Four Tax Changes You Need to Know About

First Part: Higher AMT Exemptions

The liberalized AMT exemption amounts for 2007 are:

Without this change, the AMT exemption amounts for 2007 would have been much smaller: $45,000, $33,750, and $22,500, respectively.

Second Part: Personal Nonrefundable Credits Can Offset AMT Liabilities

The second part of the patch allows so-called personal nonrefundable tax credits to help offset your 2007 individual AMT bill, as well as your regular tax bill (the same credits could be used for 2006). Here are the personal credits you can use.

Bottom Line: For 2007, higher AMT exemption amounts and the ability to use personal tax credits will not only help you reduce your exposure to the AMT, but will also insulate our beloved incumbent politicians from massive voter discontent for the time being. Keep in mind, however, that yet another patch will be required to preserve the status quo for 2008 and beyond.

Cancellation of debt (COD) income, which occurs when a lender lets you off the hook for all or part of the money you owe, is taxable unless a specific exclusion makes it tax-free. The Mortgage Relief Act retroactively creates a new exclusion for qualifying cancellations of home mortgage debt in 2007 through 2009. Under the exclusion, a homeowner can have up to $2 million of federal-income-tax-free COD income from "qualified principal residence indebtedness," which means debt that was used to acquire, build or improve your principal residence and that is secured by that residence. The basis of your principal residence is reduced by the excluded amount.

Beware: This exclusion only applies to COD income from debt used to acquire, build, or improve your principal residence. COD income from cancellations of home equity loans used for other purposes, such as paying off your credit cards, won't qualify for the new exclusion, nor will COD income from cancellations of vacation home loans. (However, other tax-law exclusions may apply in that circumstance.) Also, the new exclusion is not available to individuals in Title 11 bankruptcy cases.

Surviving Spouses May Now Be Eligible for $500,000 Home Sale Gain Exclusion

If you're single, you can potentially exclude taxes on up to $250,000 in gains from selling your principal residence. Married joint filers can potentially exclude up to $500,000. However, if you're an unmarried surviving spouse, you aren't allowed to file a joint return for any years after the one in which your spouse dies (unless you remarry, of course). Therefore, before the Mortgage Relief Act, you could not take advantage of the larger $500,000 home sale gain exclusion if you sold your home in the year following the year when your spouse died. Instead, you were limited to the smaller $250,000 exclusion. Thankfully, the new law addresses this problem, but only for sales that occur after Dec. 31, 2007. An unmarried surviving spouse can now claim the larger $500,000 gain exclusion as long as they sell their primary residence within two years of their spouse's death and that all the other requirements for the $500,000 exclusion were met at the time that person died.

Beware: The two-year eligibility period for the larger exclusion begins on the date of the deceased spouse's death. Therefore, if your spouse dies in March of 2008 and you sell your house in April of 2010, you won't qualify for the larger $500,000 gain exclusion because more than 24 months will have passed since the date of your spouse's death.

Mortgage Insurance Premium Writeoff Extended for Three More Years

Premiums for qualified mortgage insurance on debt you took out in order to acquire, construct or improve your first or second residence can potentially be treated as deductible mortgage interest. Before the Mortgage Relief Act, this break was only available for premium amounts paid during 2007. The new law extends the break for three more years, through 2010.

Beware: Under an antitaxpayer phaseout rule, you may be unable to claim the writeoff. Here's how it works. If your adjusted gross income (AGI) exceeds $100,000, the deduction is phased out by 10% for every $1,000 of AGI (or any fraction thereof) that's in excess of $100,000. That means the writeoff is fully phased out when your AGI reaches $109,001. If you use married filing separate status, and your AGI exceeds $50,000, the deduction is phased out by 10% for each $500 of AGI (or any fraction thereof) in excess of $50,000. In this case, the writeoff is fully phased out when your AGI reaches $54,501.