2007 Federal Tax Law Changes

Every year, as way to make itself feel important and useful, the federal government makes modifications to the tax code. Here’s a detailed breakdown of all the changes for 2007 and how they affect your wallet, from AMT exemption amounts, to deductions for business-related mileage.

AMT exemption amount increased: The AMT exemption amount has increased to $44,350 ($66,250 if married filing jointly or qualifying widow(er); $33,125 if married filing separately).

Exemption amount for a child: The minimum exemption amount for a child under 18 increased to $6,300.

Charitable Contributions: New recordkeeping requirement for cash contributions.: You cannot deduct a cash contribution, regardless of the amount, unless you keep as a record of the contribution a bank record (such as a canceled check, a bank copy of a canceled check, or a bank statement containing the name of the charity, the date, and the amount) or a written communication from the charity. The written communications must include the name of the charity, date of the contribution, and amount of the contribution.

District of Columbia First-Time Homebuyer Credit Extended: The credit for the first-time purchase of a home in the District of Columbia was extended through 2007. To claim this credit, use Form 8859.

Income Limits Increased for Hope and Lifetime Learning Credits: For 2007, the amount of your Hope or lifetime learning credit is phased out (gradually reduced) if your modified adjusted gross income (MAG) is between $47,000 and $57,000 ($94,000 and $114,000 if you file a joint return). You cannot claim an education credit if your MAGI is $57,000 or more ($114,000 or more if you file a joint return). This is an increase from the 2006 limits of $45,000 and $55,000 ($90,000 and $110,000 if filing a joint return).

Mortgage Insurance Premiums Treated as Home Mortgage Interest: Premiums that you pay or accrue for “qualified mortgage insurance” during 2007 in connection with home acquisition debt on your qualified home are deductible as home mortgage interest. The amount you can deduct is reduced by 10% (.10) for every $1,000 ($500 if your filing status is married filing separately) by which your adjusted gross income exceeds $100,000 ($50,000 if your filing status is married filing separately).

Qualified mortgage insurance: If you paid premiums for qualified mortgage insurance that are properly allocable to periods after the close of the taxable year, such premiums are treated as paid in the period to which they are allocated. No deduction is allowed for the unamortized balances if the mortgage is satisfied before its term (except in the case of qualified mortgage insurance provided by the Department of Veteran Affairs or Rural Housing Administration).

Mortgage insurance premiums you paid or accrued on any mortgage insurance contract issued before January 1, 2007, are not deductible as home mortgage interest.

Mortgage insurance premiums you paid or accrued after December 31, 2007, or that are properly allocable to any period after December 31, 2007, are not deductible as home mortgage interest.

Social Security and Medicare Taxes: The maximum amount of wages subject to the social security tax for 2007 is $97,500, the ceiling for 2008 is $102,000. There is no limit on the amount of wages subject to the Medicare tax.

Standard Mileage Rates: Business-related mileage: For 2007, the standard mileage rate for the cost of operating your car for business use is 48½ cents per mile.

Medical-and-move related mileage: For 2007, the standard mileage rate for the cost of operating your car for medical reasons or as part of a deductible move is 20 cents per mile.

Charitable-related mileage: For 2007, the standard mileage rate for the cost of operating your car for charitable purposes remains 14 cents per mile.

Comments

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  1. humphrmi says:

    Umm, the IRS makes tax code changes? Eh? Did Congress get disbanded and I didn’t hear about it?

  2. tasselhoff76 says:

    Technically, Congress makes the tax code changes and the IRS interprets and enforces the law.

  3. rhombopteryx says:

    @humphrmi:

    Yeah, and the President? Does he not have to be involved too, or did he retire, or something?

  4. shan6 says:

    The maximum amount of wages subject to the social security tax for 2007 is $97,500, the ceiling for 2008 is $102,000

    Personally I think that ceiling should come up, quite a bit.

  5. humphrmi says:

    @rhombopteryx: LOL I noticed now it says “…the federal government makes changes….” :)

    Has anyone else noticed that the US Government is slowly making charitable contributions harder? Now it’s almost useless to donate a used car, and you can’t make cash contributions without a receipt (it used to be up to $250 without, I think). I thought our benevolent conservative government goals to reduce tax contributions to charity were also supposed to encourage private donations; it doesn’t seem like this new tax code matches that goal.

