This Page Updated on February 12, 2008

This page is to be used in conjunction with The Educator's and Healthcare Income Tax Guide, The State and Local Government Guide, and The Taxpayer's Guide, for preparing your 2007 federal tax return. As is the case in the printed tax guides, it is the reader's responsibility to assure that the tax facts are correct and that they apply to your individual situation.

Due to the ongoing nature of Tax Code rulings, Tax Court decisions, new laws, etc., this page will help keep you up-to-date. We will publish any changes or corrections to the guide on this page. As new information becomes available, we will add it to this Tax Guide Updates page. Individual page updates are listed below in numeric order.

CURRENT TAX GUIDE UPDATES - 2007

Page 2 - New in 2007

Poker tournaments must start reporting winnings to the IRS in March 2008. Players are required to give their tax identification number or have 28% withheld from their winnings over $5000. Rev. Proc. 2007-57

Page 4 - The IRS & You

Your inbox may receive an email from the IRS offering a refund if you will respond by giving your social security number and a credit card. Do Not Respond – it is a fake. The IRS does not send any emails regarding refunds and would not ask for information such as your social security number or your credit card. Forward the email to then delete it!

Checks mailed in with your tax return will be converted into direct debits, meaning they will be deducted from your checking account immediately. Be sure your account has the funds available.

How to get your refund quickly? File as early as possible and file electronically. Choose to have your refund deposited directly into a checking/savings account, IRA, Coverdell ESA, HSA, or Archer MSA. It can be deposited into as many as three of the above accounts.

Page 6 - Alternative Minimum Tax (AMT)

The exemptions were raised for 2007: $66,350 for married filing jointly and $44,350 for singles. Dependent care and tuition credits can offset AMT.

AMT Tax Credit
Unused AMT tax credits can be used over a 5-year period beginning in 2007 according to a new law.

Page 7 - Business Deductions

New per diem rates took effect October 1, 2007. See Rev. Proc. 2007-63

Page 8 - Capital Losses

The IRS has privately ruled that Enron stock losses do not qualify as theft. They are capital losses and subject to capital loss rules. Losses greater than $3000 above capital gains is carried forward to later tax years.

Page 11 - Divorce & Alimony

Tax Court has ruled if you are paying your ex’s mortgage and you are legally responsible for the mortgage, your alimony deduction will be half of the payment since half of it is your personal obligation. (Harris, TC Summ 2007-169)

Page 12 - Education Deductions

The IRS is checking the names and social security numbers of students for filers claiming education deductions and credits. Use Form 8917.

Page 14 - Energy Credits

Many alternative fuel vehicles may qualify for a tax credit. Go to www.irs.gov/businesses/ to see if yours is on the list.

To get the latest credits available on hybrid cars, go to www.fueleconomy.gov.

Pages 15 & 46 - Job Hunting Expenses

When hunting for a job in your current profession, you may deduct travel expenses of airfare, lodging, auto expenses including car rental and meals.

Page 15 - Loans

If your mortgage is discharged in 2007 due to insolvency, up to $2 million can be excluded from income. The debt must be to build, buy or improve your primary home.

Page 21 - Sources of Tax-Free Income

Income Earned Overseas
More: The maximum amount for the foreign housing allowance exclusion for 2007 is $11,998. Workers in high cost areas receive an even larger exclusion. See Notice 2007-77

Page 30 - Non-reportable – Non-taxable Income

Cash rewards for credit card use.

Page 35 - Medical & Dental Deductions

In a private ruling, the IRS says diet foods and supplements are not a medical expense and cannot be reimbursed by flexible spending programs. Costs of weight-loss programs prescribed by a physician to treat obesity or other illnesses are deductible.

Many diagnostic tests are deductible whether the taxpayer shows symptoms or not (such as annual physicals, whole body scans). Rev. Rul. 2007-72

Page 53 - Case Study

In our case study, the Alternative Minimum Tax (AMT) applied to and seemed unfair to our family based on their income. Congress recognised the unfairness that taxpayers, with middle incomes, are now having to pay AMT, which was originally enacted to be sure upper income taxpayers paid their fair share. As a result, they repealed a portion of the law late in December. Our example was run prior to this change in the law, therefore the AMT calculation in the case study would probably have a different outcome. Every taxpayer still must perform the AMT calculation on their return and will pay the higher tax of either the AMT or regular income tax.

