With recent tax changes coming from Congress – most notably a one-year patch to the Alternative Minimum Tax (AMT) – it becomes critical for individuals to stay informed of new legislation before filing their 2007 tax returns. The way to avoid surprises at tax time is to be proactive and take control today – educate yourself and your partner and put a plan in place.

Tax planning for same-sex couples requires a year-round approach, but now is the time to take advantage of tax law changes for the 2007-filing year. Some changes to note include:

The Tax Increase Prevention Act of 2007 – Passed in late December, this act provides relief from the AMT for many taxpayers via the installment of a one-year "patch." For single filers, the AMT exemption rose to $44,350 from $42,500 for the 2007-filing year. 

Charitable donations – On 2007 tax returns, monetary donations will not be deductible unless you have a bank record, credit card statement or receipt that shows the name of the charity and the date and amount of the contribution.

Kiddie tax − In 2007, the unearned income of children under age 18 was taxable at the marginal rate of their parents, as if the parents received the income, rather than at the child’s lower rate. In 2008, the kiddie tax applies to a child under 19 instead of 18; it also applies to full-time students over 19 but under age 24. 

Higher education expenses − Extended through December 31, 2007, eligible taxpayers are able to claim an above-the-line deduction for up to $4,000 of qualified higher-education expenses. The full deduction is available to single taxpayers with adjusted gross income up to $65,000, even if they do not itemize deductions. Congress is considering extending this item for another year.  

Partial payments – Taxpayers who can’t pay their full tax liability to the IRS can offer to settle for a lower amount. The law requires taxpayers to make partial payments while the IRS considers the offer.

Same-Sex Couples’ Tax-Saving Tips for the Future

Although the federal government doesn’t permit same-sex couples to file their taxes jointly (which would typically provide greater tax savings than what two single filers can realize), partners can reduce their taxes by being thoughtful about how certain assets, liabilities and expenses are owned or paid.

For example, if two partners are jointly liable for a home mortgage on a personal residence and one partner is in a higher tax bracket than the other, it might make sense for the couple to make mortgage payments from the checking account of the partner in the higher bracket. This would result in the entire interest deduction being taken on the return of the higher-bracket partner and would generate the highest combined tax benefit for the partners. The partner in the lower bracket would not have any interest expense deduction but would still be entitled to the standard deduction.

Also consider holding investments that pay taxable interest (savings accounts, CDs, etc.) in the name of the partner in the lower bracket.

Of course, there are non-income-tax implications to be considered before deciding on the best course of action for you. Please consult a tax professional for more information and to determine if any of the tax moves we’ve outlined are appropriate for you. 

Writer Patricia Wiley is a Partner based in the New York office of Ernst & Young with more than 30 years of benefits management, consulting, and communications experience.  She is responsible for strategic planning, consulting on the design, funding, and communication of employee benefit plans including financial education and employee research and has experience in serving a variety of clients, including Fortune 500 and nonprofit organizations.