  6. Hanke says:

    @shan6: As in, there should be no ceiling.

  7. sleze69 says:

    @shan6: Personally I think that ceiling should come up, quite a bit.

    Why? People who make over $102,000 will get the same social security benefit as people making $100,000 or $30,000. Why should they be oblidged to pay more?

    That’s even assuming that social security will still be around in 30 years when I would be eligible for it.

  8. darkened says:

    @Hanke: As in there should be no such thing as social security tax.

  9. shan6 says:

    @sleze69:

    They wouldn’t be paying more of a percentage, and to me that is reason enough. The tax wouldn’t hurt them any more than it hurts me, even though I make 25k and they make 300k. I really don’t want to flame or argue too much, just wanted my opinion out there.

  10. samurailynn says:

    Does anyone know much about the mortgage insurance premiums part? Specifically, are they talking about the mortgage insurance that I have to have because I took out a 100% loan? Or are they talking about the home owner’s insurance?

  11. friendlynerd says:

    Score for PMI deductions! That’s over $1000 in 2007 to deduct in my case.

  12. friendlynerd says:

    @samurailynn:

    They mean the PMI you pay because you have a 100% loan

  13. shan6 says:

    @darkened: If there were no ceiling to the tax, I guarantee the lobbying firms would find a way to get rid of it all together.

  14. Nytmare says:

    Is there still that choice between deducting either sales taxes or state and local income tax?

  15. lemkepf says:

    @friendlynerd: Just remember with PMI: you can only deduct it if you bought your house in 2007. I bought my house in December 2006, pay $120 in pmi a month… i can’t deduct it. Bah.

  16. friendlynerd says:

    @lemkepf:
    Oh man I missed that part, thanks for pointing it out. What a load of horseshit! How have I paid any less than anyone else? Why should that make any kind of difference?

  17. samurailynn says:

    @lemkepf: Wow. That’s a good thing I bought the house in 2007 then. Does that mean we’ll only get to deduct 2007’s PMI? Or is it just for houses bought in 2007 going forward?

  18. tinders says:

    i believe the PMI deduction is for 2007 and 2008 and then will need to be renewed thereafter.

    yep, you can still choose between sales and state income tax deductions

  19. rbb says:

    @shan6: My, how cavalier you are when it comes to other people’s money. When you say “The tax wouldn’t hurt them any more than it hurts me,” how do you know?

  20. rhombopteryx says:

    @friendlynerd:
    The tax provisions penalize you in particular… because you took the tax advice of random Internet postings. The actual information from the IRS website might be different. It might not care at all when you bought the house.

  21. Solly says:

    @shan6: Should someone making 30k a year pay less to go to a movie than someone making 100k? Or is this discrimination only acceptable for teh gov’t?

  22. Solly says:

    @shan6: Should someone making 30k a year pay less to go to a movie than someone making 100k? Or is this discrimination only acceptable for the gov’t?

  23. bayboy says:

    @shan6:
    why so i can prop up a failing system?

    social security and medicare should be optional and anyone who doesn’t want to contribute to them should get to keep their money

  24. rhombopteryx says:

    @nytmare:

    “Answer unclear – check again.”
    While free tax advice from internet postings is good and all that, you may want to check from somewhere more authoritative. At least one recent page on the IRS website says the state sales tax deduction has expired for 2008. 2007 is not 2008, but it’s not clear from that page alone what the 2007 status is.

  25. friendlynerd says:

    @rhombopteryx:

    Thanks for the snarky, useless, asshole advice. I’m not stupid enough to take what I read in the comments at 100% face value, but they are good research points.

  26. @Shan: Personally, I think the limits should be expanded quite a bit as well. Perhaps a workable limit would be, I dunno, INFINITY?

    DOWN WITH REGRESSIVE TAXES!

  27. @Sleze69: The system, as currently construed, is solvent for 42+ more years. That’s the planning horizon. It’s going to be there. Worry to the contrary is fear mongering.

