2008 IRS Tax Law changes
March 22, 2009 advice, Finance, money, Taxes
When you file your taxes for 2008, there will be several important changes to keep in mind. For the sake of brevity, this article will only focus on the changes that affect most Americans. Please keep in mind that there are many other changes that might affect your tax returns.
Tax Deductions: First of all, taxpayers will enjoy larger exemptions and standard deductions for 2008. For ’08, each personal exemption you can claim is worth $3,500, which is $100 more than in ’07. Also, the standard deduction for a married couple is up $200 to $10,900. For single filers, the amount increases $100 to $5,450, and heads of household can claim $8,000 in ’08, which is up $150 from ’07.
Those who itemize can still to choose to deduct their state sales tax payments instead of deducting state and local income taxes. However, this is only useful if you actually tracked and recorded your sales taxes paid in ’08.
Congress also reinstated the deduction for up to $4,000 of college tuition and fees for ’08 and ’09.
Taxpayers who don’t itemize, can now take a deduction for property taxes paid. This would give them an even larger standard deduction. Joint filers can deduct up to $1,000 of property taxes that were paid in ’08. Single filers can deduct up to $500.
Tax Credits: If you purchased a primary residence after April 8, 2008 and are a “first-time” homebuyer, you can qualify for a tax credit equal to 10% of up to $75,000 of the purchase price. To claim this credit, you must not have owned a home in the US in the previous three years, and the credit phases out if you’re over $150,000 adjusted gross income for joint filers or $75,000 for single filers. It’s also only refundable to the extent it exceeds your regular tax liability. So, if it more than offsets your tax liability, you’ll get a refund check. It’s important to note that the taxpayer repays this credit over 15 years. The repayment starts two years after the year the credit is claimed. So, if you claim a $7,500 tax credit for a purchase in ’08, you’ll have to pay an extra $500 of income tax from 2010 through 2025. Also, if you sell the house before the credit is fully repaid, the balance is due in the year of the sale. (How’s that for a “tax break” with a few strings attached?)
There’s also been a change in the childcare tax credit. The income threshold needed to qualify to claim the child tax credit (if it exceeds your regular income tax bill) has been dropped from $12,500 to $8,500 for ’08.
Other Important Tax Changes: The long-term capital gains rate for the lower income brackets is now 0%. Prior to ’08, capital gains from the sale of assets held longer than one year, were taxed at a maximum rate of 5%, if you were in the 10 or 15 percent tax brackets. However, the 5% maximum rate now drops to 0% through 2010. The 15% maximum tax rate on long-term capital gains for taxpayers in higher brackets didn’t change. In ’08, the special 5% maximum rate on dividends (for taxpayers in the 10 and 15 percent tax brackets) also drops to 0%.
The income levels for contributing to a Roth IRA, or deducting a contribution to a traditional IRA, have been raised. If you’re covered by a retirement plan at work, you can take a full IRA deduction if you’re married and your modified adjusted gross income is less than $85,000, or $53,000 if you’re single. A partial deduction is allowed until your adjusted gross income reaches $105,000 if you’re married, or $73,000 if you’re single. Also, the opportunity to contribute to a Roth IRA is now phased out as your modified adjusted gross income rises between $159,000 and $169,000 if you’re married, or $101,000 to $116,000 if you’re single.
Beginning in ’08, Congress made a slight change to the “kiddie tax”. In ’07, a child’s unearned income over $1,700, such as gains and dividends, was taxed at the parents’ marginal rate until the year the child is 18. The threshold increases to $1,800 for ’08, and the age is raised to 19. For full-time students whose earned income is less than half their support, the age has increased to 24.
