There have been a number of tax law changes affecting individuals for 2007. Over the past year we have discussed many of them in our FOCUS e-newsletter. Now is a good time to review a few of these that may be on your mind as we begin tax filing season.

2007 TAX RATE SCHEDULES

The 2007 tax rate schedules have been adjusted to reflect the effect of inflation on the tax rate bracket thresholds.

ALTERNATIVE MINIMUM TAX

The following changes to the AMT went into effect for 2007.

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 age 18 has increased to $6,300.

Hurricane Katrina additional exemption expired. The additional exemption for taxpayers who provide housing for a person displaced by Hurricane Katrina has expired. Therefore, the additional exemption amount (formerly line 6 of Form 8914) is no longer allowable for the AMT.

CREDIT FOR PRIOR YEAR MINIMUM TAX

If you have any unused minimum tax credit carryforward from 2003 or earlier years, your minimum tax credit allowable for 2007 is not less than the "AMT refundable credit amount." In addition, a portion of the credit may be refundable in 2007. That means, if the refundable part of the credit is more than your tax, you can get a refund of the difference.

To figure the refundable amount of your minimum tax credit, and the AMT refundable credit amount, apply the rules that follow under Long-term unused minimum tax credit, AMT refundable credit amount, and Credit refundable.

Long-term unused minimum tax credit. To figure the refundable amount of your minimum tax credit, you must first determine whether you have any "long-term unused minimum tax credit." Your long-term unused minimum tax credit is the amount of your minimum tax credit carryforward from 2003 (2003 Form 8801, line 26), reduced by the amount of any minimum tax credits you claimed for 2004, 2005, and 2006 (line 25 of your 2004, 2005, and 2006 Forms 8801).

AMT refundable credit amount. After you figure your long-term unused minimum tax credit, you then must figure your "AMT refundable credit amount." Your AMT refundable credit amount is the greater of:

• 20% (.20) of your long-term unused minimum tax credit, or

• The lesser of:

  • $5,000, or

  • Your long-term unused minimum tax credit.

The AMT refundable credit amount is reduced if your adjusted gross income (AGI) exceeds certain threshold amounts based on your filing status. The AGI threshold amounts for 2007 are in the table that follows.

Your AMT refundable credit amount is reduced by 2% (.02) for every $2,500 ($1,250 if your filing status is married filing separately) that your AGI exceeds the threshold amount. Use your 2006 tax return and AGI (2006 Forms 1040, line 38, and 1040NR, line 36) as a guide in estimating your 2007 AGI.

If you are filing Form 2555, 2555-EZ, or 4563, or you are excluding income from sources within Puerto Rico, you must refigure your AGI by adding back any foreign earned income and housing exclusion (2006 Form 2555, line 45, or 2006 Form 2555-EZ, line 18), foreign housing deduction (2006 Form 2555, line 50), income from American Samoa that you are excluding (2006 Form 4563, line 15), and income from Puerto Rico that you are excluding.

For 2007, the AMT refundable credit amount is reduced if your AGI is more than the applicable amount in the second column of the following table and is eliminated if your AGI is more than the applicable amount in the third column.

Credit refundable. The refundable amount of your credit is the amount by which your minimum tax credit for the year exceeds the amount your minimum tax credit would be without regard to the above rules.

Form 8801. To claim the refundable and nonrefundable parts of this credit, use the 2007 Form 8801, Credit for Prior Year Minimum Tax--Individuals, Estates, and Trusts.

HEALTH SAVINGS ACCOUNTS (HSAS)

High deductible health plan. (HDHP) For HSA purposes, the minimum annual deductible of an HDHP increases to $1,100 ($2,200 for family coverage) and the maximum annual deductible and other out-of-pocket expenses limit increases to $5,500 ($11,000 for family coverage).

Deductible limitation on contributions. The annual deductible limitation for contributions to your HSA based on the amount of your health insurance deductible is repealed. For 2007, the maximum HSA deduction increases to $2,850 ($5,650 for family coverage) regardless of the amount of your health insurance deductible. The maximum additional deduction for individuals age 55 or older increases to $800.

