Highlights of 2008 Tax Law Changes: Tax Breaks Renewed, Recovery
Rebate Credit, Homeowner Relief
FS-2009-1, January 2009
AMT exemptions rise; several expiring deductions and credits get a
new
lease on life; a new standard property tax
deduction and a special first-time homebuyer credit are available to
some homeowners; and retirement savings incentives
expand. These are among the changes taxpayers will find when they
fill
out their 2008 tax returns. More information about
these and other changes, summarized below, can be found on IRS.gov
and
in various IRS documents, including the Instructions
for Form 1040.
Economic Stimulus Payments Tax Free
Economic stimulus payments are not taxable, and they are not reported
on 2008 tax returns. However, the stimulus payment does
affect whether a taxpayer can claim the Recovery Rebate Credit and
how
much credit he or she can get. The credit is figured like
last year's economic stimulus payment except that the amounts are
based on tax year 2008 instead of 2007. A taxpayer may qualify
for the Recovery Rebate Credit if, for example, she did not get an
economic-stimulus payment or had a child in 2008. See Fact Sheet
2009-3 for details. In most cases, the IRS can figure the credit. The
instructions for Forms 1040, 1040A and 1040EZ have more information.
AMT Exemption Increased for One Year
For tax-year 2008, Congress raised the alternative minimum tax
exemption to the following levels:
$69,950 for a married couple filing a joint return and qualifying
widows and widowers, up from $66,250 in 2007
$34,975 for a married person filing separately, up from $33,125 and
$46,200 for singles and heads of household, up from $44,350
Under current law, these exemption amounts will drop to $45,000,
$22,500 and $33,750, respectively, in 2009. Form 6251 and the AMT
Calculator provide more information.
Expiring Tax Breaks Renewed
Several popular tax breaks that expired at the end of 2007 were
renewed for tax-years 2008 and 2009. As a result, eligible taxpayers
can claim:
The deduction for state and local sales taxes on Form 1040 Schedule
A , Line 5
The educator expense deduction on Form 1040, Line 23 or Form 1040A,
Line 16
The tuition and fees deduction on Form 8917 and
The District of Columbia first-time homebuyer credit on Form 8859
In addition, the residential energy-efficient property credit is
extended through 2016. In general, solar electric, solar water
heating
and fuel cell
property qualify for this credit. Starting in 2008, small wind energy
and geothermal heat pump property also qualify. Use Form 5695 to
claim
the credit.
The non-business energy property credit for insulation, exterior
windows, exterior doors, furnaces, water heaters and other energy-
saving improvements
to a main home is not available in 2008 but will return in 2009.
Standard Deduction Increased for Most Taxpayers
Nearly two out of three taxpayers choose to take the standard
deduction rather than itemizing deductions such as mortgage interest
and charitable contributions.
The basic standard deduction is:
$10,900 for married couples filing a joint return and qualifying
widows and widowers, a $200 increase over 2007
$5,450 for singles and married individuals filing separate returns,
up
$100 and
$8,000 for heads of household, up $150
Higher amounts apply to blind people and senior citizens. The
standard
deduction is often reduced for a taxpayer who qualifies as someone
else’s dependent.
New this year, taxpayers can claim an additional standard deduction,
based on the state or local real-estate taxes paid in 2008. Taxes
paid
on foreign or business
property do not count. The maximum deduction is $500, or $1,000 for
joint filers.
Also new for 2008, a taxpayer can increase his standard deduction by
the net disaster losses suffered from a federally declared disaster.
A
worksheet is available
in the instructions for Forms 1040 and 1040A.
First-Time Homebuyer Credit
Those who bought a main home recently or are considering buying one
may qualify for the first-time homebuyer credit. Normally, a taxpayer
qualifies if she didn’t own
a main home during the prior three years. This unique credit of up to
$7,500 works much like a 15-year interest-free loan. It is available
for a limited time only –– on
homes bought from April 9, 2008, to June 30, 2009. It can be claimed
on new Form 5405 and is repaid each year as an additional tax. Income
limits and other special
rules apply.
Tax Relief for Midwest Disaster Areas
Special tax relief related to severe storms, tornadoes or flooding,
occurring after May 19, 2008, and before Aug. 1, 2008, is available
to
individuals in portions of Arkansas,
Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri,
Nebraska and Wisconsin that were affected by these disasters. Tax
benefits include:
Liberalized rules for certain personal casualty losses and charitable
contributions
An additional exemption amount for persons who provided housing for
someone displaced by these disasters
The option to use 2007 earned income to figure a 2008 earned income
tax credit (EITC) and additional child tax credit
An increased charitable standard mileage rate for use of personal
vehicle for volunteer work related to these disasters
Special rules for withdrawals and loans from IRAs and other qualified
retirement plans
Details on these and other relief provisions are in Publication 4492-
B .
Contribution Limits Rise for IRAs and Other Retirement Plans
This filing season, more people can make tax-deductible contributions
to a traditional IRA. The deduction is phased out for singles and
heads of household who are
covered by a workplace retirement plan and have modified adjusted
gross incomes (AGI) between $53,000 and $63,000, compared to $52,000
and $62,000 last year.
For married couples filing jointly, in which the spouse who makes the
IRA contribution is covered by a workplace retirement plan, the
income
phase-out range is $85,000
to $105,000, up from $83,000 to $103,000 last year.
