Extension for Current AMT Exemptions

December 21, 2007

CONGRESS PASSES AMT PATCH (HR 3996)

On December 19, Congress passed HR 3996 extending the current AMT exemptions through the end of 2007 and allowing nonrefundable credits to continue to offset the Alternative Minimum Tax through 2007. This action prevents an increase in the number of individuals subject to AMT from approximately $4 million to approximately $24 million. In the end, the House passed the bill with no offsets. Therefore, the revenue provisions originally attached to the bill were dropped. The bill costs approximately $55 billion.

MORTGAGE FORGIVENESS DEBT RELIEF ACT OF 2007 (HR 3648)

On December 19th, Congress approved the Mortgage Forgiveness Debt Relief Act of 2007. The President is expected to sign the bill! The following are several key provisions included in this new law.

Discharge of "Qualified Principal Residence Indebtedness" Not Taxable. The bill provides that debt forgiveness income will not be triggered when qualified principal residence indebtedness is discharged. The provision only prevents income recognition when the debt is home acquisition debt for the principal residence of the individual and the total amount of the debt does not exceed $2,000,000. "Principal residence" as defined under section 121 (the home sale exclusion rules). This exclusion for debt forgiveness applies for 2007, 2008, and 2009. Note! Prior to this law change, debt forgiveness was tax-free only to the extent of an individual's insolvency or if the individual was in bankruptcy.

Extension of Home Mortgage Insurance Deduction. The bill also extends the provision allowing homeowners to deduct home mortgage insurance payments from their taxable income. The deduction would be allowed through 2010.

Allowing Surviving Spouse $500,000 Home Sale Exclusion for Two Additional Years. Effective for sales or exchanges after 2007, a surviving spouse will be able to use the $500,000 home sale exclusion (rather than the $250,000 exclusion) for sales occurring within 2 years after the death of a spouse. This rule only applies if the taxpayers qualified for the $500,000 exclusion immediately before the death of the deceased spouse.

Penalties Increased for Failing to File Partnership or S Corp Returns. Currently, there is a penalty of $50 per month/per partner for failing to file a partnership return. The penalty applies for a maximum of 5 months. Therefore, the maximum penalty is currently $250 per partner. In addition, there is currently no comparable penalty for failure to file an S corporation return.

After the President signs this bill, the penalty for failing to file a partnership return or an S corporation return will be $85 per month/per owner for a maximum period of 12 months. Therefore, the maximum penalty per partner in a partnership or per shareholder in an S corporation will be $1,020. These penalties also apply to a failure to provide the information required on the return as well as to a failure to file a return. The penalty does not apply if a failure to file a return or to provide required information is due to reasonable cause.

IRS ISSUES NOTICE 2008-1 EXPLAINING TREATMENT OF HEALTH INSURANCE PREMIUMS WHERE THE INSURANCE IS IN THE OWNER-EMPLOYEE'S NAME

In Fax No. 161 (issued on May 24, 2007), I discussed the deductibility of health insurance premiums paid by S corporation shareholder-employees owning more than 2% of the S Corporation's stock, where the insurance policy was purchased by the shareholder rather than by the S corporation. I pointed out that on May 15, 2006, the IRS said in an article at the IRS web site (Headliner Volume 163) that if an individual is the sole owner and the sole employee of an S corporation and the health insurance is purchased in the owner-employee's name, the owner may not deduct the health insurance premiums under '162(l) as a for AGI deduction. In the article, IRS concluded that S corporation shareholder-employees were not allowed to purchase health insurance in the shareholder=s own name and still obtain the for AGI deduction under '162(l). I also mentioned in Fax No. 161 that the AICPA had suggested to the IRS that the premiums should be deductible as a for AGI deduction if the premiums were either 1) paid directly to the insurance company by the S corporation or 2) reimbursed to the shareholder-employee by the S corporation.

Last week, the IRS issued Notice 2008-1 which, for the most part, follows the AICPA's suggestions. In essence, the Notice provides that an S corporation shareholder-employee may deduct the medical insurance premiums on the front of form 1040 even if the policy is in the owner's name. However, to obtain the deduction, the Notice requires that:

1. Either a) the S corporation pays the premium directly to the insurance company during the tax year or b) the S corporation reimburses the shareholder-employee for the premium during the tax year after receiving proof of the premium payment by the shareholder, AND

2. The S corporation includes the premium payment in the shareholder's W-2 for that same tax year. (Note! The Notice points out that the premium payment is not taxable for FICA purposes if the S corporation covers all employees under a medical plan or covers a class of employees which includes the shareholder-employee [see Announcement 92-16]).

IRS says that if the premiums are not paid or reimbursed by the S corporation and included in the shareholderemployee's gross income, the shareholder is not allowed a deduction for the premiums under section 162(l) (the for AGI deduction).

Caution! Notice 2008-1 specifically requires the premiums to be included in the shareholder-employee's W-2 for the year the premiums are paid in order for the shareholder to deduct the premiums under section 162(l) as a for AGI deduction. The Notice says, "In order for the 2-percent shareholder-employee to deduct the amount of the accident and health insurance premiums, the S corporation must report the accident and health insurance premiums paid or reimbursed as wages on the 2-percent shareholder-employee's Form W-2 in that same year. In addition, the shareholder must report the premium payments or reimbursements from the S corporation as gross income on his or her Form 1040, U.S. Individual Income Tax Return."

Amended Returns For Prior Taxable Years. Notice 2008-1 says that taxpayers who did not claim deductions for medical insurance premiums described in the Notice may file timely amended tax returns to claim the deduction under 162(l) if the taxpayers satisfy the requirements of the Notice. The statement "Filed Pursuant to Notice 20081" should be written on the top of any amended return.