AMT Exemption Amounts for 2007

January 2, 2008

In Fax No. 166 I pointed out that Congress continued the higher AMT exemption amounts into 2007. However, I did not give the amounts. The 2006 amounts were indexed for inflation. Therefore, HR 3996 provides that the AMT exemption amounts for 2007 are: Joint Returns-$66,250, Singles-$44,350. Note! President Bush signed HR 3996 on December 26, 2007.

IRS PROCESSING OF CERTAIN RETURNS UNTIL AT LEAST FEBRUARY 11, 2007

While Congress was debating the fate of the higher AMT exemptions, etc., discussed above, IRS warned that a delay of the passage of the AMT provisions would delay the processing of returns. IRS announced in Information Release 2007-209 that it expects to begin processing most returns on January 14, 2007. However, IRS says the processing of returns with the following schedules will be delayed until at least February 11, 2007. The five affected forms include: Form 8863, Education Credits; Form 5695, Residential Energy Credits; Form 1040A's Schedule 2, Child and Dependent Care Expenses for Form 1040A Filers; Form 8396, Mortgage Interest Credit; and Form 8859, District of Columbia First-Time Homebuyer Credit.

ADDITIONAL CHANGE TO PARTNERSHIP PENALTIES

HR 4118, signed by the President on December 19, 2007, provides that payments made to the victims of the Virginia Tech shootings and to their families from the Virginia Tech Memorial Fund are exempt from federal income taxation. This bill also increases the penalty for failing to file a partnership return or for filing an incomplete partnership return to $86 per month/per partner for up to twelve months, but only for returns for partnership years beginning in 2008. This provision does not apply to S corporations. Therefore, for 2008, the maximum penalty for failing to file a partnership return is $1,032 per partner, whereas the maximum penalty for failing to file an S corporation return is $1,020 per shareholder.

IRS CLARIFIES "QUALIFYING RELATIVE" DEFINITION (Notice 2008-5)

Qualifying Relative Definition. Section 152(a) provides that the term "dependent" for purposes of the dependency deduction includes a "qualifying child" or a "qualifying relative". Section 152(d) says that a "qualifying relative" means, with respect to any taxpayer for any tax year, an individual:

1. Who is either a) the taxpayer's son, daughter, brother, sister, nephew, niece, aunt, uncle, son-in-law, daughter-in-law, brother-in-law, sister-in-law, father, mother, grandfather, grandmother, granddaughter, grandson, stepson, stepdaughter, stepbrother, stepsister, stepfather or stepmother, or b) an individual that has as his or her principal place of abode the taxpayer's home, is a member of the taxpayer's household for the entire tax year, and the relationship between the taxpayer and such person is not in violation of local law;

2. Whose gross income for the calendar year in which that tax year begins is less than the amount of the personal exemption ($3,400 for 2007);

3. With respect to whom the taxpayer provides over one-half of the individual's support for the calendar year in which that tax year begins (a taxpayer who is treated as providing more than one-half an individual's support because of the multiple support agreement rules of �152(d)(3) and has a properly completed Form 2120 meets the requirements of this paragraph); and

4. Who isn't a qualifying child of that taxpayer or of any other taxpayer for any tax year that begins in the calendar year in which that tax year begins.

Notice 2008-5. As outlined in item "4" above, section 152(d) provides that an individual is not a qualifying relative of a taxpayer if the individual is a qualifying child of any other taxpayer. Notice 2008-5 clarifies that an individual is not a qualifying child of "any other taxpayer" if the individual's parent (or other person with respect to whom the individual is a qualifying child) 1) is not required by section 6012 to file an income tax return, and 2) does not file an income tax return, or files an income tax return solely to obtain a refund of withheld income taxes. The following is Example 1 from the notice illustrating this exception. Please see Notice 2008-5 for additional examples.

Example 1. A supports, as members of his household for the taxable year, an unrelated friend, B, and her 3-year-old child, C. B has no gross income, is not required by section 6012 to file an income tax return, and does not file an income tax return for the taxable year. Accordingly, because B does not have a filing requirement and did not file an income tax return, C is not treated as a qualifying child of B or any other taxpayer, and A may claim both B and C as his qualifying relatives, provided all other requirements of sections 151 and 152 to qualify for the deduction are met.

CLARIFICATION OF WASH SALE RULES (Rev Rul 2008-5)

In Rev Rul 2008-5, the IRS says that an individual who sells stock or securities for a loss and causes his or her IRA to purchase substantially identical stock or securities within 30 days before or after the sale may not deduct the loss on the sale of the stock or securities. In other words, the IRS says that the wash sale rules of section 1091 apply to a sale by an individual and a corresponding purchase by the individual's IRA. In addition, the IRS ruled that the individual's basis in the IRA was not increased under section 1091(d).

IRS WAIVES ISO REPORTING FOR 2007 (Notice 2008-8)

The 2006 Tax Relief and Health Care Act (TRHCA) added a requirement that an employer make an information return with IRS, in addition to providing information to the employee, about the transfer of stock pursuant to the exercise of an incentive stock option (ISO), and to certain stock transfers regarding employee stock purchase plans (ESPPs). The new requirement to report the exercise of an ISO or the purchase of stock under an ESPP is effective for stock transfers occurring after 2006. Because IRS has not yet issued regs providing guidance on this reporting requirement, IRS is waiving the new reporting requirement for 2007 stock transfers. However, IRS says employers must continue to supply the required information to employees.