Tax Law Changes That Will Impact Your 2007 Tax Return

Expect some changes when you file your 2007 tax return! Here are a few highlights from the Small Business and Work Opportunity Act of 2007.

Do you own real estate?

At the very end of 2007, Congress passed a bill with several tax law changes impacting real estate. Qualified Joint Ventures by Married Taxpayers If a husband and wife who file a joint return are the only members of a qualified joint venture, they can elect not to be treated as a partnership for Federal tax purposes. Applies to tax years beginning after December 31, 2006.

§179 Deductions: This great deduction has been extended through 2010. Taxpayers with $500,000 or less in assets placed in service on or after January 1, 2007 can elect to expense immediately up to $125,000.

GO ZONE §179 Deductions: For 2007 Taxpayers with $1,050,000 or less in assets placed in service on or after January 1, 2007 can elect to expense immediately up to $212,000.

FICA Tip Credit: The FICA tip credit will continue to be based on the old minimum wage of $5.15 even though the minimum wage is scheduled to increase to $7.25 over the next two years. Applies to tips received for services performed after December 31, 2006.

Work Opportunity Tax Credit: The Work Opportunity Tax Credit is extended an additional 44 months through August 31, 2011. (Note that with respect to an employer that hires a targeted individual on August 31, 2011, the credit will be available for wages paid through August 30, 2012.) The targeted veterans group is expanded to include veterans with service-connected disabilities, and doubles the maximum credit for hiring those veterans. The "high-risk youth" targeted group has been replaced with a much broader group that includes older individuals (up through age 39), and individuals who reside in certain rural counties. The rehabilitation referrals group has been expanded to include individuals referred through a Social Security Administration Ticket to Work and Self-Sufficiency Program. Applies to individuals who begin work for the employer after May 25, 2007.

Waiver of AMT Limits on Work Opportunity and FICA Tip Credits: The work opportunity tax credit and the credit for portion of FICA taxes paid with respect to employee cash tips may offset alternative minimum tax liability. The waiver of AMT limits apply to credits determined in tax years beginning after December 31, 2006, and to carrrybacks of such credits. Effective for tax years beginning after December 31, 2006, and to carrybacks of such credits.

Sale of Stock in a Qualified Subchapter S Subsidiary: An S corporation's sale of a QSub's stock is treated as a sale of an undivided interest in the QSub's assets followed by a deemed creation of the subsidiary in a §351 transaction. These new rules are not intended to affect current law treatment of transfers of QSub stock in otherwise nontaxable transactions. For example, certain pro rata distributions of QSub stock by a parent S corporation to its shareholders can qualify for tax free treatment if the requirements of §355 and §368(a)(1)(D). Applies to tax years beginning after December 31, 2006.

What changes are in store for your 2008 taxes?

Kiddie Tax: The kiddie tax is expanded to apply to any child who is 18 years old or is a full time student over the age of 18, but under age 24. However, the kiddie tax will not apply to such individuals if their earned income exceeds half of their support for the year. Does not apply until 2008.

Passive Investment Income of S Corporations: S corporation capital gain from the sale or exchange of stock or securities is no longer characterized as passive investment income. Gross receipts from more regular income streams (those derived from rents, royalties, dividends, interest and annuities) remain subject to the passive investment income limitations. Becomes effective for tax years beginning after May 25, 2007.