With the new year approaching, we would like to remind our clients and friends of tax law changes that will take effect on January 1, 2007.
Decrease in Maximum Estate and Gift Tax Rate. Effective January 1, 2007, the maximum federal estate and gift tax rate will be 45% (down from 46% in 2006). It should be noted that the $2 million federal estate and generation-skipping transfer tax exemptions (and $1 million gift tax exemption) will remain unchanged. Also note that the state (New Jersey and New York) estate tax exemption remains the same at $675,000 and $1 million, respectively.
Inflation Adjustments. The IRS has set forth, in Revenue Procedure 2006-53, those items that will be adjusted for inflation in 2007. Some of the more significant items are listed below.
a. Standard Deduction. The 2007 standard deduction amounts will be as follows: $5,350 for a single individual (up from $5,150 in 2006); $10,700 for a married couple filing jointly (up from $10,300 in 2006); $7,850 for a head of household (up from $7,550 in 2006); and $5,350 for married couples filing separately (up from $5,150 in 2006).
b. Personal Exemption Amount. The 2007 personal exemption amount will be $3,400 (up from $3,300 in 2006). c. Phase-out of Personal Exemptions. The 2007 adjusted gross income threshold amounts at which personal exemptions are phased out will be as follows: for a single individual, the exemption phaseout begins when AGI exceeds $156,400 (up from $150,500 in 2006) and is fully phased out when AGI exceeds $278,900 (up from $273,000 in 2006); for married couples filing jointly and surviving spouses, the exemption phaseout begins when AGI exceeds $234,600 (up from $225,750 in 2006) and is fully phased out when AGI exceeds $357,100 (up from $348,250 in 2006); for a head of household, the exemption phaseout begins when AGI exceeds $195,500 (up from $188,150 in 2006) and is fully phased out when AGI exceeds $318,000 (up from $310,650 in 2006); and for married couples filing separately, the exemption phaseout begins when AGI exceeds $117,300 (up from $112,875 in 2006) and is fully phased out when AGI exceeds $178,550 (up from $174,125 in 2006).
d. Overall Limitation on Itemized Deductions. Total itemized deductions otherwise allowable are reduced if a taxpayer's adjusted gross income exceeds certain threshold amounts. The threshold amounts for 2007 will be as follows: $156,400 (up from $150,500 in 2006) for all taxpayers other than married taxpayers filing separately; and $78,200 (up from $75,250 in 2006) for a married taxpayer filing separately.
e. Tax Rate Schedules. As a result of changes to the 2007 taxable income brackets, for single filers, married couples filing jointly and heads of household, the top bracket of 35% will apply to taxable income in excess of $349,700 (up from $336,550 in 2006); for married couples filing separately, the top bracket will apply to taxable income in excess of $174,850 (up from $168,275 in 2006); and for estates and trusts, the top bracket will apply to taxable income in excess of $10,450 (up from $10,050 in 2006).
f. Annual Gift Tax Exclusion. The annual gift tax exclusion for 2007 will remain $12,000, as it was in 2006. However, the annual gift tax exclusion for gifts to a spouse who is not a United States citizen will be $125,000 (up from $120,000 in 2006).
g. Adoption Credit. The credit allowed for the adoption of a child with special needs will be $11,390 (up from $10,960 in 2006). The maximum credit allowed for other adoptions is the amount of qualified adoption expenses up to $11,390 (up from $10,960 in 2006). The adoption credit begins to phase out for taxpayers with modified adjusted gross income of $170,820 (up from $164,410 in 2006) and is completely phased out when modified adjusted gross income reaches $210,820 (up from $204,410 in 2006).
h. Hope and Lifetime Learning Credits A phaseout range of $47,000 to $57,000 of modified adjusted gross income, or $94,000 to $114,000 for joint filers (up from $45,000 to $55,000, or $90,000 to $110,000 for joint filers, in 2006) will be used to determine the reduction in the amount of the Hope Scholarship and Lifetime Learning Credits otherwise allowable.