FILING TIPS

File Form 4868 to obtain an automatic 6-month extension by April 15 but do not forget to pay the taxes you expect to owe at the time you file your extension. Otherwise, you will be charged interest plus a penalty of .5% per month on what you owe.

LOOKING AHEAD TO 2008

Standard mileage rate: Business............................ 50.5 cents per mile
Medical/Moving................... 19 cents per mile
Charitable.......................... 14 cents per mile
Social Security Wage Base: $102,000

IRA and Roth IRA maximum contribution: $5,000 (50 and older add additional $1,000)

Tax update.

This page is to be used in conjunction with The Educator's and Healthcare Income Tax Guides, for preparing your 2002 federal tax return. As is the case in the printed tax guides, it is the reader's responsibility to assure that the tax facts are correct and that they apply to your individual situation.

Due to the ongoing nature of Tax Code rulings, Tax Court decisions, new laws, etc., this page will help keep you up-to-date. We will publish any changes or corrections to the guide on this page. As new information becomes available, we will add it to this Tax Guide Updates page. Individual page updates are listed below in numeric order.

Page 1:

Page 2 - New in 2002:

Health care tax credit - Workers who lose their jobs as a result of trade agreements can claim a 65% refundable tax credit for premiums to continue their health insurance coverage. This includes COBRA and state-sponsored insurance programs. Use Form 8885. This law is part of the Trade Act of 2002.

Free tax preparation for low incomers - The IRS is working with firms who prepare tax returns to offer free tax preparation and electronic filing for low incomers. Low income has not yet been defined but this will apply for 2002 returns.

Home Sale Relief for 9-11 Attack - If a house had to be sold due to physical damage or the owner or other resident was killed or lost or changed jobs due to the terrorist attack of September 11th and they had not lived in the home 2 out of the 5 years prior to the sale, capital gains can still be excluded. It will be in a reduced amount from the $250,000 for singles, $500,000 for marrieds. To determine the allowable gain, multiply $250,000 or $500,000 (whichever is applicable) by the proportion of the two years the house was used as their principal residence.

On 2002 returns, individuals will not have to file Schedule B, Interest and Ordinary Dividends, unless their interest and dividends total $1500 or higher. If they have interest in any amount in a foreign account or trust, the schedule will still have to be filed. IR-2002-102

Buyers of GAS/ELECTRIC HYBRID CARS - This deduction is not limited to cars used for business. Cars used personally (the "family" car) also qualify.

Social Security Wage Base - If you overpaid your social security tax this year, you should file for a credit on your income tax return. Enter the credit on Form 1040, line 65 or Form 1040A, line 43.

Page 3 - Interesting Court Cases:

A law school librarian went back to school for a law degree. She deducted her education costs as a business expense saying it aided her current job at the library. The Tax Court did not allow the deduction saying it qualified her for a new profession. Stephen Galligan, et ux, TC Memo 2002-150

A music teacher deducted the room where he gave lessons in his home. The IRS said it was not used exclusively for his sideline business. It also contained a sofa bed, closet and personal belongings. 75% of the room was used exclusively - equipped with sound equipment, speakers, tapes, a keyboard and computer, therefore, that portion of the room was allowed for the deduction. Jack C. C. Huang, TC Summary Opinion 2002-93

A pilot who left the military was employed as a commercial pilot. He was required to take a training course for flying the type of plane the airline used. He deducted it as an education expense. The IRS Disallowed the deduction saying it qualified him for a "first job." The Tax Court ruled since the training was required for all the pilots working for the airline, the expense qualified as an employee business expense. Jon R. Echer, TC Summary Opinion 2002-44

A rental had a leak in the roof and rather than repairing it, the owner replaced the roof, deducting it as a repair. The IRS said it was an improvement and had to be depreciated. The Tax Court ruled since the purpose was to repair the leak, it did not "improve" the home and allowed the deduction. Nevia Campbell, TC Summary Opinion 2002-117

Page 4 - IRS:

If you can't pay your taxes, the IRS has an installment plan where you can pay them over the next three years. There is a set-up fee of $43 plus interest and penalty per month on the balance unpaid. If you owe less than $10,000 and haven't defaulted on IRS payments in the past, you may be eligible. This could cost less than charging it on your credit card or taking out a loan.

The penalty for not filing is 5% per month up to 25%. If you file on time, the late payment fee is .5% per month and is reduced to .25% if you pay through the installment plan.

