The Kiplinger Tax Letter for Dec. 15 is, as always, chock full of tax information that everyone needs to know.  With the year coming to a close, and tax returns arriving in about two weeks or so, it is time to start preparations for the upcoming income tax filings.  Even if you are getting a refund, you may not want to rush to submit your return, the reason will be discussed later.

There is a big thing for those with mortgage insurance and a new thing to factor into your mortgage plan, another reason for your annual mortgage check up.  Starting in 2007, private mortgage insurance premiums will be tax deductible, however there are limits.  The big limitation is that it will only apply to mortgage insurance issued after 2006, current homeowners will not be eligible.  Also, there is an AGI (Adjusted Gross Income) limitation where the deduction phases out above $100,000 for married couples and $50,000 for the single folk.

Now for the rest of the tax information you need to know.  Congress renewed many of the expired tax breaks, thus extending them through 2007.  However, one big break many needed did not get passed.  The higher AMT exemptions after 2006 did not pass, but don't fear yet.  While millions of angry voters will wind up on the minimum tax rolls, thus minimizing their ability for tax deductions, Congress can still act to extend it during the next year.  Personally though, with the Democrats history, I wouldn't bet on it.

Health Savings Accounts or HSAs will not be limited to the accompanying health plans deductible anymore.  Instead, you will be able to contribute up to $5,650 for family coverage and $2,850 for self-only.  Also, IRA funds can be rolled into HSAs in 2007.  A onetime transfer is allowed up to your limitation, allowing you to avoid the tax and 10% penalty associated with early withdrawals.  Funds in Flex Plans can be rolled over one time as well, once Bush signs the bill.

Due to the large number of complaints the IRS received regarding tax preparation firms and the loans issued for advanced refunds, the agency is barring from marketing these advances.  Many of these tax refund advances were laden with high interest rates and hidden fees according to the complaints.  Also, free e-filing will again be shut out for high income filers, those with an AGI over $52,000. 

Now for the bad news...

For those of you with an S company, this one may affect you.  S companies will no longer be permitted to deduct a sole owner's day care expenses.  This nixes the scheme where the owner hires his spouse to work part time in the business and have the S company deduct day care for their pre-school aged children.

For those of you that are members of a pension plan, there are now issues regarding the tax deductible of your IRA contributions.  The IRS has ruled that even if you receive no benefits, you are considered an active plan participant.  You can only deduct IRA contributions if your AGI is below $60,000 for singles, $85,000 for married couples with both spouses active, and $160,000 for married couples with only one spouse active. 

The IRS is also going after conservation easements.  Twelve states currently offer credits for the value of a donated easement and more states are mulling such breaks.  The IRS is thinking about denying federal tax deductions, at least partially, for donations that reap the benefit of state credits.  They are also eyeing the states that allow the sale of unused credits, saying the sale proceeds may be required to be reported as taxable income.

Family Limited Partnerships are again a favorite target of the IRS.  Many estate planners recommend placing business assets and investments in partnerships and giving interests to family members.  In essence, when the donor dies, the family can claim big estate tax valuation discounts for a minority stake and lack of marketability of the partnership.  The IRS will be targeting these large discounts, especially when involving cash or cash equivalents.  It will also likely deny discounts on asset transfers after family members receive gifts of partnership interests.  If the donor retains too much control, the IRS may even tax the entire partnership to the estate.

And the reason for not quickly filing this year...

Due to the late passage of the tax bill, the IRS is behind schedule for preparing their software for the upcoming tax season.  They were already struggling to accommodate refunds of the phone tax and a new rule allowing the splitting of refunds between multiple accounts.  This means that since the IRS needs at least six weeks to reprogram and test its systems, early refunds will likely be delayed. 

Here is a list of some tax deductions that have been continued, but you may have issues in finding out how to receive these deductions...

• State Sales Tax
• College Tuition
• Teacher's Supplies

There will be confusion as these items are NOT on the tax forms, but they are allowed.  The IRS will provide guidance on where to list them and what codes to use to ensure your get credit for the deduction.

This information does not cover the entire tax changes, only some of the highlights.  Also, I am not a tax advisor, so this is what I have read and you should seek professional guidance to see what applies to your situation.  Hopefully this will help you find more deductions or prevent tax issues for the future.   

If you would like to know how these tax changes, and others, may affect your mortgage plan, feel free to contact me or visit my website.