  28. @Bayboy: “Nobody likes paying taxes, but paying taxes is the price we pay to live in a civilized society” – Assistant U.S. Attorney M. Scotland Morris

    Imagine, if you will, an opt out medicaid system. Who will opt in? No one. How will the current users of medicaid feel about this? And what options might they have? Let’s say, outcomes are something to be afraid of. Thus, we pay to live in a civilized society. Else, we embrace anarchy.

    PS- Will be fun watching Wesley Snipes going to jail for a long time.

  29. johnva says:

    @sleze69: The same argument you just made could be used to argue that no one should pay more than a capped amount in federal income taxes, since presumably there is a finite limit to the benefit any one person gets out of the federal government. If you’re for a cap for the reason you just stated, you’re probably against the idea of progressive taxation, period (or even flat taxation, since people making more than the cap actually pay a lower effective SS tax rate). I do believe there are good reasons we have progressive taxation: richer people derive more intangible benefit from certain functions of the government, for one thing (if you have more wealth, you have more of an interest in military defense to protect that wealth, for example).

    And also we have progressive taxation simply because there is a tendency for wealth and income to become concentrated in a small segment of the population. Progressive income taxes are one of the few things that exist to counteract that effect, which could be corrosive to the long-term stability of our democracy. Their wealth-leveling effect has been weakened significantly by the fact that capital gains and dividends are usually taxed at a lower rate. Social Security is not a savings account; it’s a government insurance program. There is no guarantee of you “getting back” what you put in. Thus I don’t buy the argument that the amount you pay in taxes for it necessarily needs to be coupled to the amount you get back.

  30. Celeste says:

    @rhombopteryx: and sometimes the advice from random internet postings is correct. The actual IRS link is here: Mortgage Insurance Premiums Treated As Home Mortgage Intere… and it clearly states: the mortgage insurance contract must have been issued after 2006, and you must have paid the premiums before 2008 for coverage in effect during 2007.

  31. disavow says:

    @PotKettleBlack: Way wrong. Social Security payments are expected to outpace revenues by 2017, and the “trust fund” (which arguably doesn’t exist) will be depleted by 2040 or 2041. Try educating yourself instead of posting dangerously inaccurate information.

    One.
    Two.

  32. humphrmi says:

    @PotKettleBlack: The problem with pyramid schemes is that someone in the system always loses when, eventually, everyone else opts out. Which is why they will never let us opt out.

  33. chagasi says:

    Shan5 is still wrong. Extending the cap on Social Security income limits does nothing to increase the solvency of the system. The payout of SS is tiered to your income paid in, so Increase the CAP = Increased benefits to those above the cap. This prevents SS from becoming welfare. If I pay taxes to say, $250,000, I am entitled to benefits tiered to $250,000. Under current law, when SS income<< Raising the income cap does nothing without limiting benefits. Changing the cost of living adjustment to be inflation-based as opposed to wage based would be an easy first step to fixing SS.

  34. ELC says:

    2007???

  35. johnva says:

    @disavow: In what sense does the “trust fund” not exist? The government legally owes the money to Social Security and will have to repay the bonds. The only “problem” is that this will require income taxes to be raised or general spending to be cut if we don’t want to increase the size of the budget deficit. Social Security itself is perfectly solvent until that point in the 2040’s. By then, most of the Baby Boomers will be dead, and the main purpose of the “trust fund” will no longer exist. The reason SS needed to “save” its surplus was this demographic problem (a large generation followed by a smaller one). The remaining fiscal problems with SS can be solved by retuning the SS tax and benefits paid out so that the ratio of money coming in is more closely equal to the ratio of money going out. But it’s hard to predict how that tuning needs to happen without knowing how the demographic situation will have changed by 2040 and later.

    The real main reason Republicans want “Social Security reform” is so that rich people don’t have to pay higher income taxes to repay the bonds the government owes (since the repayment will come from a progressive income tax instead of the regressive Social Security tax). It’s that simple.

  36. johnva says:

    @humphrmi: Social Security is not a “pyramid scheme”. It doesn’t require ever-increasing numbers of people paying in to sustain the system. Instead, it just requires a stable demographic situation and limits on the benefits paid out so that enough money is coming in to pay the benefits going out. A lot of the problem we’re having is caused by changes in our society (including the Baby Boomer population bubble, increased life expectancy, falling real incomes for young workers entering the system, etc).