New free electronic filing for your 2002 tax return. The IRS Free File program is available to 60% of all taxpayers. To find out if you're eligible, go to www.irs.gov and click on Free File.

If your tax return under reports the tax you owe, the IRS may apply a 20% penalty. To avoid this, they require "adequate disclosure" regarding the deduction. The IRS has published rules defining "adequate disclosure."

New filing addresses for the following states: Arizona, Idaho, Indiana, Kentucky, Louisiana, Maine, Mississippi, Nebraska, New Jersey, New Hampshire, North Dakota, Ohio, Oklahoma, South Dakota, Vermont and Washington. You can get the correct address at www.irs.gov in "The Newsroom." A return sent to the wrong address may be delayed or lost.

Don't forget, you can get a four month filing extension by using Form 4868. Taxes are still due, so be sure to make a tax payment to cover any shortfall.

Most forms and publications can be printed from the IRS website, www.irs.gov.

IRS Audits - The IRS will return to random audits on individual tax returns this year.

The IRS and You - Be sure if you use an IRS approved carrier at a store location such as Mail Boxes Etc., that you know when they will actually ship. A taxpayer dropped off a Tax Court petition utilizing UPS' next day air at Mail Boxes Etc. but they didn't get it to UPS until the following day, causing the taxpayer to miss the deadline and the IRS ruled it was filed late. Richard M. Schafer, TC Summ Op 2002-119.

Two new toll-free phone numbers:

1-800-829-4933 - This is for small businesses for information or assistance with tax returns.
1-800-829-1954 - This is for individuals inquiring on their expected current year tax refund.

IRS Web Page - A new IRS web page covering estate and gift tax rules as well as recent tax law changes is found at www.irs.gov. Type "estate and gift tax" in the Search window.

Page 6:

Alternative Minimum Tax Trigger - Too many employee business expenses (deductible if exceeds 2% of adjusted gross income for regular tax) can set off alternative minimum tax.

Adoption Expense Credit - A tax credit for a foreign adoption cannot be taken until the adoption is final.

Page 7 - Capital Gains:

A university professor's hiring agreement stated that the rights to any inventions he made while in their employ would be turned over to the college. The school paid him royalties for an invention he patented. The IRS ruled that patent royalties are taxed as capital gains because they were in addition to his university salary and the amount of the payment was determined by what the school earned from licensing the patent.

Page 8 - Capital Gains - Principal residence:

Home sales that occur before two years can get a partial exclusion if the move is due to job changes that add fifty miles to the commute, health issues (like multiple births or moving nearer to a health care facility) or circumstances such as divorce. These rules are retroactive. See IRS Pub 523, Selling Your Home.

Page 9 - Divorce:

A couple's divorce decree stated that if the ex-husband paid alimony in a timely manner and if his ex-wife was alive and not remarried after a specified amount of time, he could pay the remainder of his alimony in a lump sum. He chose to use that option. Although the divorce decree did not state the payment was tax-free, the IRS has ruled a lump sum payment of alimony is tax deductible to the ex-husband, the payer, and taxable to the ex-wife, the recipient.

Page 10 - Educational Tax Credits:

The IRS has ruled if a parent waives their dependency election for their student/child, the student can claim an education credit. Therefore, if your adjusted gross income exceeds the maximum amount to take the credit, you should consider this to allow the student to receive the benefit of the credit. Note: The student must have offsetting income in order to claim an education credit.

The IRS says students can claim education tax credits if their parents do not claim them as personal exemptions. This even applies if the parents paid the student's tuition. The student must have offsetting tax liability and can't claim a personal exemption on their own return.

Page 11 - Home Offices - For the Employee:

Be sure if you are an employee claiming a home office deduction, you can prove it is for your employer's convenience. Have your employer write a detailed letter why it is necessary for you to maintain an office at home for their convenience.

If you claim a home office deduction, verify it with pictures. You may not need the photographs now, but if you are audited two or three years after you last use the office (or move from that home), they will come in handy.

Page 17 - Tax Alert:

Make sure your social security number is correct on your W-2 sent with your tax return. If incorrect, it will be ruled "not a compressible form." Your refund will be held and will not accrue interest while it is held.

Page 18 - Withholding the correct amount:

Did you refinance your mortgage this year? If your payment is lower, your interest is probably lower and this could result in a higher tax bill.

