Ten Tax Laws You Gotta Know

3. AMT relief, delay

As 2007 was winding down, lawmakers reached an agreement for a temporary fix, or patch, to the alternative minimum tax. This costly parallel tax system, commonly referred to as the AMT, snares more filers each year, primarily because it's not indexed for inflation.

Another major problem posed by the AMT: Many common tax breaks used every year by individual taxpayers to lower their IRS bills are not allowed under the alternative system. For example, under the AMT, you cannot deduct state and local taxes.

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For the last several years, Congress has increased the amount of income that's excluded from the AMT, thereby saving millions of taxpayers from having to make the tax's additional calculations.

The 2007 patch raised the exemptions to:

• $66,250 for married, joint return filers.
• $44,350 for single or head of household taxpayers.
• $33,125 for married couples who file separate returns.

While the legislation solved one problem, it created a couple of others. First, it is only for tax year 2007. Congress is expected to pass additional measures to take care of 2008 taxes, but until it does, planning by taxpayers is hampered.

Secondly, because the AMT patch became law in late December, tax-filing is delayed for some taxpayers. Five AMT-related forms (Form 8863, Education Credits; Form 5695, Residential Energy Credits; Schedule 2, Child and Dependent Care Expenses for Form 1040A filers; Form 8396, Mortgage Interest Credit; and Form 8859, District of Columbia First-Time Homebuyer Credit) won't be ready for filers until Feb. 11. If you need to file any of those forms, the IRS will not accept your return -- or issue any refund -- until that February date.

4. More donation proof demanded

The IRS got tougher on donation documentation in 2007. Previously, you had to get a receipt or other acknowledgement from a charity if you gave $250 or more. Now, for a monetary gift of any amount, must be able to produce "a bank record or a written communication" from the charity detailing the group's name and the date and amount of the gift.

A canceled check is fine. If you charge a contribution, your credit card statement should be sufficient. Many charities also already provide a receipt for all monetary gifts, regardless of the amount.

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You don't have to send the receipts for your smaller financial gifts with your 1040, but you will need them if the IRS questions your deductions. Without them, the agency will automatically disallow the write-off.

And don't forget about the good-or-better requirement that took effect in August 2006 for noncash gifts. Under this law, if the IRS determines you donated clothing or household items that didn't meet the standard, it can disallow your deduction. So don't even think about dumping worthless items in a charity's donation bin and then deducting the so-called gift.

5. Older philanthropist options

One tax-law change, however, made last year's charitable giving by older philanthropists easier. Individuals 70½ or older were able to transfer money directly from an IRA to a charitable organization. The option is available to either Roth or traditional IRA owners, but it is most beneficial when the money comes from a traditional account, because much of that cash is eventually taxed.

This was the case for taxpayers who had to take required minimum distributions from a traditional IRA. By sending the withdrawal directly to a charity, the donated amount wasn't included in the giver's taxable income, thereby lowering the filer's tax bill a bit.

If you took advantage of this option, remember that you can't double dip by claiming a deduction for the contribution. For this reason, the rollover method appeals to taxpayers who otherwise wouldn't get a tax deduction, such as those who take the standard deduction instead of itemizing.

The direct to charity rollover expired at the end of 2007. However, it should be renewed for the 2008 tax year. The House approved a one-year extension as part of its alternative minimum tax measure, but the charitable provisions were dropped by the Senate and never made it into the final AMT patch.

Look for lawmakers to act early in 2008 to reauthorize this donation option so that older IRA account holders can plan accordingly.

6. 'Enron' retirement catch-up

Before the subprime mortgage mess dominated the news, all eyes were focused on workers who lost their retirement plan money because of corporate improprieties. In an effort to help those individuals, a provision in the Pension Protection Act of 2006 allows certain workers to make larger IRA contributions to make up part of what they lost in their company retirement accounts.

Under this law, dubbed the Enron IRA catch-up provision, if you participated in a 401(k) plan and your employer went into bankruptcy in a prior year, you may be able to contribute up to $7,000 (instead of the general $4,000 or $5,000 limits) to your IRA.

The key, though, is that your employer must have been indicted or convicted in connection with business transactions related to the company's bankruptcy that wiped out employee accounts, hence the Enron nickname. The law also requires that:

• You were a participant in a 401(k) plan under which the employer matched at least 50 percent of your contributions to the plan with stock of the company.
• You were a participant in the 401(k) plan six months before the employer filed for bankruptcy.
• The employer (or a controlling corporation) must have been a debtor in a bankruptcy case in an earlier year.

If you are eligible for and use the Enron IRA option, which will be in effect through 2009, you can't also use the 50-or-older add-on; that is, you can't put an extra $1,000 into your account on top of the $7,000.

You can find more on all this provision and other IRA contribution rules in IRS Publication 590.

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