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IRS Releases 2007 Inflation Adjustments and Tax Rate Tables
Document: Rev. Proc. 2006-53, 2006-48 I.R.B. __.

The IRS released inflation-adjusted items for 2007, including the tax rate tables for tax years beginning in 2007. Rev. Proc. 2006-53, 2006-48 I.R.B. __.

The adjusted items include the standard deduction amounts, personal exemption amounts, adoption credit, Hope and Lifetime learning credits, low-income housing credit, and earned income credit, as well as other miscellaneous items. This year, three new items have been indexed for inflation courtesy of the Pension Protection Act of 2006. For the first time, inflation adjustments will raise the income limits that apply to the retirement savings contributions credit, contributions to a Roth IRA and deductible contributions to a traditional IRA where the taxpayer or the taxpayer's spouse is covered by a retirement plan at work.

Standard Deduction
For 2007, the standard deduction amounts under Code Section 63 are: $10,700 for married individuals filing jointly and surviving spouses; $7,850 for heads of household; $5,350 for unmarried individuals; and $5,350 for married individuals filing separately. The additional standard deduction amounts for taxpayers who are at least 65 years old or blind are $1,050 for each. These amounts are increased to $1,300 if the individual is also unmarried and not a surviving spouse. Finally, the standard deduction amount for an individual who may be claimed as a dependent by another taxpayer may not exceed the greater of $850 or the sum of $300 and the individual's earned income.

Overall Limitation on Itemized Deductions
For taxable years beginning in 2007, the applicable amount of adjusted gross income above which the amount of a taxpayer's otherwise allowable itemized deductions will begin to be phased out is $156,400 ($78,200 for a married individual filing separately).

Personal Exemption
The personal exemption amount for tax years beginning in 2007 is $3,400. For joint return filers and surviving spouses, the personal exemption amount begins to phase out when adjusted gross income reaches $234,600 and is completely phased out at $357,100. For heads of household, the phase-out begins at $195,500 and is complete at $318,000. For unmarried individuals (other than heads of households and surviving spouses), the phaseout begins at $156,400 and is complete at $278,900. For married individuals filing separately, the amounts are $117,300 and $178,550.

Kiddie Tax
The amount used to reduce net unearned income on a child's return subject to the kiddie tax in 2007 is $850 (which is the same amount as the standard deduction allowed to a taxpayer who can be claimed as a dependent by another taxpayer). The same $850 is also used for the determination of whether a parent may elect to include a child's gross income in the parent's gross income.

For taxable years beginning in 2007, for a child to whom the kiddie tax applies, the exemption amount for the alternative minimum tax may not exceed the sum of: (1) the child's earned income, plus (2) $6,300.

Child Tax Credit
For taxable years beginning in 2007, the value used in determining the amount of credit that may be refundable is $11,750.

Adoption Credit and Assistance Programs
For 2007, the maximum credit allowed for the adoption of a child is the amount of the qualified adoption expenses up to $11,390. The maximum credit allowed in the case of an adoption of a child with special needs is $11,390, regardless of the amount of expenses (if any) paid or incurred. The available adoption credit begins to phase out for taxpayers with modified adjusted gross income in excess of $170,820 and is completely phased out for taxpayers with modified adjusted gross income of $210,820.

The maximum amount that can be excluded from an employee's gross income in connection with the adoption by the employee of a child with special needs is $11,390. The maximum amount that can be excluded from an employee's gross income for the amounts paid or expenses incurred by the employer for qualified adoption expenses furnished under an adoption assistance program in connection with other adoptions by the employee is $11,390. The amount excludable from an employee's gross income begins to phase out for taxpayers with modified adjusted gross income in excess of $170,820 and is completely phased out for taxpayers with modified adjusted gross income of $210,820.

Hope and Lifetime Learning Credits
The modified gross income taken into account in 2007 in determining the reduction of both the Hope and Lifetime Learning credits is the amount in excess of $47,000 ($94,000 in the case of a joint return). In addition, 100 percent of qualified tuition and related expenses not in excess of $1,100 plus 50 percent of such expenses in excess of $1,100 but not in excess of $2,200 are taken into account in determining the amount of the Hope Scholarship Credit. The maximum credit for 2007 is $1,650.

Retirement Contributions
For 2007, the adjusted gross income amounts that determine the applicable percentage of in calculating the retirement savings contribution credit are:

• For the 50 percent applicable percentage, not over $31,000 on a joint return, $23,250 for a head of household, and $15,500 for all other returns;

• For the 20 percent applicable percentage, not over $34,000 on a joint return, $25,500 for a head of household, and $17,000 for all other returns;

• For the 10 percent applicable percentage, not over $52,000 on a joint return, $39,000 for a head of household, and $26,000 for all other returns.

The applicable dollar amount used to determine the dollar limit for the contribution limit to Roth IRAs is $156,000 for a joint return, $99,000 for all other taxpayers (except for married taxpayers filing separately), and $0 for married taxpayers filing separately.

For qualified retirement contributions in 2007, the applicable dollar amount used to determine the amount of reduction for the limitation on deduction for taxpayers who are active participants and for spouses who are not active participants in certain pension plans is $83,000 for taxpayers filing a joint return, $156,000 for the taxpayer's spouse if the spouse is not an active participant, and $52,000 for all other taxpayers (except for married taxpayers filing separately), and $0 for married taxpayers filing separately is $0.

Low-Income Housing Credit
For 2007, the amounts used to calculate the state housing credit ceiling for the low-income housing credit is the greater of: (1) $1.95 multiplied by the State population, or (2) $2,275,000.

