Now that tinkering with the tax code has become a favorite congressional pastime, the annual filing season is more of an ordeal than ever, with laws kicking in and phasing out virtually every year.
This time around there are new breaks for songwriters, homeowners and onetime dot-com millionaires whose shares turned to dust. There are new hurdles for children with income, people who donate cash to charity and buyers of hybrid cars. A variety of income thresholds have been indexed to inflation, giving some a chance to claim breaks they might otherwise have missed. As always, there are a handful of nagging challenges when it comes to claiming breaks that aren't specifically noted on tax forms.
And for millions of Americans, filing season has only just started, because last-minute changes by Congress made it all but impossible for the Internal Revenue Service to process certain forms before Monday of last week.
Ready? Here's what you need to know about the work-in-progress tax code:
Laws passed in the last two years ushered in a host of new deductions and hazards to watch out for. Specifically:
Mortgage insurance write-offs. Mortgage insurance premiums are now deductible, but there are caveats. The insurance has to be on a mortgage that you used to buy your main or second home in 2007 -- not before. Jackie Perlman, tax researcher for H&R Block in Kansas City, noted that the deduction is reduced for single or joint filers earning more than $100,000 and disappears entirely once income hits $110,000.
Debt cancellation exclusion. Before last year, if you lost your house in foreclosure or were forced to sell it for less than the loan amount, you'd typically be subject to "debt cancellation income." The short version: The IRS assessed income tax on the money you didn't have to pay back.
Let's say you had a home with a $500,000 mortgage and a market value of $450,000. Before Congress passed a three-year exception to help people cope with the sub-prime crisis, if the lender took the home in foreclosure and you walked away owing nothing, the $50,000 difference was taxable income to you.
For 2007 through 2009, debt cancellation on your primary residence, whether as the result of a so-called "short sale" or a foreclosure, is not taxable. (Taxpayers are likely to get a 1099C showing the phantom income, however, so you must fill out a Form 982 to exclude that income from tax, Perlman said.)
Charitable receipts. The IRS will no longer take your word for the $20 you put in the collection plate each week, said Mark Luscombe, federal tax analyst at CCH Inc., an Illinois-based publisher of tax information. You need to either write a check or get a receipt for every donation. This documentation does not need to be sent with your return, but you should keep it just in case you're audited.
AMT credit. If you paid the alternative minimum tax in a prior year because of a phantom gain, you might qualify for a refundable credit in 2007, Luscombe said. The credit phases out for singles earning more than $156,400 and married couples earning more than $234,600.
This break was designed to help former dot-com workers who received incentive stock options during the boom, only to have the value of these options evaporate later.
Many of these people owed hundreds of thousands of dollars in tax on phantom gains because of a glitch in the AMT law. They had complained for years that they were being made destitute by taxes owed on gains that had never materialized. This credit helps some in this group, those who paid AMT taxes prior to 2004, reclaim a portion of those taxes.
Song sales. If you wrote a song -- or inherited one -- and sold the rights for a profit, you get to take preferential capital gains treatment on the sale. That can save some songwriters 20 percentage points in tax.
Child exemptions. The clarification of rules stipulating who can claim a child as a dependent allows some unmarried partners and grandparents to take tax write-offs for children they support who might live with a parent.
Kids and taxes. Children under the age of 18 may have to pay tax on unearned income at their parents' marginal rate. (The old law threatened kids with being subject to their parents' rates only until the age of 14.) Full-time students can be subject to kiddie tax rules until they're 24.
Here today, gone tomorrow
Two popular breaks expired in 2007, giving taxpayers one last chance to claim them.
Tuition and fees. Your 2007 tax return is your last opportunity to claim the tuition and fees deduction, a lucrative break for taxpayers paying college bills for themselves or a dependent.
Like many other tax breaks, this is income-tested. Singles earning less than $65,000 annually and married couples with less than $130,000 in adjusted gross income can claim a write-off of up to $4,000 for college costs paid last year.