Tax changes carry over to family law realm

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Several recent changes in the 2007 tax laws affect families, including those undergoing a divorce, and provide opportunities for tax savings.

On the eve of an election year, Congress was still grappling with tax relief measures as late as mid-December. One of the last-minute provisions was the alternative minimum tax (AMT) relief. The much talked-about “relief” was nothing more than preventing the 2007 AMT exemption amount from falling back to $45,000 for joint return filers and $33,750 for single return filers. Instead, the bill increases the AMT exemption to $66,250 for joint returns and $44,350 for single returns. In 2006, the AMT exemptions were $62,550 for joint returns and $42,500 for single filers. This is not dramatic relief, but it does prevent a large number of unsuspecting people from being hit with the AMT.

Taxpayers also can expect the typical inflationary adjustments made to the tax brackets, standard deductions, exemption amounts and a variety of phase-out ranges. Some of the key items for 2007 and 2008 can be seen in the chart on this page.

The child tax credit for children under the age of 17 remains at $1,000 for 2007 and 2008. For 2007, the phase-out begins at $110,000 for joint filers, and $75,000 for single and head of household status. The credit is reduced by $50 for each $1,000 (or part of $1,000) of adjusted gross income above the phase-out threshold.

Kiddie Tax

A change also was made in the application of the “kiddie” tax. For 2007, children under the age of 18 who have investment income greater than $1,700 may be subject to tax based on their parents’ income. This results in the child’s investment income being taxed at the parents’ tax rate. For 2008, the kiddie tax provisions extend to include children age 18 and those who are full-time students age 19 to 23.

Couples who divorce in 2007 and 2008 can reduce their total tax burden by carefully planning and using these provisions. For example, if one of the parents in a divorce situation is earning more than $100,000 while the other is earning $50,000, allocating the dependency exemption and resulting child tax credit to the lower earning spouse can save the $1,000 child tax credit. In this same scenario, if the child has investment income in excess of $1,700, the kiddie tax is computed at the lower earning spouse’s rate.

Mortgage Forgiveness;

Insurance

Other tax law changes will affect individual filers for 2007, including a provision to help individual taxpayers affected by the mortgage crisis.

The Mortgage Forgiveness Debt Relief Act allows individuals to exclude from income the amount of debt forgiven, if that debt was incurred to acquire a principal residence. This does not apply to investment properties and second homes. This is effective for debt forgiveness after Jan. 1, 2007, and before Jan. 1, 2010.

This same act allows a tax deduction for mortgage insurance premiums incurred in acquiring a residence. The additional amount added to the homeowner’s mortgage payment for this insurance is now deductible as qualified residence interest. This deduction has a phase-out provision for incomes over $100,000.

Some other provisions originally scheduled to expire after 2006 were extended for 2007, including the $250 deduction allowed for teachers’ out-of-pocket classroom expenses, the higher education expense deduction, and certain tax credit provisions.

Small Business Expenses

One of the most significant changes affecting business is the extension of the small business expensing election for the acquisition of business equipment. For 2007, the expensing limit is increased to $125,000 and the investment-based phase out is increased to $500,000. The provision was extended through 2010 and will be indexed each year. The limit for 2008 is increased to $128,000. The State of Wisconsin has not adopted this increase and the expensing deduction remains at $25,000 on Wisconsin returns.

Conclusion

Complicated tax laws do not mean that families must pay more to the government — just that they need to use the provisions available to minimize their tax burdens. This is especially true in the context of divorce, where money may be tight due to the cost of establishing and maintaining two homes, legal fees, etc. Attorneys and tax professionals can work in tandem to devise a tax strategy that will serve the parents and children best, post-divorce.

Gregory J. Ksicinski is a principal practicing in the Brookfield office of Suby, Von Haden & Associates S.C., Certified Public Accountants & Business Consultants, as a member of the firm’s valuation and litigation services group. He can be reached at [email protected].