Every year, Congress changes the tax law. Some changes are very narrowly targeted and do not make much difference to the typical taxpayer. Others affect a lot of people. Here are a few changes that may affect you for the 2007 filing season.

Some good things have happened in 2007 in the areas of tax breaks, health insurance and medical saving accounts, and home buying.

Three very popular tax breaks for individuals have been extended through the end of 2007:

• the optional sales tax deduction
• the option to count non-taxable combat pay as “earned income” for figuring whether you qualify for the Earned Income tax credit
• the educator expense deduction

Unlike last year, these are already approved and will not create headaches for those who file early.

There is also some welcome news about health insurance and medical savings accounts.

First, the deadline for setting up an Archer Medical Savings Account has been pushed back to the end of 2007.

Second, the amount you may contribute to a Health Savings Account is no longer reduced if you are only covered for part of the year. Also, now you may make a one-time tax-free rollover contribution from a Flexible Spending Account or IRA account.

Finally, retired public safety officers such as police officers and fire fighters may exclude up to $3,000 in distributions from a qualified governmental retirement plan from their taxable income, if the distribution is paid directly to an insurance carrier to pay for health insurance or long-term care insurance.

Private mortgage insurance premiums are deductible this year, if you took out the policy in 2007, and for the premiums paid for coverage that applies to 2007. Premiums for future years and premiums on policies taken out before 2007 are not deductible. The deduction is subject to income limits. For example, for married filing jointly taxpayers, the deduction begins to phase out when their adjusted gross income is above $100,000, and is eliminated when adjusted gross income is more than $109,000.

There is some good news for small business owners too, including easier filing for some businesses, increased depreciation and section 179 deductions, higher domestic production activities deductions, and expanded tax credits. 

Husband-and-wife-owned businesses that are not incorporated no longer have to file a partnership return. Each spouse can file a Schedule C, E, or F with their Will Help 1040 to report their shares of the jointly owned business. This will relieve couples of the burden of filing an additional tax return and let them allocate earnings to each for their Social Security and Medicare accounts.

The maximum amount of the section 179 deduction for assets placed in service during the year has increased to $125,000, and the limit for the total cost of section 179 property placed in service before the section 179 deduction is limited has increased to $500,000. Additional higher limits will still apply to the Gulf Opportunity Zone through the end of 2008.

Also, the section 179 deduction on the cost of off-the-shelf computer software has been extended through 2007.

The rule allowing qualified restaurant property and leasehold improvements to be depreciated as 15-year property has also been extended through the end of 2007.

The domestic production activities deduction percentage has increased to 6% for 2007. The work opportunity tax credit has been expanded and will now apply to wages paid to a broader range of newly hired employees, including long-term family-assistance recipients who would have been covered under the expired welfare-to-work credit. Also, the hiring deadline has been extended to August of 2011 for all targeted groups of employees except the Hurricane Katrina group. The amount of the FICA tip credit, which is figured based on the old minimum wage rate of $5.15 per hour, will not be reduced by the new, higher minimum wage. And both the FICA tip credit and the work opportunity credit can be used to offset the taxpayer’s AMT liability.

In most cases this will only affect tax returns for 2008 and later, but for tax years starting after May 27, 2007, S Corporations will no longer treat capital gains as passive income when calculating excess net passive income.

Of course, not all of the news is good. A few changes to the tax laws are intended to get more money from taxpayers.

Starting with the 2008 tax year, the "kiddie tax" will expand to include many college-aged students. Any “child” who is either under 19 or is a full-time student under 24, has at least one living parent, did not file a joint return, and did not have enough income to provide at least half of his or her own support, will be subject to kiddie tax if they have more than $1,800 in unearned income, such as investment income and capital gains. For example, the tax would mean that a child would pay the 15% long-term capital gains rate that adults pay, not the 5% rate children usually pay. The new law goes into effect January 1, 2008, so affected taxpayers should consider selling investments before then to avoid the higher rate.

Tax return preparers will be held to higher standards this year, and the penalties for not meeting those standards will be much higher. The penalty a preparer must pay for taking an “unreasonable position” on a tax return has been increased to either $1,000 or half of preparer's fee for that return, whichever is more. The penalty for “willful or reckless conduct” has been increased to either $5,000 or half of the preparer's fee for that return, whichever is more.

Any taxpayer who claims an excessive refund now may be charged a penalty of 20% of the amount of the excess refund. And in related news, legal fees related to collecting an IRS award for turning in a tax cheat are now tax deductible.

Two narrowly targeted provisions are worth noting ...

An additional $3,000 “catch-up” IRA contribution is allowed for taxpayers who participated in a 401(k) plan where the employer made matching contributions in the form of company stock and the employer has filed for bankruptcy. The catch-up contribution is only allowed if a criminal indictment was filed related to the bankruptcy. This one seems to be intended to help former Enron employees.

The other provision extends to members of the "intelligence community" an election that had only been available to members of the armed forces. Normally, profit from selling a home is tax-free, up to $250,000 for individuals and $500,000 for married filing jointly, if the home was the taxpayer's primary residence for two of the last five years. Extended duty away from home interrupts this two-year period. Certain employees of the Department of Homeland Security, FBI, and several other agencies may now "pause the clock," and residency is not considered to be interrupted. The provision is for any sale between December 20, 2006 and December 31, 2010, when the taxpayer was serving on qualified official extended duty at least 50 miles from home.