cancellation of indebtedness (up to $2,000,000) related to the sale of your principal residence will not be included in income.  This is intended to help homeowners for whom their lender accepted less than the total amount owed on their loan when the house was sold.  However, the forgiven debt amount will be used to reduce the basis in your home.  In the event you show capital gains in excess of the exclusion amount ($250,00 for a single person and $500,00 for a married couple), you could still have some tax liability.

Mortgage Insurance Premiums are now deductible along with mortgage interest.  However, the deduction phases out if your AGI exceeds $100,000.

A husband and wife who run a business together can now file two Schedule C’s and allocate the business activity between the two.  In the past, husband and wife businesses had to either file a partnership return, or identify one spouse as the owner of the business and have the other spouse work for the business as an employee.  This new system greatly simplifies the tax filing requirements for these kinds of husband and wife businesses.

Health Savings Account (HSA) contributions can be made up to the IRS prescribed maximum amount without regard to the high deductible health plan’s annual deduction.  This is a significant easing of the HSA contribution rules.  Prior to 2007, contributions were limited to the amount of the deductible and had to be prorated if you did not have the plan for the entire year.  Until the Congress comes up with a better solution to our health care issues, this is probably the best bet for taxpayers who have to pay for medical insurance and expenses on their own

The Bad

The IRS has increased penalties and fees in a number of areas, and in other instances, new penalties have been created.  The IRS is not only targeting taxpayers, but tax preparers as well.  The new regulations increase penalties significantly and make it much easier for the IRS to hold tax professionals liable for information that appears on the tax return.  

In general, we all need to realize that the days of the “kinder, gentler” IRS are over.  Since raising taxes is currently politically difficult, the IRS is hoping to raise revenue with more robust penalties, as well as with more audits.  Self employed taxpayers continue to be a target for audits, and small S-Corporations are now receiving more scrutiny. 

Alternative Minimum Tax relief, as well as several other tax related provisions, were not passed by the Congress until December 14, 2007.  As a result, several IRS Schedules will not be available until February.  This may delay the filing of returns that are completed in January and early February.

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