Deductible contributions for part-year coverage. For HSA purposes, you can be treated as an eligible individual for each month in your tax year if you are an eligible individual during the last month of your tax year. This applies to each month for which you would not otherwise qualify as an eligible individual. For these months, you are treated as enrolled in the same HDHP that you were enrolled in for the last month of your tax year. However, if you are not an eligible individual, for any reason other than death or becoming disabled, for the 12 months following the end of your tax year, any contribution attributable to these months is included in your income and is subject to an additional 10% tax. The income and additional 10% tax are reported for the tax year in which you cease to be an eligible individual.

Transfers from a health reimbursement arrangement (HRA) or health flexible spending arrangement (FSA) to an HSA. Your employer can make a one-time direct transfer of the balance in your HRA or health FSA to your HSA without violating the requirements for those arrangements. The maximum allowable transfer is the lesser of the HRA or health FSA balance on September 21, 2006, or on the date of transfer.

The amount transferred is not included in your gross income, is not taken into account in applying the HSA contribution limitation, and is not deductible. However, if you are not an eligible individual, for any reason other than death or becoming disabled, for the 12 months following the month of the transfer, the amount transferred is included in your income and is subject to an additional 10% tax. The income and additional 10% tax are reported for the tax year in which you cease to be an eligible individual.

If the employer makes a transfer available to any employee, all employees who are covered under an HDHP of the employer must be allowed to make a transfer. Otherwise, the employer is subject to an excise tax.

Generally, you are not an eligible individual for an HSA if you have health coverage other than an HDHP. For tax years beginning after 2006, coverage under a health FSA for the period immediately following the health FSA's plan year during which unused benefits or contributions remaining at the end of the year may be paid or reimbursed to you for qualified expenses incurred during that period does not disqualify you from being an eligible individual. The coverage does not disqualify you if the balance in the health FSA at the end of the plan year is zero or the entire remaining balance in the health FSA is transferred to your HSA as described above.

Comparable contributions by an employer. An employer that makes contributions to the HSAs of employees must make comparable contributions to all comparable participating employees' HSAs. For tax years beginning after 2006, for purposes of making contributions to the HSA of an employee who is not highly compensated, a comparable participating employee does not include a highly compensated employee.

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).

For the definitions of home acquisition debt and qualified home, see Publication 936, Home Mortgage Interest Deduction.

Qualified mortgage insurance. Qualified mortgage insurance is mortgage insurance provided by the Veterans Administration, the Federal Housing Administration, or the Rural Housing Administration, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006).

Special rules for prepaid 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 balance if the mortgage is satisfied before its term (except in the case of qualified mortgage insurance provided by the Department of Veterans Affairs or Rural Housing Administration).

Schedule A (Form 1040). You can deduct mortgage insurance premiums you paid or accrued during 2007 on Line 13 of the 2007 Schedule A (Form 1040).

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.

STANDARD MILEAGE RATES

Business-related mileage. For 2007, the standard mileage rate for the cost of operating your car for business use is 48 ½ cents per mile. The rate for 2008 is 50 ½ cents per mile.

Car expenses and use of the standard mileage rate are explained in chapter 4 of Publication 463, Travel, Entertainment, Gift, and Car Expenses.

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. See Transportation under What Medical Expenses Are Includable in Publication 502 or Travel by car under Deductible Moving Expenses in Publication 521.

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

CAPITAL ASSET TREATMENT FOR SELF-CREATED MUSICAL WORKS

Musical compositions and copyrights in musical works are generally not capital assets. However, you can elect to treat these types of property as capital assets if you sell or exchange them in tax years beginning after May 17, 2006, and:

• Your personal efforts created the property, or

• You acquired the property under circumstances (for example, by gift) entitling you to the basis of the person who created the property or for whom it was prepared or produced.

CLICK HERE FOR A COMPLETE LISTING OF ALL 2007 TAX LAW CHANGES FOR INDIVIDUALS.