[following is a tax update I sent to my clients in our year end update letter]

The long-awaited “AMT patch” was finally signed into law on Wednesday, December 19th, 2007.  We wanted to give you an update on the potential for this tax to affect nearly 21 million taxpayers in 2007.  Since 1969, the Alternative Minimum Tax (AMT) has been available in the tax code to make sure the very rich pay some tax.  However, the income exemption levels protecting the middle class from having AMT imposed on them do not increase each year with inflation.  Some consider this a major flaw in the original bill (although the bill provides some pretty nice tax revenue for the treasury each year).  Due to this oversight in the original bill, and as incomes have risen, more and more middle class have been subject to the AMT.  And this most recent legislation is only a one-year patch, with the quarreling to begin again next year (an election year, no less).  Now that the patch has been passed, these AMT tax revenues won’t be making their way into the coffers of the U.S. Treasury.

On the other hand, no offsetting tax savings were passed in this AMT patch bill – less AMT tax revenues means an estimated $50 billion have been added to the U.S. deficit due to this law. Had the exemption patch not been passed, those married filing joint taxpayers with income (slightly modified) over $45,000 would have felt the AMT bite.  That would have been nearly 23 million taxpayers this year (consider: only 3.5 million taxpayers paid AMT in 2006).  However, the patch has raised this married filing joint income exemption level to $66,250 ($44,350 for single taxpayers) for 2007, safe enough to exempt most middle class taxpayers.

The AMT provisions affect a number of the IRS’s internal programming capabilities, and have estimated a seven week delay in processing returns for this tax season.  The IRS is unsure if this needed reprogramming and testing of its system will make both AMT AND non-AMT filers wait for the proper processing of their returns.  We at Blumer & Associates, CPAs, PC use some high-end tax processing software, and all approved forms must come through our tax vendor.  We will keep you informed on the processing delays as tax season progresses.  We don’t expect it to actually take seven weeks (tax legislation was passed last year on Dec. 20th and the delay was only about three weeks).

Other late-year tax news includes a mortgage relief bill for those forced to claim mortgage debt forgiveness as income.  Basically, taxpayers facing foreclosure of their homes often have debt forgiveness given to them by mortgage companies who can’t cover that taxpayers full loan balance with the sale of their home (often called a short sale).  This forgiveness comes in the form of a 1099, or “imputed” income, to the taxpayer.  In this new bill, up to $2 million dollars of this “imputed” income on primary residences can be excluded from income, IF the mortgage is refinanced within a three year window.

OTHER MAJOR LAW CHANGES: The 2008 budget omnibus bill was also passed to keep the Treasury department running, with $70 billion going to fund the wars in Iraq and Afghanistan. An energy bill was also passed raising vehicle fuel economy standards by 40%, and increasing biofuel production.  

In addition, victims’ families of the awful Virginia Tech shooting will receive some income exclusion benefits related to payments received from special memorial funds.

Thanks, Jason M. Blumer