  37. disavow says:

    @johnva: The trust fund doesn’t exist for precisely the reason you stated. Congress spent all the surplus funds and replaced them with Treasury notes, aka government IOUs. As P.J. O’Rourke put it, that’s like writing on a piece of paper, “I get a bunch of money when I turn 21.” Technically they wouldn’t have to raise payroll taxes to keep paying SocSec, but they’d have to raise the cash from somewhere–probably by raising taxes somewhere else. The purpose of a trust fund is to have money set aside for the future. If that money has to come from somewhere else, then it’s not really being set aside, is it?

    And FYI, according to the Senate Budget Committee’s projections (see my second link above), when today’s younger people are ready to retire, there will be only two workers supporting every retiree, compared to 3.3 workers today. It’s another Ponzi scheme that’s gradually running out of suckers.

    @ericole: Taxes are paid the year after they’re incurred…so in 2008 we pay taxes on 2007 income.

  38. disavow says:

    @johnva: (I didn’t refresh before posting.) It doesn’t require an ever-expanding bottom layer, but that bottom layer does need to be proportionately big enough to sustain the top–and that’s just not happening at our current population growth rates. You’re absolutely right that limiting outlays to revenues would keep it solvent in the long term. Unfortunately, nobody in D.C. wants to be the jerk to cut benefits, so fiscal responsibility isn’t something I think we’ll see.

  39. eeefresh says:

    @johnva: The real main reason Republicans want “Social Security reform” is so that rich people don’t have to pay higher income taxes to repay the bonds the government owes (since the repayment will come from a progressive income tax instead of the regressive Social Security tax).

    It’s awfully nice of you to speak on behalf of all Republicans! While you are at it, why not take this opportunity to explain to me why I believe in Jesus?

    I am a middle-class Republican and I support social security reform because I hate paying money into a fund from which I will never benefit. You are right to say that there is no guarantee of “getting back” what I put in. In fact, the only guarantee right now is that I won’t see a dime of it.

    If SS is an insurance program, as you say, then I should get to choose my insurer. I would much rather invest that money, stimulate the economy and actually make a profit than let the U.S. government mismanage my money.

  40. johnva says:

    @disavow: You’re not understanding correctly. Yes, the government irresponsibly did not save the surplus money from Social Security (they decided to spend it on things like wars and the military instead). But Social Security holds legal claims on money from the Treasury. The current legal structure FORCES the government to pay the bonds back, and actually they already budget for this. So there is no SS fiscal crisis under the current rules. There is a fiscal crisis for the federal budget, and it’s caused not by Social Security but by overspending and irresponsible income tax cuts. An attempt to “reform” Social Security by not paying back the bonds is just legalized theft because it means that a bunch of money that people thought they were paying for Social Security suddenly would be spent on other things.

    Seriously, why shouldn’t we just raise income taxes to cover our budget deficit instead of gutting Social Security and invalidating its bonds? The taxes should have been higher all along to pay for all of that extra spending that was enabled by the surplus SS money.

  41. lougump67 says:

    JohnVA – some of the liberal reteric your spewing is hard to take. You made a comment earlier, “I do believe there are good reasons we have progressive taxation: richer people derive more intangible benefit from certain functions of the government, for one thing (if you have more wealth, you have more of an interest in military defense to protect that wealth, for example.” Your statement is obviously flawed as it is based on faulty reasoning. Talk to anyone that understands wealth and they will explain that capitalism protects our money while the governments liberal evolution has continued to peck away at individual’s fortunes. At what point in our great nation’s history did we decide that it was ok to take from one person in order to give to another? I say that the more wealth an indivual has, the more of an interest the government and society has in that individual to create more value in our society.

  42. johnva says:

    @disavow: I think this problem needs to be fixed with a combination of solutions. They should raise the retirement age significantly, for one thing. People are living much longer, and so are able to draw Social Security for longer. If life expectancy continues to go up, we must increase the retirement age to halt growth in the total payout per retiree. I think this is reasonable because with better healthcare, etc many people choose to work to a later age anyway. In any case, if we do nothing we will still be able to pay something like 70% of promised benefits from what I have read (because that’s the projection of what the future tax revenue will cover). We can just wait and let the problem solve itself since the money simply won’t be there and benefits will have to go down. But it would be better for us to think about all the tradeoffs now and come up with the fairest solution.

