Congress has passed the tax rebate legislation emanating from the US Government's economic stimulus package. It will give a cheque of $1,200 for married taxpayers and $600 to single taxpayers. Individuals with children under 17 will get an additional $300 per child. However, the rebates will start to phase out for married taxpayers with income in excess of $150,000 and single taxpayers with income in excess of $75,000.

The rebate will come in the form of a cheque from the US Treasury and will be based on the income reported in your 2007 tax return. It is expected that the US Treasury will begin sending these cheques in May 2008. So if you expect a rebate this is a good reason to file your 2007 tax return as early as possible.

Discharge of Mortgage Debt

In an earlier column we noted that if you are unable to pay your mortgage and if the house is repossessed by the mortgage company, and you are no longer liable to pay the mortgage that the mortgage loan that was forgiven is considered taxable income to you.

Under new legislation, if the mortgage debt was on your principal home, and the funds were used to purchase, construct or improve you home, up to $2,000,000 of otherwise taxable income can be excluded for discharges between January 1, 2007 and December 31, 2009.

Tax Return Preparer Penalties

A tax return preparer is now liable for a fine of $1,000 or 50 percent of the fee received for the preparation of a tax return where a position is taken that reduces the tax liability unless the tax return preparer has a reasonable belief that the tax treatment of the position would more likely than not be sustained on the merits.

A tax return preparer is considered to reasonably believe that the tax treatment of an item is more likely than not the proper tax treatment (without taking into account the possibility that the tax return will not be audited, that an issue will not be raised on audit, or that an issue will be settled) if the tax return preparer analyses the pertinent facts and authorities and, in reliance upon that analysis, reasonably concludes in good faith that there is a greater than 50 percent likelihood that the tax treatment of the item will be upheld if challenged by the IRS.

A signing tax return preparer shall be deemed to meet the requirements of section 6694 with respect to a position for which there is a reasonable basis, but for which the tax return preparer does not have a reasonable belief that the position would, more likely than not, be sustained on the merits, if the tax return preparer discloses the position by filing Form 8275, Disclosure Statement, with the tax return.

The result of this new tax law will be to give a tax return preparer pause to take a position on a return on the basis that the return will likely not be audited. And where the tax preparer concludes that the position would more likely than not be sustained on the merits, it is doubtful that the client would agree to have the Form 8275, Disclosure Statement attached to the tax return, as such disclosure is more likely than not to lead to an audit.

What Are My Chances of Being Audited?

This question is frequently asked by clients. According to recently released IRS statistics, if your income is over $1 million you have a 10-percent chance of being audited, if your income is between $100,000 and $1,000,000 you have a two-percent chance of being audited, and if your income is under $100,000 you have a one-percent chance of being audited.

Reminder to US Owners of A Foreign Trust

The Internal Revenue Service recently reminded US owners of a foreign trust that Form 3520A is required to be filed by March 15, 2008 and that the trust must also furnish copies of the foreign grantor trust owner statement and the foreign grantor trust beneficiary statement to the US owners and US beneficiaries. The penalty for failure to file this form is initially five percent of the assets of the trust.

Wash Sales

The wash sale rule will not allow you to take a capital loss on your tax return when you purchase the identical security 30 days before or after the sale. For example, suppose you bought 100 shares of XX corp. stock for $10 or $1,000 on January 2. On February 2 you bought another 100 shares of XX corp. stock for $8 or $800. On February 15 you sell 100 shares of XX corp. stock for $6 or $600. Depending on what batch of stock you sold, you are unable to claim a loss of $400 or $200. Instead, your basis in the stock that was not sold is now $1,200.

Capital Gains and the Alternative Minimum Tax

It is not unusual for a taxpayer to only realise long term capital gains in a year as they want to take advantage of the 15-percent long-term capital gains tax rate. As noted in an earlier column, if you are married and have income between $150,000 and $415,000 and are subject to the alternative minimum tax, the effective tax rate that you will pay will likely be 22 percent on your long term capital gains.

Pre-paid Mortgage Insurance Premium

If you took out private mortgage insurance after January 1, 2007, and prepaid the premium, the IRS will allow you to amortise the premium over seven years and take the portion of the premium allocable to 2007 and deduct it as an itemised deduction on Schedule A.

The tax advice given by this column is, by necessity, general in nature. You should, of course, check with your own US tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances.

James Paul Sabo, CPA, is the President of ETS Ltd., PO Box HM 1574, Hamilton HM GX, Bermuda. Questions should be sent to: jsabo@expatriatetaxservices.com