TaxAlmanac:Featured article/April 25, 2007

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Highlights of 2007 Tax Changes

Estate and Gift Taxes

Annual Exclusion for Gifts to Spouses Increased

The annual exclusion for gifts made to spouses who are not U.S. citizens has increased to $125,000.

Maximum Estate and Gift Tax Rate Reduced

For estates of decedents dying, and gifts made, after 2006 and before 2010, the maximum rate for the estate tax and the gift tax is 45%.

Foreign Issues

Foreign Earned Income and Housing Exclusions

  • Exclusion amount. The maximum foreign earned income exclusion has increased to $85,700.
  • Housing expenses—base amount. The base housing amount has increased to $37.57 per day, or $13,712 for an entire calendar year.

Foreign Tax Credit

  • Income categories eliminated. For tax years beginning after 2006, the following categories of income will be eliminated for purposes of computing the foreign tax credit limit. Income that previously fell in these categories will fall in either the passive income category or the general limitation income category.
  • High withholding tax interest.
  • Financial services income.
  • Shipping income.
  • Dividends from a domestic international sales corporation (DISC) or former DISC.
  • Certain distributions from a foreign sales corporation (FSC) or former FSC.
High withholding tax interest and shipping income will fall in the passive income category or general limitation income category, depending on the circumstances. Financial services income will fall in the general limitation income category if you are predominantly engaged in the active conduct of a banking, insurance, financing or similar business. Dividends from a DISC or former DISC and certain distributions from a FSC or former FSC will fall in the passive income category. See Publication 514 for more information on the foreign tax credit for individuals.

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