2007 - Last Year for Higher Education Expenses Deduction

Unless extended by Congress before year’s end, 2007 is the final year for
the deduction for qualified higher education expenses. Individual taxpayers
will be allowed to deduct up to $4,000 of higher education expenses instead of claiming the Hope or Lifetime Learning tax credits. The deduction is taken “above-the-line,” so that it is deductible even for those taxpayers who do
not itemize their deductions.

Caution: This deduction phases out for higher-income individuals. Married taxpayers filing jointly with an Adjusted Gross Income (AGI) of $130,000 or less are allowed to deduct up to $4,000 of expenses. The maximum deduc-
tion drops to $2,000 for taxpayers with an AGI over $130,000, but no deduction is allowed at all if the AGI exceeds $160,000. For other taxpayers, the equivalent AGI limits are $65,000 and $85,000. In addition, taxpayers
filing as Married Separate, Dependent of Another or Non-Resident Alien are not allowed to take this deduction.

Final Year for Teacher’s Expenses

2007 is the final year that the $250 tax deduction for out-of-pocket costs incurred to purchase books, supplies and other classroom equipment by elementary and secondary school teachers and certain other school professionals can be taken “above-the-line,” so that it is deductible even
for those taxpayers who do not itemize their deductions.

Combat Pay EIC Election Lost After 2007

Without Congressional action, 2007 is the last year that a taxpayer can
elect to have excluded combat pay counted as income for purposes of calculating the earned income tax credit (EIC).

Caution: Making this election for EIC purposes may or may not be advantageous. If the taxpayer has earned income below the maximum
amount of earned income on which the credit is calculated, including the combat pay will increase the credit amount. On the other hand, if the taxpayer’s earned income is already in the phase-out range, electing to
include combat pay as earned income will decrease the amount of credit
that can be claimed.

One-Year Only Deduction - Mortgage Insurance Premiums

For the 2007 tax year only, the Act establishes an itemized deduction for
the cost of premiums for mortgage insurance on a qualified personal resi-dence for amounts paid or accrued after December 31, 2006 and before January 1, 2008, and that aren’t allocable to any period after 2007. The deduction applies only to mortgage insurance contracts issued in 2007,
so premiums paid on mortgage insurance for homes purchased before
2007 don’t qualify. The deduction is phased-out ratably by 10% for each $1,000 by which the taxpayer’s adjusted gross income exceeds $100,000.

DISCLAIMER

The purpose of this guide is to provide current information on tax, financial and business developments and to suggest general tax planning ideas that may be appropriate in certain situations. It suggests general tax planning ideas that may only be appropriate when claiming tax benefits in a manner consistent with the statutes and Congressional purpose. The information and opinions are generalizations and may not apply to all taxpayers and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. Therefore, it is important that you seek appropriate advice before implementing any of the ideas suggested.