i. Earned Income Credit. The maximum earned income credit will be $2,853 for a taxpayer with one qualifying child (up from $2,747 in 2006), $4,716 for a taxpayer with two or more qualifying children (up from $4,536 in 2006), and $428 for a taxpayer with no qualifying children (up from $412 in 2006). The adjusted gross income phaseout range is $15,390 to $33,241 for a single, surviving spouse or head of household taxpayer with one qualifying child (up from $14,810 to $32,001 in 2006); $15,390 to $37,783 for a single, surviving spouse or head of household taxpayer with two or more qualifying children (up from $14,810 to $36,348 in 2006); $7,000 to $12,590 for a single, surviving spouse or head of household taxpayer with no qualifying children (up from $6,740 to $12,120 in 2006); $17,390 to $35,241 for married taxpayers filing jointly with one qualifying child (up from $16,810 to $34,001 in 2006); $17,390 to $39,783 for married taxpayers filing jointly with two or more qualifying children (up from $16,810 to $38,348 in 2006); and $9,000 to $14,590 for married taxpayers filing jointly with no qualifying children (up from $8,740 to $14,120 in 2006). The earned income credit is not allowed if the aggregate amount of certain investment income exceeds $2,900 (up from $2,800 in 2006).
j. Low-Income Housing Credit. The amounts used to calculate the state housing credit ceiling for the low-income housing credit will be the greater of (1) $1.95 multiplied by the state population or (2) $2,275,000 (up from $1.90 multiplied by the state population or $2,190,000 in 2006).
k. Alternative Minimum Tax Exemption for a Child Subject to the "Kiddie Tax." For a child to whom the "kiddie tax" applies, the exemption amount for purposes of determining the alternative minimum tax may not exceed the sum of (1) the child's earned income for the year, plus (2) $6,300 (up from the sum of the child's earned income for the year plus $6,050 in 2006). Note that under the Tax Increase Prevention and Reconciliation Act, signed on May 17, 2006, the "kiddie tax" cutoff age was raised from 14 to 18.
l. Expensing of Depreciable Business Assets. The aggregate cost that may be deducted for investments in certain depreciable business assets (known as Section 179 property) will be $112,000 (up from $108,000 in 2006). This amount is reduced by the amount by which the cost of the asset exceeds $450,000 (up from $430,000 in 2006).
m. Valuation of Qualified Real Property in Decedent's Gross Estate. For an estate of a decedent dying in 2007, if the executor elects to use the Code Section 2032A special use valuation method for qualified real property, the aggregate decrease in value for estate tax purposes resulting from the election cannot exceed $940,000 (up from $900,000 in 2006).
n. Higher Income Limits for Retirement Savings. (1) Traditional IRAs. Effective January 1, 2007, for married couples filing jointly where both spouses participate in an employer sponsored plan, the deduction for contributions to a traditional IRA begins to be phased out at a combined modified adjusted gross income of $83,000 (up from $75,000 in 2006) and is fully phased out at $103,000 (up from $85,000 in 2006). For married couples filing jointly where only one spouse participates in an employer sponsored plan, the deduction for contributions by the non-participant spouse to a traditional IRA begins to be phased out at a modified adjusted gross income of $156,000 (up from $150,000 in 2006) and is fully phased out at $166,000 (up from $160,000 in 2006) (contributions by the participant spouse are subject to the $83,000 to $103,000 phaseout range). For single individuals and heads of household who participate in an employer sponsored plan, the deduction for contributions to a traditional IRA begins to be phased out at a modified adjusted gross income of $52,000 (up from $50,000 in 2006) and is fully phased out at $62,000 (up from $60,000 in 2006). For a married taxpayer filing separately where either spouse participates in an employer sponsored plan, the modified adjusted gross income phaseout range for contributions to a traditional IRA of $0 to $10,000 (i.e., full phaseout at $10,000) continues to apply.
(2) Roth IRAs. Effective January 1, 2007, for married couples filing jointly, the deduction for contributions to a Roth IRA begins to be phased out at a combined modified adjusted gross income of $156,000 (up from $150,000 in 2006) and is fully phased out at $166,000 (up from $160,000 in 2006). For single individuals and heads of household, the deduction for contributions to a Roth IRA begins to be phased out at a modified adjusted gross income of $99,000 (up from $95,000 in 2006) and is fully phased out at $114,000 (up from $110,000 in 2006). For a married taxpayer filing separately, the modified adjusted gross income phaseout range for contributions to a Roth IRA of $0 to $10,000 (i.e., full phaseout at $10,000) continues to apply.
Year-End Reminder: Remember to make any remaining gifts for 2006 by December 31 (see the guidelines discussed separately in this newsletter). Gifts made in 2006 which aggregate more than $12,000 for any donee must be reported on an IRS Form 709 United States Gift (and Generation Skipping Transfer) Tax Return filed with the IRS by April 15, 2007.