Page 19 - Retirement Plans:

The IRS can make hardship exceptions to the 60-day rollover rule for distributions from a retirement plan in the case of a disaster or an event beyond the control of the taxpayer.

Page 21:

Minimal distribution age for 403(b), 401(k) and other qualified retirement plans begins at 70� unless you are still employed. This does not apply to IRA's.

401(k) Cash or Deferred Plans - The IRS has ruled that an employer who allowed workers to exchange unused sick leave for a paying to their 401(k) plan and did not give them a cash option, these pay ins are tax-free. No income, Social Security and Medicare tax is required.

Page 22 - Roth IRA:

If you closed out your Roth IRA due to the falling stock market, the loss may be taken as a miscellaneous deduction subject to the 2% of adjusted gross income rule. You must close out all your Roth IRA accounts to claim it.

Page 23 - Section 529 Plans:

Has your Section 529 Plan taken a loss with the downturn of the stock market? The IRS has not made a formal ruling on how to deal with losses, but preliminary advice says they fall under Section 165. This would allow you to close the account without a penalty and deduct the loss as a miscellaneous itemised deduction exceeding 2% of your adjusted gross income. As with any investment, wait 60 days before opening a new account or the IRS could disallow your deduction.

The IRS has determined that you can deduct losses in 529 plans for college savings. If you close out an account due to losses in the stock market, you can treat the loss as an itemised deduction.

If the deduction doesn't help, open a new account in the same child's name or a sibling (or grandchild) within 60 days of closing the old one. It will be treated as a tax-free rollover.

Page 25:

If you are an employee of a university which offers reduced tuition for graduate school classes, it is not considered a tax-free fringe benefit by the IRS and the $5250 exclusion for employer-paid education does not apply. Reduced tuition for undergraduate courses is excusable.

Page 30 - Medical & Dental Deductions:

In Publication 502, the IRS states that health club memberships can not be treated as a medical expense, even if used to treat obesity and required by a physician.

A disabled person and his mentally and physically impaired son were recommended by their doctors to swim for therapy. They built a pool and deducted its maintenance as a medical expense. The IRS rejected the deduction but the Tax Court determined the pool was prescribed by their physicians and was not used by rest of the family for recreation, therefore the maintenance costs are deductible as a medical expense. Robert Emanuel, TC Sum Op 2002-127.

Now that Claritin is available over the counter, it cannot be deducted as a medical expense nor can it be reimbursed from a flexible spending account.

Medical expenses paid for a surrogate mother are not deductible unless the surrogate qualifies as a dependent of the taxpayer. Legal fees are also not deductible.

Page 34 - Charitable Contributions:

In Rev. Ruling 2002-67, the IRS confirms that a taxpayer may transfer an auto to a charity's authorised agent and treat it as a direct donation to the charity qualifying for a deduction. For example, a car dealer values the car, sells it and gives the charity the money from the sale. In addition, the agent may take care of the required paperwork necessary for the contemporaneous written acknowledgement of the donation. Remember, it is important to have proof of the condition of the vehicle such as photographs, maintenance records, independent appraisals. The IRS requires that the method used to determine the fair market value of the auto must be reasonable. A used car pricing guide can establish the value only if the car is the same make, model and year, it is sold in the same area and is in the same condition.

Here are last-minute ways you can save on your taxes:

Don't forget to contribute to an IRA for 2002. The deadline is April 15, 2003. If your children had earned income, they are also eligible. Their maximum contribution is either $3,000 or the amount of their earned income (whichever is less).

If you own your own business, contributions to its qualified retirement plan can be made as late as the extended due date of the tax return.

If you are married, figure out your tax bill both ways: married filing jointly and married filing separately. File your return for the one that generates the better result.

Can you file as Head of Household or as a Surviving Spouse? This will give you a better tax benefit if you're eligible.

You may want to file an amended return for a deduction you previously overlooked or for a tax law that is retroactive. You have three years from when you filed your return or two years after you paid the tax.

Looking Ahead to 2003:

Standard mileage rate for business driving is 36 cents per mile, down from 36.5.

Medical and moving driving rates are 12 cents per mile, down from 13.

Charity remains 14 cents per mile.

Standard deduction: $7950 for marrieds, $7000 for head of household, $4750 for singles.

Personal exemption: $3050.

Social Security tax wage base increases to $87,000.