Besides cancellation-of-debt relief, the Mortgage Forgiveness Debt Relief Act of 2007 has other provisions that might prove helpful to you.

More time for surviving spouses
As mentioned in the preceding article, you can exclude $250,000 worth of gains from the sale of your home. Married couples filing jointly get an even better break: They can exclude up to $500,000 worth of gains as long as both couples occupied the house as a principle residence for at least two years (730 days) of the five years preceding the sale.

That sounds fine, but what if a hypothetical Beth Williams died in late 2007 and her widower Bob decides he wants to sell the big house in which they lived. Under federal law, as an unmarried surviving spouse, Bob would be able to claim the larger exclusion available to married couples only if he sold the house within the calendar year of the deceased spouse's death. As a result, many surviving spouses had to settle for a $250,000 exclusion rather than a $500,000 exclusion. That's not the case under the new law. Effective for sales after 2007, an unmarried surviving spouse can exclude up to $500,000 worth of gains on a home sale, providing the sale occurs within two full years of the spouse's death.

Example: Beth dies on October 31, 2008.

Old law: To get the $500,000 exclusion, Bob must sell the house in the year of death - by December 31, 2008.

New law: Bob has two full years, until October 31, 2010, to sell the house and take the larger tax break.

To get the bigger tax break, all of the requirements for the $500,000 exclusion must have been met at the date of the spouse's death.

Mortgage insurance deductions
Many homeowners buy mortgage insurance when they take out a home loan. Prior law called for the insurance premiums to be tax deductible, but that law was scheduled to expire after 2007. The new law extends this provision; premiums paid through 2010 may be deducted as if they were home mortgage interest. Unlike home mortgage interest, however, the mortgage insurance premium deduction is subject to a phaseout. If your adjusted gross income (AGI) is over $100,000, each additional $1,000 of AGI cuts the write-off by 10%.

Example: With an AGI of $100,001, you can deduct only 90% of your mortgage insurance outlays. At an AGI of $101,001, you can deduct only 80%, and so forth. As you can see, if your AGI is $109,001 or higher, you'll get no deduction at all.

Revenue raisers
Two not-so-helpful provisions of the new law may affect small companies:

• Partnership returns. Failure-to-file penalties relating to partnership returns are now in effect for 12 months, up from 5 months under prior law. The penalties have been increased, too, from $50 to $85 per partner.

• S Corporation returns. Penalties for failing to file an S corporation return or failing to provide required information on the return can be assessed for 12 months. The penalty is $85 per shareholder per month.

Alleviating the AMT
Another new law, the Tax Increase Prevention Act of 2007, provides a "patch" for the alternative minimum tax (AMT). The law increases the 2007 AMT exemption amounts beyond their 2006 levels and sets them much higher than they would have been without the one-year relief. The 2007 AMT exemption amounts have been set at $66,250 for joint returns and $44,350 for single filers. Those numbers were $62,550 and $42,500, respectively, in 2006.

In addition, the new law allows taxpayers to use personal tax credits to offset the AMT, as has been the case in the past. These two provisions will allow an estimated 20 million taxpayers to avoid the AMT for 2007.

 

States Most Heavily Hit by the AMT
State	Percentages of Tax Returns Paying the AMT -- 2005
New Jersey	6.82%
New York	6.00%
Connecticut	5.90%
District of Columbia	5.19%
Maryland	5.02%
California	4.86%
Massachusetts	4.74%
U.S. Total	3.01%
Source: Tax Foundation