Top New Tax Breaks You Need to Know About

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If you're getting ready to file your 2007 taxes, you'll want to make sure you take advantage of every available tax break. After all, the more money you can keep for yourself, the better. Here are some examples of tax breaks that are either new for the 2007 tax year or among the lesser used write-offs. Take a moment to review these three tax tips to make sure you're covered for your 2007 tax filing.

Private mortgage insurance (PMI) deduction

If you bought a home and paid less than 20% of its value as a down payment, chances are your lender required that you purchase private mortgage insurance, or PMI. If you took out a loan in 2007 on which you were required to buy PMI, you may be eligible for a tax deduction on your PMI payments. But there are a few points to keep in mind:

  • PMI is insurance on the balance due for your mortgage, not for hazards to your house. Some taxpayers mistake PMI for regular home insurance, which is not the same thing.
  • The PMI deduction is generally only available to those with incomes under 100,000 ($50,000 if married filing separately). Also, it only applies to your primary residence, not to vacation homes.
  • If your PMI is for a home equity loan, you can only deduct payments for the portion of the loan that is used to improve your home. Otherwise, the deduction does not apply.

If you're going to claim PMI payments as a write-off, make sure your PMI is eligible. If it is, it can be a great way to lower your tax bill.

Home office deduction

If you are a small business owner and use a portion of your home exclusively for business - a spare room used as an office, for example - you may be entitled to a home office deduction. With a home office deduction, you can write off the expenses associated with the portion of your home that is used exclusively for business, including a percentage of your mortgage payments and utility bills.

To calculate the eligible amount, you'll need to determine the percentage of the square footage used for business in relation to your home's total square footage. For example, if your house is 3,500 square feet and you use a 350-square-foot room as a home office, you can write off 10% of your mortgage payment, electric bills, etc., as a business expense.

The home office deduction can help you drastically reduce your tax bill, but use it with caution: Only space used regularly and exclusively for business qualifies. Make sure your home office is eligible before you write off the expenses.

Home mortgage debt forgiveness

The home mortgage crisis has been in the news for months, with foreclosures and loan defaults rising at an alarming rate. These days, banks are more willing to work with borrowers who are feeling the financial pinch, but it could come with a price. For example, homeowners who stave off foreclosure by working with a lender to restructure their loan in a way that involves the lender writing off a portion of the principal could find themselves liable for taxes on the amount the lender writes off.

That's bad news for homeowners who are already facing a financial squeeze. But there's good news on the tax front this year for some in that situation: the Mortgage Debt Forgiveness Act of 2007. Under this law, homeowners who receive debt forgiveness on their primary residence won't owe taxes on the forgiven amount if they meet certain requirements:

  • The forgiven amount does not exceed $2 million (or $1 million for a married person filing separately).
  • The debt was discharged in 2007.

Depending on the size of the debt forgiven, this tax relief provision could be worth a huge amount of money. If you were in a debt-forgiveness situation in 2007, it is definitely worth checking out.

2007 wrap up

Wrap up 2007 the right way by keeping your tax bill as low as possible. Make sure you are taking advantage of all the tax breaks for which you are eligible. As always, individual situations are unique, so it may be best to consult a qualified tax advisor of your choosing.