Friday, October 26, 2007


I have had a chance to more closely review at least the Summary of H.R. 3970 – the Tax Reduction and Reform Act of 2007.

To be honest I was a bit disappointed. With all the hype about being “the mother of all tax reforms” and “the most significant change to the Internal Revenue Code since the Tax Reform Act of 1986” I was expecting a lot more. Outside of the permanent repeal of the dreaded Alternative Minimum Tax it really does nothing to significantly change the Tax Code for 1040 filers.

For individual taxpayers here is what it does:

(1) It permanently raises the Standard Deduction amount by $425.00 for Single and Married Filing Separate, $625.00 for Head of Household, and $850.00 for Married Filing Joint and, I assume, Qualifying Widow(er), and annually adjusts these additional amounts for inflation. Big whoop! An additional $850.00 for a couple in the 15% tax bracket is only $128.00 - $213.00 for a couple in the 25% bracket. Hey, it’s still better in your pocket than in the government’s!

(2) It expands the number of low-income persons without children who would qualify for the Earned Income Credit by increasing the credit % and the phase-out % used in calculating the EIC tables for individuals (I can’t really call them taxpayers as most of them do not pay any federal income taxes) with no qualifying children.

(3) It allows for a refundable Child Tax Credit of 15% of the amount by which a taxpayer’s earned income exceeds $8,500. Currently the threshold amount will be $12,050 for 2008, and this amount is indexed annually for inflation. The Act fixes the threshold at $8,500 permanently, without annual inflation adjustments. Regular visitors to TWTP know that I am strongly opposed to refundable credits.

(4) I am extremely happy to report that it establishes “mandatory cost basis reporting by brokers for transactions involving publicly traded securities”. The securities covered under this requirement include stock, debt, commodities, derivatives, and any other investments specified by the Secretary of the Treasury which are “acquired in the account or transferred to the account managed by the broker”. This mandatory cost basis reporting will apply to stock purchased after January 1, 2009, and all other investment products purchased after January 1, 2011. I expect/hope that this will eventually mean that the 1099B received by a taxpayer from his brokerage firm will include not only the gross proceeds but also the date of purchase and cost basis for each sale (if the original purchase took place after 1/1/09 or 1/1/11, as applicable).

The Act also provides a one (1) year extension for the following popular individual tax breaks, as well as many other more obscure business-related ones, that are scheduled to expire on December 31, 2007 – allowing them to apply for 2008 tax returns:

* the deduction for PMI - private mortgage insurance - premiums (it is still a complete mystery to me why this should be deductible),

* the option to deduct state and local sales tax paid instead of state and local income tax paid,

* the “above-the-line” adjustment to income for qualified tuition and fees,

* the ability to transfer up to $100,000 tax-free from an IRA to a qualified charity,

* the “above-the-line” adjustment to income for elementary and secondary school “educator expenses”,

* the election to include exempt combat pay in earned income for purposes of calculating the Earned Income Credit, and

* the ability of active duty reservists to make penalty-free withdrawals from retirement accounts.

According to the Ways and Means Committee press release, the above extenders, plus the AMT fix for 2007 discussed below, “will be extracted from the larger bill in the coming weeks for expedited consideration” so action can be taken before Congress adjourns for the year in November.

To pay for the above the Act would tax “carried interest” as ordinary income, instead of as a long-term capital gain, closing a tax break that has been causing a lot of buzz lately, and close some other obscure loopholes.

The Act also makes various changes to corporate taxation, most notably reducing the top corporate income tax rate from 35% to 30.5%, repealing the “domestic production activities” (Section 199) deduction, and making the increased Section 179 expensing limits, scheduled to “sunset” in 2011, permanent.

The centerpiece of the Tax Reduction and Reform Act of 2007 is the permanent repeal of the dreaded Alternative Minimum Tax on individuals effective with tax year 2008.

Prior to AMT repeal, the increased exemption amounts, adjusted for inflation, are reinstated for 2007, as is the ability to reduce AMT by certain non-refundable personal credits – the expected one-year AMT “fix”.

While the actual tax is finally put to death, the benefit of its repeal is “limited” for certain “upper-income” taxpayers.

(1) A “replacement tax” of 4% is imposed on income in excess of an amount set by the Treasury Department that is “determined by selecting an income level above which 90% of all married taxpayers would otherwise be subject to tax under AMT, but in no event less than $200,000”. While not mentioned in the 10-page summary, I do believe the minimum threshold for single taxpayers will be $150,000. This surtax increases to 4.6% on income in excess of $250,000 for singles and $500,000 for couples.

(2) The “read my lips” taxes, the phase-out of itemized deductions and personal exemptions, are adjusted for Single taxpayers with an AGI in excess of $250,000 and married taxpayers with an AGI in excess of $500,000.

(3) The 2% of AGI exclusion on miscellaneous itemized deductions is increased to 5% for the portion that a taxpayer’s AGI exceeds the “amount set by the Treasury Department” discussed above.

So all the hype boils down to basically three positive items for 1040 filers – the death of the AMT, the temporary extension of expired tax breaks, and the mandatory reporting of investment cost basis.

Don’t forget that this is just a bill that has been introduced in the House. There will lots and lots of debate and compromises before a final Tax Reduction and Reform Act of 2008 is signed into law by the President – and that final bill will most likely look a lot different than the one I have outlined above.

Let us hope that at least the one-year extenders, including the 2007 AMT fix, are passed promptly.

BTW, you can read the complete text of the Act by clicking


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