  43. johnva says:

    @eeefresh: You WILL benefit from it. Trust me. You might not benefit as much as people now benefit from it, but there will always be at least some money from current taxes. Most of SS is funded by current taxes; it’s “pay as you go”. The amount of benefits possible might fluctuate as the ratio of workers to retirees changes, but there will be some money as long as people are still working and paying taxes in this country.

    You cannot think of it as an investment. That’s simply not what it’s for. It’s not about building wealth for you but instead it’s just about making sure you have something in retirement despite what else might happen to your savings, investments, etc.

  44. samurailynn says:

    @johnva: But what happened to people taking care of their families, their neighbors, their friends and themselves. When I was about 18 and still in high school my dad retired and I got a monthly social security check (in my name, not my parent’s). At the time, I thought it was great – what kid doesn’t love free money! Now, I realize how ridiculous it was that I was receiving a benefit because my dad retired. At this point in time (thinking as a tax payer, instead of a kid) I don’t even think that retirees should get additional income because they have children to support. You can control whether or not you have children. If you realize that you’re going to retire before your kids are out of school, plan for that! (Or don’t have kids so late in life.) Don’t expect the taxpayers to take care of them for you. My problem with social security is that we are expected to take care of everyone else. And you know what? There are some people that I don’t think deserve it. I would rather only take care of the people I want to take care of. When one of my parents dies, the other may not be able to support themself alone. I and my siblings will have to take care of that. And you know what else? As a taxpayer, I do not ever want to support someone who is retired but has a mortgage payment of $10,000 per month. I worked with someone whose parents had exactly that. They obviously had other retirement income, but if they can afford a $10,000 per month mortgage payment, there’s no reason I should be supporting that.

  45. johnva says:

    @samurailynn: I agree with many of your points. Of course people rely on their families when they can’t take care of themselves (and they should). That’s party of the social safety net. Social Security came out of a crisis (the Depression) where we had an economic collapse so severe that this safety net broke down. You might not have been able to take care of your parents even if you wanted to, because you might not even be able to take care of yourself. That is what Social Security is for. It’s not meant to be extra spending money or whatever. It’s just part of the safety net and strengthens it by putting the power of government behind it.

    I also don’t think that people who can afford $10,000 per month mortgage payments should be getting Social Security money; they obviously don’t need it. Unfortunately (if you’ll allow me to be more cynical here for a moment) that structure is part of what allows Social Security to survive politically. Like it or not, the ultra-rich have a lot of influence in this country. Because Social Security benefits everyone and not just “the poor”, it is more protected politically than something like a straight welfare program. Personally, I do think it would be more fair and less wasteful if Social Security benefits were metered to income or wealth somehow and it was more like welfare to benefit the truly poor retired people with no other options. But the idea of welfare has been so demonized in this country that I just don’t think that kind of reform is possible.

  46. samurailynn says:

    @johnva: I see how social security would have been a great safety net during a time like the Depression. But most of the time we’re not in a depression, and most times are not anything like they were then.
    I agree that social security being a little more like welfare would be better, but I still don’t like it. Even welfare doesn’t do much other than keep poor people poor. If you know that having below a certain income also gets you so much in ‘freebies’ (be it money, food stamps, healthcare, whatever…) a lot of people feel that that is an encouragement to stay below that income level, and therefor stay ‘in the system’. I see a lot of relatives of mine doing the same thing with retirement. They think that because social security is there, they don’t need to save. A lot of older relatives think that it is too late to do any worthwhile savings. Basically, a lot of my relatives will end up working as long as they can, and then retire and find that they can barely get by on social security. But they never saved for their own retirement because of that safety net.
    I also agree that the wealthy have a lot of political power in our nation. I think it’s unfortunate. The middle class is shrinking and the gaps between the classes are growing. I don’t know what this will mean for our country in the long run, but it doesn’t seem pretty. Of course, those with power (the wealthy) aren’t going to do too much to limit the income of the upper class.

  47. humphrmi says:

    @johnva: That’s a matter of opinion, and in my opinion A pyramid scheme is any system that cannot sustain itself indefinitely based on current income. If we could opt out and decide not to take social security benefits, then it wouldn’t be a pyramid scheme.

