When it comes to changes in the federal income tax law, no news can be good news, tax advisers here say. Yet, while most of the tax code has been relatively untouched this year, some changes are worth noting, as are possible changes in the future that could affect businesses tax planning this year.


Many of the tax-law adjustments for 2007 are minor and apply to specific segments of the population, thanks largely to gridlock in Congress leading up to the 2008 election that has prevented any sweeping change, tax advisers say. Congress could pass some major tax laws before the end of the year, though, and taxpayers should plan now for possible changes when a new president and Congress take office in 2009, they say.


Its been a pretty quiet year, which allows companies and individuals to plan because there are no big changes to complicate matters, says David Green, tax partner in the Spokane office of Seattle-based Moss Adams LLP.


Still, he adds, In 2009, I think all bets are off. Change is probably coming.


Under the Tax Relief and Health Care Act of 2006, several tax breaks that expired at the end of 2005 were extended to 2007. One such provision continued to make a sales-tax deduction available to Washington state residents, Green says.


Under that provision, federal taxpayers can choose to deduct either state income taxes or state sales taxes from their taxable income. Washington doesnt have an income tax, but the provision allows residents of the state to take an itemized deduction for sales taxes they pay.


A deduction for college tuition also was extended, he says. That provision allows single taxpayers with adjusted gross income of $65,000 or less and married couples filing jointly with income of $130,000 or less to take a $4,000 deduction for payment of college tuition and qualifying fees. Single taxpayers with incomes of up to $80,000 and joint filers with incomes of up to $160,000 can take a $2,000 deduction.


The Hope Credit and Lifetime Learning Credit are still available to taxpayers this year, he says. They provide tax credits based on a percentage of qualified college expenses for taxpayers within certain income limits.


In addition, Congress extended the educators deduction, which allows teachers to take a deduction of up to $250 for certain out-of-pocket expenses for their classrooms, he says.


The Tax Relief and Health Care Act of 2006 also included a provision that allows taxpayers with taxable incomes of up to $100,000 to deduct the full cost of their mortgage insurance on home mortgages that close this year, Green says. The deductible amount phases out as taxpayers incomes rise above $100,000, and the deduction only applies to this year, although Congress could extend it in future years, he says.


Congress is expected to extend a moratorium on Internet sales taxes, says Dean Ozuna, tax manager at Spokane-based Williams & Webster PS. The temporary ban, which prohibits state and local governments from taxing Internet access and from slapping multiple taxes on e-commerce, went into effect in 1998 and is scheduled to expire Nov. 1.


Meanwhile, retirement savings benefits ushered in by the Pension Protection Act of 2006 have kicked in fully this year, Green says. The provisions included in that bill that are now permanent include higher annual contribution limits for IRAs and workplace 401(k) plans, for catch-up contributions to IRAs, and for workplace retirement-savings plans for individuals age 50 and older, he says.


Single taxpayers with income of less than $52,000 and married couples filing jointly with income of less than $83,000 can take a full IRA deduction. The deduction amount phases out as income rises. The maximum employee contribution for 401(k) and other workplace retirement plans now is $15,500. The limit for workers age 50 and older now is $20,500.


Roth 401(k) plans also have been made permanent, which means more employers likely will start offering that option to employees this year, Green says.


One of the provisions under the Pension Protection Act thats set to expire at the end of this year allows senior citizens to withdraw money from an IRA and donate it to a qualified charity without paying taxes on the donated amount, he says. Seniors also can count that donation toward their required minimum IRA distribution for the year. Seniors who want to take advantage of the provision should do so soon before it expires, he says.


A new law this year requires that even for cash donations of less than $250, taxpayers must have a canceled check or other bank record of the transaction and a thank you or other written acknowledgement from a charity for donations to qualify as a deduction, Green says. Previously, taxpayers had to have documentation only for cash donations of more than $250, and could estimate smaller contributions.


