Ten Tax Laws You Gotta Know

7. Home energy and tax savings

A carryover tax break from 2006 might be able to help cut your 2007 tax bill, too.

The Energy Tax Incentives Act of 2005 offers taxpayers a tax credit for making energy-efficient home improvements. Credits, which reduce your tax bill dollar for dollar, range from $50 for the installation of a whole-house circulating fan to $2,000 for conversion to a solar water-heating system.

Relatively simple upgrades, such as replacing drafty windows and doors, adding insulation and replacing an old heating or air conditioning unit will allow you to shave several hundred dollars off your tax bill.

The one drawback to this tax break, which expired at the end of 2007, is that any energy-efficient home improvements you made last year must be combined with any you made in 2006. And the two-year total allowed is only $500.

"It came into effect in 2006," says Hodson, "so if you took the full credit then there's nothing left."

You can, however, claim more generous credits if you added solar water, heat or power systems to your house last year. And solar-related credits continue for 2008.

8. Fuel-efficient auto tax savings

Another continuing credit for energy conscious taxpayers is the one allowed for hybrid vehicles. Tax credits, depending on the make and model of the vehicle, range from a couple hundred dollars to several thousand.

However, the credit phases out for the fuel-efficient vehicles once a carmaker sells 60,000 hybrids; eventually the credits are completely eliminated.

That happened to Toyota in 2007, meaning you'll need to pay attention to when you bought your vehicle to determine your precise tax savings. If you purchased a Toyota or one of its Lexus model hybrids after Oct. 1, 2007, you get no tax credit.

The tax break for qualifying automakers continues through 2010, but the credit amounts will be reduced for some vehicles. Honda credits, for example, were cut in half Jan. 1.

9. Popular deductions reappear

The 2007 filing season brings some good news for taxpayers who claim several popular tax deductions, such as those for state sales taxes, college tuition and fees, and classroom expenses. Last year, these tax deductions were approved too late to make it onto the IRS forms. That meant filers had to do some extra work to make sure they claimed them.

But when they were extended in late 2006, they were made effective for 2007, too. So the IRS had plenty of time to get the deductions back on Forms 1040 and 1040A (tuition and fees and classroom expenses at the bottom of page one on each of these) and, for fliers who itemize, on Schedule A (in the deductible taxes section).

There is one addition here for 2007 returns. If you claim the tuition and fees deduction, you now must also file the new Form 8917 and submit it with your 1040 or 1040A.

The deductions are scheduled to expire at the end of 2008, but Congress is expected to renew them again. The IRS and taxpayers hope it will be soon enough to allow them to make it on to 2008 tax forms.

10. 2008 tax changes of note

Some significant tax law changes took effect Jan. 1. While they won't affect your 2007 return due this April, you might find them useful as you devise your 2008 tax strategies. They are:

1. Expansion of the home-sale exclusion for surviving spouses.

2. More changes to the kiddie tax.

3. Zero percent capital gains taxes for some investors.

Under prior tax law, a married couple could exclude up to $500,000 profit from taxation when they sold their home as long as they met certain conditions. After a spouse's death, the surviving spouse also could claim that exclusion amount if the home was sold in the year his other spouse passed away. In that situation, the widow or widower would be able to file a tax return using the married filing jointly status.

However, if the widow or widower sold the residence the next year or later, the sale exclusion was cut in half. Because many widows and widowers delay making such major decisions after losing a husband or wife, they were penalized by the tax code when they finally did sell their house.

But thanks to a provision in the Mortgage Debt Forgiveness Act, bereaved home sellers get some tax relief. Now a surviving spouse has two years in which to sell a home that was jointly owned and take the $500,000 gain exclusion.

"This is a significant new benefit, and the surviving spouse continues to be allowed a step up in basis in a jointly owned residence for the deceased spouse's one-half share. The $500,000 exclusion is in addition to that," says CCH's Luscombe.

Parents also need to pay attention to the Jan. 1 changes to the kiddie tax.

In order to save for their child's college costs, some parents open accounts in the child's name. Not only does this designate the fund for the youngster's use, but it also had the tax advantage of having the earnings taxed at the youth's usually lower rate.

However, when a child's account earns a certain amount ($1,700 in 2007, $1,800 in 2008), the kiddie tax kicks in. In essence, the kiddie tax requires that excess earnings be taxed at the parents' highest marginal tax rate (which could be as high as 35 percent) until the child reaches a certain age, at which time the child's lower rates (typically 10 percent to15 percent) then apply.

In 2007, a child's tax rates took effect when the youth turned 18. For 2008, the parents' higher rates will be collected on investment earnings until the child turns 19 or 24 if the youngster is a full-time student.

This change, says Luscombe, was designed to keep wealthier parents from taking advantage of another 2008 tax-law change, zero percent capital gains on lower-income investors.

Now about that new no taxes due law. Taxpayers in the 10 percent and 15 percent tax brackets can sell long-term assets this year through 2010 and not owe any capital gains on the profits. To qualify for the zero rate in 2008, a married couple must make less than $65,100 in taxable income; single filers earning less than $32,550 will pay no tax on their sales of assets they've owned for more than a year.

While the kiddie tax might keep many young investors from taking advantage of this law change, it could be a viable strategy for others such as retirees whose income will allow them to take advantage of the zero capital gains break.

Finally, in addition to the new 2007 tax code changes and prior year carryovers, many pre-existing laws have new dollar amounts this filing year, thanks to inflation adjustments. For details on these tax issues, see Bankrate's companion story, "Old tax laws, new amounts."

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