    A system similar to social security that is not a pyramid scheme is insurance. Insurance companies know with statistical certainty how many claims will be filed against their policies, and they set aside enough assets to cover those claims. If they miscalculate the risk, they take it in the pants, but for the most part they survive (if they are appropriately managed) and their policyholders still get paid.

    We know with statistical certainty that everyone who contributes to Social Security will someday file claims against the system, and yet the system does not have enough reserves to cover all of those claims. Ergo, it is illiquid and a pyramid scheme.

  48. joexmd says:

    social security is an insurence program. With everyone in the same pool, the less fortunate get more help. There should be no ceiling on what wages get taxed. Despite what republicans would have you believe, there are some hard working people at the bottom. Not everyone is a drug using, lazy, low-life.

    i’ve been paying for fire insurence for 40 years and never had a fire. When I sold my house should I get my money back?

  49. Alan Thomas says:

    Sheesh, folks. Look up the work “promulgate” sometime. There are laws, which Congress enacts, and regulations, which agencies promulgate based on specific authority given to them by Congress.

  50. Kevin Cotter says:

    When they set up the Social Security Administration it was not intended to be a shared welfare type of program. You were supposed to put money in, and get a percentage back upon retirement age. To remove the ceiling and/or stop payments to wealthy people would require rewriting the whole program.

    I have a low-life uncle that has lived his whole life trying to work under the table to avoid taxes. Now that he’s getting older he doesn’t know how he’ll get by when he starts to collect. With that in mind, the other thing people seem to forget about when Social Security was created, is it was intended to supplement not be the sole support.

    The problem I’m running into is with my wife’s income we’re slowly being disqualified from IRA’s and her 401K contributions are severely limited. Her contribution, as a percentage, is limited to the percentage the average employee contributes at the company.

    I don’t have any concrete answers to the broken system, but somebody needs to start coming up with some ideas.

  51. humphrmi says:

    @Kevin Cotter:

    With that in mind, the other thing people seem to forget about when Social Security was created, is it was intended to supplement not be the sole support.”

    Good point, but the problem is also when Social Security was implemented, everyone who worked had a pension plan from their employer, even the fry cooks at greasy spoon diners. That wasn’t sustainable either, as the world got smaller and US companies had to compete with foreign companies that didn’t have pension plans because their tax-ridden governments provided pensions for everyone.

    And yeah, there aren’t any concrete answers. I can tell you that I am saving like mad for my retirement. I fear that when I retire, many of my peers who aren’t saving now will be broke and we (our generation, post-baby-boomers) will rely on the government even more for support.

  52. samurailynn says:

    @Kevin Cotter: As far as being limited in your contributions to IRAs and 401k plans, you could always have additional money in a regular savings account. Or you could invest it yourselves. The money will be taxed now, but that also means that it won’t be taxed later. I’m not entirely sure, but I believe you can also contribute to a spouse’s retirement plan. If she has reached her limit, she could contribute to your plan. Of course, this would mean that she would have to trust that the two of you would be together in retirement.
    Personally, I had a 401k but the company I was working for went out of business. I had to put the money somewhere, so it is now in an IRA. Since I had only been contributing to the plan for a year, I don’t have a lot of money in there. This means that I can’t put it in a money market account, I basically have to have it in a CD. So, it’s making some interest, but not much. I would have been better off putting the money in an ING Direct savings account, but of course I can’t do that since it’s a retirement account. Luckily, I’ll be able to put it back into a company 401k plan sometime this year.

  53. rhombopteryx says:

    @Celeste:

    Thanks for fixing the link. You’re proving again why advice from the internet is often intended to be funny and helpful but might not be either… The guidance you & I linked to talks about when the insurance contract was issued, which has not much to do with the year the house was bought. Grandma Moses with a 190-year-old house that’s been paid off for 160 years might still be interested in this provision for the policy she bought in 2007. Similarly, if FriendlyNerd bought his house in 2006, but didn’t get his insurance issued ’til 2007, it might still help him.

  54. friendlynerd says:

    @rhombopteryx:

    Nah. bought it in 2005, been paying ever since. But thanks for thinking of me :)