After much debate, posturing from both political parties and media attention, Congress passed 2007 tax legislation in late December. When Congress reconvenes this year, additional legislation may be passed to extend certain tax credits that expired in 2006.

Below are highlights of some of the provisions that have already been passed.

Tax Increase Prevention Act of 2007

This act provides a one-year stopgap fix referred to as the alternative minimum tax (AMT) patch. The AMT is a parallel tax system that disallows certain deductions under the regular tax system and requires certain preference adjustments.

The AMT was long regarded as a tax on the rich; however, in recent years, millions of middle-income families inadvertently fell prey to the AMT. Congress previously provided temporary relief from the AMT by raising the allowances (which expired in 2006) that reduced alternative minimum taxable income. If Congress had not acted, the allowance levels would have reverted to the 2000 amounts, and it was estimated that more than 20 million additional taxpayers would be subject to the AMT.

The AMT patch provides relief in three areas. First, the AMT allowance was extended for one year and increased to (a) $66,250 for married individuals filing a joint return and surviving spouses; (b) $44,350 for single individuals; and (c) $33,125 for married individuals filing separate returns. Second, the use of personal tax credits to offset regular tax liability and the AMT tax liability expired in 2006, but was extended to 2007. Third, the utilization of refundable longterm AMT tax credits (referred to as minimum tax credits) was expanded for 2007.

To properly account for the changes to the AMT, the IRS is in the process of reprogramming its systems with a target date of Feb. 11. This date is not set in stone. Be advised that certain taxpayers cannot e-file their returns until the reprogramming is complete. Taxpayers filing the following forms will be impacted: Form 8863, Education Credits; Form 5695, Residential Energy Credits; Form 1040A Schedule 2, Child and Dependent Care Expenses for Form 1040A Filers; and Form 8396, Mortgage Interest Credit.

Mortgage Forgiveness Debt Relief Act

As a general rule, for income-tax purposes, forgiveness of debt results in taxable income to a taxpayer. There are exceptions to this rule, such as discharge of indebtedness in a Title 11 bankruptcy case. As a result of the subprime mortgage crisis, millions of taxpayers were potentially faced with taxable income when their principal residence was foreclosed upon. To mitigate this situation, Congress passed legislation that provides a tax break to homeowners who have forgiveness of mortgage debt. This tax break only applies to a taxpayer's principal residence.

The tax break is effective from January 1, 2007 through Dec. 31, 2009, and is capped at $2 million for married individuals and $1 million for married individuals filing separate returns. This tax relief applies to the original purchase price plus improvements, and includes second mortgages or home-equity loans only to the extent that loan proceeds were used to acquire, construct or substantially improve the taxpayer's principal residence. Thus, proceeds used to take that long vacation or pay off credit cards will not qualify for the tax break.

Business and corporate changes

Congress increased the penalty that applies to partnerships that fail to file a return. The penalty was increased from $50 to $86 per partner, and the period for calculating the penalty was increased from five to 12 months. For the first time, S corporation returns will also be subject to a penalty for failure to file. The S corporation will be assessed a penalty at $85 per shareholder for a period of up to 12 months.

Some instructions won't be updated

The IRS recently announced on its Web site changes to the instructions for Form 1040 (and Form 1040NR) that involve health savings accounts, charitable contributions of fractional interests and the foreign earned-income exclusion. The IRS further stated that the paper and online versions of the 2007 Form 1040 (and Form 1040NR) and instructions will not be revised to reflect the above changes.

Richard Gabaldon, a CPA, is a tax partner with Moss Adams LLP. This column first appeared in the New Mexico Business Weekly, a sister publication.