Late Legislation Affects AMT, Mortgage Foreclosures, FUTA

Just before adjourning in December, Congress passed several pieces of legislation that will affect 2007 tax returns.

AMT: The president signed the Tax Increase Prevention Act of 2007 (H.R. 3996) on December 27, 2007. This act increases the alternative minimum tax (AMT) exemption amounts through 2007 (Sec. 55(d)). The new exemption amounts (before the phaseout) are $66,250 for married taxpayers filing jointly and surviving spouses (up from $62,550 in 2006) and $44,350 for unmarried individuals (up from $42,500 in 2006). The phaseout rules remain the same.

The act also extended the AMT relief for nonrefundable personal credits under Sec. 26(a) through 2007. Under this provision, the various credits can offset both regular income tax and the AMT.

The IRS announced that as a result of the AMT legislation, as many as 13.5 million taxpayers will not be able to file their 2007 returns until February 11, 2008 (IR-2007-209). This is because the Service needs time to reprogram its systems to reflect the changes made by the act. Taxpayers filing any of these five forms will have to wait until February 11:

• Form 8863, Education Credits;
• Form 5695, Residential Energy Credits;
• Form 1040A, Schedule 2, Child and Dependent Care Expenses;
• Form 8396, Mortgage Interest Credit; and
• Form 8859, District of Columbia First-Time Homebuyer Credit.

The IRS expected to be able to begin processing all other returns—including Form 6251, Alternative Minimum Tax—on January 14, 2008.

Mortgage debt relief: On December 20, 2007, the president signed the Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648). This act provides that taxpayers who have mortgage debt on a qualified principal residence discharged (as in a foreclosure sale for less than the residence’s full market value) do not recognize income as a result of the discharge of up to $2 million of the debt (Sec. 108(a)(1)(E)). The provision affects discharges through 2009. The act also provides that the amount excluded from gross income as a result of this provision will reduce the taxpayer’s basis in the residence (but not below zero).

The act also permits surviving unmarried spouses to qualify for the $500,000 home-sale exclusion if (1) the sale occurs not later than two years after the spouse’s death and (2) the requirements for the $500,000 exclusion were met immediately before the spouse’s death. This provision is effective for sales and exchanges after December 31, 2007. Previously, the $500,000 exclusion was available only if spouses filed a joint return for the year of sale. 

The act extends the treatment of mortgage insurance premiums as interest through 2010 (Sec. 163(h)(3)(E)(iv)). It also provides benefits for volunteer firefighters and other emergency responders, including an exclusion from income for state and local tax benefits and for qualified payments of up to $30 a month. These benefits will apply to tax years beginning after 2007 and before 2011.

The act pays for these measures by increasing the monthly failure-to-file penalty for partnership returns and imposes a monthly failure-to-file penalty or a failure to provide required information penalty for S corporation returns. The penalty for failure to file partnership returns is $85 per shareholder per month, and the period for calculating the penalty is 12 months (up from $50 and five months). The penalty imposed for failure to file an S corporation return is $85 per shareholder per month, up to 12 months.

The act also increases by 1.5% the required installment amount for estimated tax payments due in July, August, or September 2012 by corporations with assets of $1 billion or more from 115.75% to 117.25% of the amount otherwise due.

FUTA surtax: On December 19, 2007, the president signed into law the Energy Independence and Security Act of 2007 (H.R. 6). This act extended the 0.2% FUTA surtax in Sec. 3301(1) through 2008.

The act also extends the amortization period for geological and geophysical expenditures from five years to seven years for major integrated oil companies (Sec. 167(h)(5)).