Included in the changes for businesses this year is an increase in expensing limits for equipment placed in service in 2007, Green says. Section 179 of the tax code allows a special deduction against the cost of certain types of depreciable business assets. The deduction amount phases out as the size of the investment in assets increases, he says.


Another deduction that has been increased is the domestic production activities deduction, which applies to companies that conduct domestic business in industries such as construction, engineering, and equipment manufacturing, Green says. The percentage of net income that can be deducted has doubled to 6 percent, he says.


Married couples who operate a business jointly and want to report their 2007 income separately now can split their income for self-employment tax purposes without first filing a partnership form, which was required previously, says Chris Hesse, director of taxation at Spokane-based LeMaster & Daniels PLLC.


Looking ahead


One law that will go into effect for the 2008 tax year, but that taxpayers should take note of this year, involves whats referred to as the kiddie tax. The law involves a series of rules intended to keep parents from taking advantage of their childrens lower tax rates by passing taxable income to their children, Hesse says. If a child has more than $1,700 in investment income, it is taxed at the parents rate instead of the childs rate, he says. That level is adjusted annually for inflation. A childs earned income from jobs or self-employment is exempt from the tax.


Currently, the law applies to children under 18, but starting next year it will include dependents under 19 and dependent full-time students under 24, Hesse says. Children who provide more than half of their own support arent affected by the change.


Thus, if a parent is thinking about shifting some of their income to a child who will be subject to the new rules next year, it might make sense to do that now instead of in 2008, Green says.


In terms of enforcement issues, Congress has raised the standards for tax returns prepared after the 2007 calendar year, Hesse says. Paid tax preparers must have reasonable belief that the positions theyve taken on tax returns will more than likely be sustained if challenged by the IRS, he says. The previous standard was a one-in-three likelihood that the position taken was correct. An exception to the rule is if a tax preparer draws a target on themselves for an audit by including a disclosure on the return, he says.


If taxpayers want to be aggressive, but preparers dont want to get penalties, then we have a conflict between preparers and their clients, and the clients might go to someone who isnt knowledgeable to get them to prepare their returns as they wish, Hesse says.


Congress also likely will pass a law to go into effect next year that will require tax preparers to obtain certification and to take continuing education classes, Ozuna says.


Its a certification so that the general public knows and has confidence in the person preparing their taxes, he says. It would be put in place to protect the consumer.


AMT


Currently, Congress is discussing changes to the alternative minimum tax (AMT), Hesse says. Taxpayers who take a large number of write-offs, enabling them to pay little or no tax, can be subject to the AMT. A taxpayer pays the larger of the AMT or the amount of tax owed after the deductions.


The AMT was intended to prevent wealthy individuals from taking excessive advantage of loopholes to avoid taxes, but hasnt been indexed for inflation, so the number of people who are subject to the tax has been increasing, particularly in the middle-income category, Ozuna says.


Everybody agrees something needs to be done to revamp it, but legislators cant seem to agree how to change it, Ozuna says.


Congress could pass the mother of all tax bills before the end of the year, and one of the provisions in such a bill likely would fix the AMT permanently, rather than covering the problems associated with it with a temporary patch as Congress has done in the past, Hesse says.


A possible change in the future that taxpayers might want to take into consideration now is a likely increase in the long-term capital-gains tax rate, Green says. Congress lowered the capital-gains tax rate to its current level of 15 percent in 2001. That rate is scheduled to go back to 20 percent after 2010 unless Congress extends it, he says.


Green and Ozuna say that some experts suspect that if the Democrats control both the White House and Congress after the 2008 election, the capital-gains rate might be raised even before 2011. So, taxpayers who sell assets in 2007 or 2008 and choose the installment method for receiving payments should be aware that their capital gains payments in future years might be taxed at a higher rate than they would be now, Green says. Thus, for some people it might make sense to elect out of the installment method of receiving payments, get what would be due to them, and pay capital-gains taxes on the entire sale in 2007 at the current rate, he says.


Contact Emily Proffitt at (509) 344-1265 or via e-mail at emilyp@spokanejournal.com.