Expensing of Depreciable Assets
For taxable years beginning in 2007, the aggregate cost of depreciable property a taxpayer can elect to expense cannot exceed $112,000. This $112,000 limitation is reduced on a dollar-for-dollar basis (but not below zero) to the extent the total cost of eligible property placed in service during the year by the taxpayer exceeds $450,000.

Earned Income Credit
The earned income amounts, i.e., the amounts of earned income at or above which the maximum amount of earned income is allowed, are: for taxpayers with one qualifying child, $8,390; for taxpayers with two or more qualifying children, $11,790; and $5,590 for taxpayers with no qualifying children. The maximum amount of the credit is $2,853 for taxpayers with one qualifying child; $4,716 for taxpayers with two or more qualifying children; and $428, for taxpayers with no qualifying children.

The threshold phaseout amounts, i.e. the amount of adjusted gross income (or, if greater, earned income) above which the maximum amount of the credit begins to phase out, are: for taxpayers with one qualifying child, $15,390; for two or more children, $15,390; and for taxpayers with no children, $7,000. The amounts at which the phaseout is complete are $33,241 for one child; $37,783 for two or more children; and $12,590 for no children.

For married filing jointly taxpayers, the threshold phaseout amounts are: $17,390 for taxpayers with one qualifying child; $17,390 for taxpayers with two or more qualifying children; and $9,000 for taxpayers with no qualifying children. The completed threshold phaseout amount for married filing jointly taxpayers with one qualifying child is $35,242; two or more qualifying children, $39,783; and no qualifying children, $14,590.

In addition, the earned income tax credit is denied if the aggregate amount of certain investment income exceeds $2,900 in 2007.

Qualified Transportation Fringe Benefit Exclusion
The monthly limitation on the aggregate fringe benefit exclusion amount for transportation in a commuter highway vehicle and any transit pass is $110. The monthly limitation on the fringe benefit exclusion amount for qualified parking is $215.

Interest on Education Loans
The $2,500 maximum deduction for interest paid on qualified education is reduced when modified adjusted gross income exceeds $55,000 ($110,000 for joint returns), and is completely eliminated when modified adjusted gross income is $70,000 ($140,000 for joint returns).

Income From U.S. Savings Bonds
For 2007, the exclusion for income from United States savings bonds for taxpayers who pay qualified higher education expenses begins to phase out for modified adjusted gross income above $98,400 for joint returns and $65,600 for other returns. This exclusion completely phases out for modified adjusted gross income of $128,400 or more for joint returns and $80,600 or more for other returns.

Long-Term Care Insurance Premiums
For 2007, the amount of long-term care premiums eligible to be deducted as medical care expenses is set at $290 for an individual age 40 or less at the close of the taxable year; $550 for an individual over age 40 but not over age 50; $1,110 for an individual over age 50 but not over age 60; $2,950 for an individual over age 60 but not over age 70; and $3,680 for an individual over age 70.

The dollar amount of the per diem limitation on periodic payments received under a qualified long-term care insurance contract or periodic payments received under a life insurance contract that are treated as paid by reason of the death of a chronically ill individual is $260.

Medical Savings Accounts
A high-deductible health plan for self-only coverage is defined as a health plan that has an annual deductible that is not less than $1,900 and not more than $2,850, and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits does not exceed $3,750. A high-deductible health plan for family coverage is defined as a health plan that has an annual deductible that is not less than $3,750 and not more than $5,650, and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits does not exceed $6,900.

Health Savings Accounts
For health savings accounts, the monthly limitation on deductions for an individual with self-only coverage under a high deductible plan as of the first day of such month is 1/12 of the lesser of: (1) the annual deductible; or (2) $2,850. For an individual with family coverage under a high deductible plan as of the first day of such month is 1/12 of the lesser of: (1) the annual deductible; or (2) $5,650. Also, for 2007, a high deductible plan is defined as a health plan with an annual deductible that is not less than $1,100 for self-only coverage or $2,200 for family coverage, and the annual out-of-pocket expenses do not exceed $5,500 for self-only coverage or $11,000 for family coverage.

Annual Exclusion for Gifts
For 2007, the first $12,000 of gifts to any person (other than gifts of future interests in property) is not included in the total amount of taxable gifts made during that year. The first $125,000 of gifts to a spouse who is not a citizen of the United States (other than gifts of future interests in property) is not included in the total amount of taxable gifts made during that year. Recipients of gifts from foreign persons may have to report gifts if the aggregate value of the gifts exceeds $13,258.

Miscellaneous Items

• For purposes of determining whether an individual's loss of citizenship had a principal purpose of avoiding tax, the threshold is more than $136,000 in average annual net income tax for the five taxable years ending before the loss of citizenship.

• For contracts entered into during calendar year 2007, a qualified funeral trust may not accept aggregate contributions by or for the benefit of an individual in excess of $8,800.

• The aggregate decrease in the value of qualified real property under an election to use the special use valuation method cannot exceed $940,000.

• A federal tax lien is not valid against a purchaser of personal property in a casual sale for less that $1,290, or a mechanic's lien or that repaired or improved residential property for a price of no more than $6,450.

• The value of fuel, provisions, furniture, and other household personal effects exempt from levy may not exceed $7,720. The value of books and tools for the taxpayer's trade or business exempt from levy may not exceed $3,860.

• The dollar amount used to determine interest on estate tax payable in installments is $1,250,000.

• The attorney fee award limitation is $170 per hour for 2007.

• The $5, $25, and $50 guidelines for disregarding the value of insubstantial benefits received by a donor in return for a fully deductible charitable contribution are, in 2007, $8.90, $44.50, and $89, respectively.

• The foreign earned income exclusion amount for 2007 is $85,700.

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