Letter to your client: Tax changes for your 2008 return
By now you should have received your Forms W2, 1099s, and broker's statements, and you may be getting ready to organize your tax records. Some things have changed for 2008 and I thought you might find some of the following information useful as you prepare to file and look ahead to 2009.
Increases in standard deduction, the personal exemption and some of the phaseout limits for 2008 include:
- The personal exemption is $3,500 - up by $100 from 2007.
- The standard deduction for married filing jointly rises to $10,900 - up by $200 from 2007. For single filers, the amount increases to $5,450 in 2008- up by $100 over 2007. And heads of household can claim $8,000 in 2008- a jump of $150 from 2007.
- The income phaseout limits for the education credits and the student loan interest deduction have been increased.
- The phaseout limit for itemized deductions has been increased to $159,950. Beginning in 2008, the amount by which these excess itemized deductions are reduced is only 1/3 of the amount of the reduction that would have applied under prior law.
Changes to AMT provisions
Taxpayers can use nonrefundable personal credits including the child tax credit, the adoption credit, and the saver's credit in 2008 to reduce their AMT liability.
There is a change to the credit for prior year minimum tax. The credit is now the greater of 50% of the long-term unused minimum tax credit or the amount of the AMT refundable credit for the taxpayer's preceding tax year.
Increased contribution limits for traditional IRAs
The contribution limit to a traditional IRA for 2008 will be increased to the smaller of the following amounts:
- $5,000, or
- Your taxable compensation for the year.
Catch-up contributions to a traditional IRA for those of you who were age 50 or older before 2009 will be the smaller of the following amounts:
- $6,000, or
- Your taxable compensation for the year.
Modified AGI limit for traditional IRA contributions increased
For 2008, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified adjusted gross income (AGI) is:
- More than $85,000 but less than $105,000 for a married couple filing a joint return or a qualifying widow(er),
- More than $53,000 but less than $63,000 for a single individual or head of household, or
- Less than $10,000 for a married individual filing a separate return.
For 2008, if you either live with your spouse or file a joint return, and your spouse is covered by a retirement plan at work, but you are not, your deduction is phased out if your AGI is more than $159,000 but less than $169,000. If your AGI is $169,000 or more, you cannot take a deduction for contributions.
Health/medical-related tax changes
For 2008, the minimum annual deductible, maximum annual deductible, and the maximum out-of-pocket expenses limit have increased for Archer Medical Savings Accounts and Health Savings accounts. For 2008, the maximum amount of qualified long-term care premiums includible as medical expenses has increased.
Capital gains taxes lowered
The 5 percent tax rate for married taxpayers with income under $65,100 and single taxpayers with income under $32,500 has been reduced to zero percent for 2008. The 15 percent maximum tax rate on long-term capital gains for taxpayers in higher brackets stays the same. Similarly in 2008, the special 5 percent maximum rate on dividends of taxpayers in the 10 and 15 percent tax brackets drops to zero percent through 2010.
First-time homebuyer credit
Homebuyers may be able to claim a one-time tax credit of up to $7,500 ($3,750 if married filing separately) or 10 percent of the purchase price of a home (whichever is smaller) if they purchased their main home in the United States after April 8, 2008, and before July 1, 2009, and did not own any other main home during the three-year period ending on the date of purchase. Right now, the law states that the taxpayer generally must repay the credit over a 15-year period in 15 equal installments. However there is legislation pending that would remove the payback requirement.
Exclusion on sale of main home by surviving spouse
For sales after 2007, the maximum exclusion on the sale of a main home by an unmarried surviving spouse is $500,000 if the sale occurs no later than 2 years after the date of the other spouse's death.
Standard mileage rates
For 2008, the standard mileage rate for the cost of operating a car for business use is:
- 50.5 cents per mile for the period January 1 through June 30, 2008, and
- 58.5 cents per mile for the period July 1 through December 31, 2008.
For 2008, the standard mileage rate for the cost of operating a car for medical reasons or as part of a deductible move is:
- 19 cents per mile for the period January 1 through June 30, 2008, and
- 27 cents per mile for the period July 1 through December 31, 2008.
For 2008, the standard mileage rate for the cost of operating your car for charitable purposes remains 14 cents per mile.
Standard deduction for property taxes
Homeowners who take the standard deduction can claim an additional deduction of the smaller of $500 ($1,000 for married taxpayers filing jointly) or the actual amount paid for payment of real estate property taxes in 2008.
The rules regarding the age of a child whose investment income may be taxed at the parent's tax rate have changed for 2008. These rules continue to apply to a child under age 18 at the end of the year but, beginning in 2008, will also apply in certain cases to a child who either:
- Was age 18 at the end of 2008 and did not have earned income that was more than half of the child's support, or
- Was a full-time student over age 18 and under age 24 at the end of 2008 and did not have earned income that was more than half of the child's support.
Special tax relief is available for taxpayers who suffered catastrophic losses from severe weather occurring between May 19 and August 1, including last summer's flooding in Iowa. The benefits also are available to those affected by disasters in parts of Nebraska.
The relief includes liberalized casualty-loss rules and additional exemptions and deductions for people who came to the aid of disaster victims
- The social security and Medicare wage threshold for household employees has been increased to $1,600.
- Filing late. If you file more than 60 days late the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
- There are some new addresses for mailing paper returns.
- Recovery rebate credit. Any economic stimulus payment you received in 2008 is not considered taxable income. But the IRS wants you to declare the amount of the payment on this year's form to see if you are eligible for what's known as the rebate recovery credit.
Economic and tax policy have been discussed and debated widely in 2008, and in some cases the debates may have obscured the actual tax rules. Here are some reminders and clarifications from Internal Revenue resources.
Tax provisions scheduled to expire in 2008 that were reinstated by the Emergency Economic Stabilization Act (often called the Bailout bill) included:
- Education deductions and credits -- The tuition and fees deduction, the education credits, and the educator expenses deduction were extended.
- State and local tax deduction as an alternative to deducting state and local income tax was extended.
- Deduction for mortgage insurance premiums paid on a qualified residence has been extended through 2009.
- The AMT "patch" was passed as part of this legislation. For tax year 2008, the AMT exemption amounts will increase to $46,200 for single and head of household filers, $69,950 for married filing jointly or qualifying widower, and $34,975 for married filing separately.
The IRS also reminds us that:
- In 2008 retirees with tax-deferred retirement funds such as 401(k)s and IRAs must take minimum amounts out of those funds once they reach age 70 1/2. The required minimum disbursements are suspended for 2009.
- The self-employment tax rules apply no matter how old you are and even if you are already receiving Social Security or Medicare.
- Some energy credits that were available in 2006 and 2007 are not allowable this time around.
- You must report foreign source income.
- There are strict rules for recordkeeping for gifts to charity by cash and for gifts other than by cash and check.
If you have any questions about any of these topics or about any circumstances that may have changed for you this year please do not hesitate to contact your accountant.