2008 Tax Law Change Highlights

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Some of the changes taxpayers will see on their 2008 tax returns include: a rise in AMT exemptions, a new standard property tax deduction, a special first-time homebuyer credit and expanded retirement savings incentives. Economic Stimulus Payments Tax Free

Economic stimulus payments are not taxable, and 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. 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.

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

Currently, these exemption amounts will drop to $45,000, $22,500 and $33,750, respectively, in 2009.

Expiring Tax Breaks Renewed

The following tax breaks that expired at the end of 2007 were renewed for 2008 and 2009. Eligible taxpayers can claim:

  • The deduction for state and local sales taxes
  • The educator expense deduction
  • The tuition and fees deduction
  • The District of Columbia first-time homebuyer credit

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.

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

Almost two thirds of taxpayers choose to take the standard deduction rather than itemizing deductions. 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

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 qualify. The maximum deduction is $500, or $1,000 for joint filers.

Also new for 2008, a taxpayer can increase their standard deduction by the net disaster losses suffered from a federally declared disaster.

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 is repaid each year as an additional tax. Income limits and other special rules apply.

Contribution Limits Rise for IRAs and Other Retirement Plans

More people can make tax-deductible contributions to a traditional IRA this filing season. 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.

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.

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.

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.

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 years 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.

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.

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.