Where an IRA contributor who is not covered by a workplace retirement
plan is married to someone who is covered, the deduction is phased
out
if the couple’s income
is between $159,000 and $169,000, up from $156,000 and $166,000 in
2007.
The phase-out range remains $0 to $10,000 for a married individual
filing a separate return who is covered by a retirement plan at work.
The worksheet in the instructions for Form 1040 Line 32 or Form 1040A
Line 17 can help a taxpayer figure the IRA deduction.
For 2008, the elective deferral (contribution) limit for employees
who
participate in 401(k), 403(b) and most 457 plans remains unchanged at
$15,500. This limit rises to
$16,500 in 2009. The catch-up contribution limit for those aged 50 to
70-½ remains at $5,000 in 2008 but rises to $5,500 in 2009.
The AGI phase-out range for taxpayers who contribute to a Roth IRA is
$159,000 to $169,000 for joint filers and qualifying widows and
widowers, compared to $156,000
to $166,000 in 2007. For singles and heads of household, the
comparable phase-out range is $101,000 to $116,000, compared to
$99,000 to $114,000 in 2007.
Standard Mileage Rates Adjusted for 2008
The standard mileage rate for business use of a car, van, pick-up or
panel truck is 50.5 cents per mile from Jan. 1, 2008, to June 30,
2008, up 2 cents from 2007. The rate
is 58.5 cents for each mile driven during the rest of 2008.
From Jan. 1, 2008, to June 30, 2008, the standard mileage rate for
the
cost of operating a vehicle for medical reasons or as part of a
deductible move is 19 cents per mile,
down a penny from 2007. The rate is 27 cents from July 1 to Dec. 31.
The standard mileage rate for using a car to provide services to
charitable organizations is set by law and remains at 14 cents a
mile.
As noted earlier, special rates
apply to the Midwest disaster area.
Exemptions Rise
The value of each personal and dependency exemption is $3,500, up
$100
from 2007. Most taxpayers can take personal exemptions for themselves
and an additional
exemption for each eligible dependent. An individual who qualifies as
someone else’s dependent cannot claim a personal exemption, and
though
personal and dependency
exemptions are phased out for higher-income taxpayers, the phase-out
rate is slower than in past years.
This is one of more than three dozen individual and business tax
provisions that are adjusted each year to keep pace with inflation. A
complete rundown of these
changes can be found in 2008 Inflation Adjustments Widen Tax
Brackets,
Change Tax Benefits.
Earned Income Tax Credit Rises
The maximum earned income tax credit (EITC) is:
$4,824 for people with two or more qualifying children, up from
$4,716
in 2007
$2,917 for those with one child, up from $2,853 last year and
$438 for people with no children, up from $428 in 2007.
Available to low and moderate income workers and working families,
the
EITC helps taxpayers whose incomes are below certain income
thresholds, which in 2008
rise to:
$41,646 for those with two or more children
$36,995 for people with one child and
$15,880 for those with no children
One in six taxpayers claim the EITC, which, unlike most tax breaks,
is
refundable, meaning that individuals can get it even if they owe no
tax and even if no tax is
withheld from their paychecks.
Taxes Lowered for Many Investors
The five-percent tax rate on qualified dividends and net capital
gains
is reduced to zero. In general, this reduction applies to investors
whose taxable income is below:
$65,100, if married filing jointly or qualifying widow or widower
$32,550, if single or married filing separately or
$43,650, if head of household.
Note that taxable income is normally less than total income. The
worksheet for Form 1040 Line 44, Form 1040A Line x or Schedule D and
its instructions provide details.
Kiddie Tax Revised
The tax on a child's investment income applies if the child has
investment income greater than $1,800 and is:
Under 18 old
18 years of age and had earned income that was equal to or less than
half of his or her total support in 2008 or
Over 18 and under 24, a student and during 2008 had earned income
that
was equal to or less than half of his or her total support.
Previously, the tax only applied to children under age 18. Form 8615
is used to figure this tax.
Self-Employment Tax Changes
For those who receive Social Security Retirement or disability
benefits, any Conservation Reserve Program (CRP) payments are now
exempt from the 15.3-percent
social security self-employment tax. Schedule SE and its instructions
and Publication 225, Farmer’s Tax Guide, have the details.
More farmers and self-employed people this year can choose the
optional methods for figuring and paying the self-employment tax.
These optional methods allow those
with net losses or small amounts of business income a way to obtain
up
to four credits of Social Security coverage. The income thresholds
for
both the farm optional
method and the nonfarm optional method are increased for 2008 and
indexed for inflation in future years. Choosing an optional method
may
increase a taxpayer’s
self-employment tax but it may also qualify him for the earned income
tax credit, additional child tax credit, child and dependent care
credit or self-employed health
insurance deduction. Schedule SE and its instructions have details.
www.richard.bonilla.com
Post by ~^ beancounter ~^I can help you make use of recent tax law changes for 2008. IRS Fact
sheet FS-2008-26 provides numerous tax tips and links to an English
and Spanish podcast that provides useful year-end tax planning
information.
And remember....if you make year-end contributions to charity, keep in
mind several important tax law provisions that have taken effect in
recent years. Details are in IRS news release IR-2008-138. Remember
that Dec. 31 is the last day for most of these actions to occur...
Contact me for additional information and services....
cheers
Richardwww.richard.bonilla.com