Start Preparing Now! Tax Law Changes for 2008 |

Start Preparing Now! Tax Law Changes for 2008

December 10, 2008

Highlights of the Tax Law Changes for 2008

For tax planning, it is always helpful to look at tax law changes at year-end to see what changes may affect you and to consider what actions you may be able to take in order to take advantage of these changes, thus, saving taxes and money.

To see a summary of the changes that impact most individual taxpayers in 2008, please visit http://www.irs.gov/pub/irs-drop/rp-07-66.pdf . Also included are some key provisions of the “Economic Rescue Bill” and the “Housing Assistance Bill”.

Marriage Penalty Relief. Current law makes the standard deduction for married couples filing jointly and qualified widowers to be double that of single tax filers. This puts the standard deduction for 2008 at $10,900. In addition to the increased standard deduction, the 15% tax bracket has been increased for married tax filers to further reduce the impact of the marriage penalty.

Child Tax Credit. The child tax credit is $1,000 through 2010. The credit is, however, phased out for higher incomes.

Dependents. A dependent is someone you support and for whom you can claim a dependency exemption. In 2008, each dependent you claim entitles you to receive a $3,500 reduction in your taxable income (see exemptions below). In 2008, each dependent under the age of 17 also receives a tax credit of $1,000. The credit is, however, phased out for at higher incomes.

Exemptions. Each exemption you claim reduces your taxable income by $3,500 for 2008. You receive an exemption for yourself, your spouse and one for each of your dependents.

“Kiddie Tax”. The Kiddie Tax amount for 2008 is $1,800. The “Kiddie Tax” applies to a child’s unearned income regardless of source and requires a calculation of the parents’ allowable tax, which is the increase in the parents’ tax liability that results from adding to the parents’ taxable income the net unearned income of all of the parents’ children under 18. The parent of a child under the age of 18 (some rules apply to full-time students under 24) may elect to include the interest and dividend income of the child in excess of $1,800 in his or her gross income for the 2008 tax year by filing Form 8814.

Education Tax Credits. The Hope and Life Learning education tax credits are $1,800 and $2,000, respectively, for 2008.

Student Loan Interest. Student loan interest, up to $2,500 in 2008, may be deducted “above the line” by qualifying taxpayers.

Additional Standard Deduction for Homeowners: Under the “Economic Rescue Bill” (The Emergency Economic Stabilization Act of 2008), homeowners (who do not itemize) may claim an additional standard deduction for real property taxes, up to $500 ($1,000 for joint filers).

Other key provisions of the Economic Rescue Bill relating to individuals:

The Alternative Minimum Tax (AMT) exemption amount for individuals is increased for tax years beginning in 2008, to: $69,950 for married individuals filing a joint return and surviving spouses; $46,200 for unmarried individuals; and $34,975 for married filing separately.
For tax years beginning in 2008, the nonrefundable personal tax credits are allowed to the full extent of the taxpayer’s regular tax and AMT liability.
The election to deduct state and local general sales taxes in lieu of state and local income taxes is extended to tax years beginning before January 1, 2010.
The deduction for qualified tuition and related expenses is extended for two years, through December 31, 2009.
The deduction for educator expenses, up to $250, has been extended to tax years beginning in 2008 and 2009.
There are changes in the allowable child tax credit and the definition of a “qualifying child”. Please call for more information, or consult with your tax expert or preparer.
There are new tax credits for tax years beginning after December 31, 2008 for new qualified plug-in electric drive motor vehicles. $2,500 plus $417 for each kilowatt hour of traction battery capacity in excess of four kilowatt hours. (We are sure there will be more on this as Congress has been providing relief to the “Big 3” automakers and attempting to encourage the automaker to develop new “greener” vehicles.)
There are many other provisions in the Economic Rescue Bill, including numerous provisions that apply to small businesses.

Please call for more information, or consult with your tax expert or preparer.

Reduced Taxes on Capital Gains. Capital gains tax rates (long-term) reduce to 0% and 15% respectively, for 2008. These capital gains rates are for property that was held for at least one year.

Capital Gain or Loss. This is the total capital gain you realized from the sale of assets. Any short-term capital gain is taxed as normal income. Any long-term capital gain is taxed as follows:

Long-term capital gains are taxed at either 0% or 15%. The tax is 0% for the portion of your gain that would have been taxed at 15% or lower tax if it were a short-term gain. The tax is 15% for any of your capital gain that would have been taxed at a rate higher than 15% if it were considered a short-term gain. However, there are different rules for capital gains that come from collectibles, section 1202 gains or un-recaptured 1250 gains. These types of capital gains are taxed at 28%, 28% and 25% respectively (unless your ordinary income tax bracket is a lower rate).

Reduced Taxes on Dividends. The current law applies the capital gains tax rates to qualified dividends paid from most U.S. corporations and certain qualified foreign corporations. All qualified dividends will appear in column 1b of Form 1099-DIV, which should be sent to you in January of the year following the dividend payment. Taxpayers in the 10% or 15% bracket pay 0% percent in 2008. Taxpayers in tax brackets above 15%, pay a 15% rate of tax on dividends paid through December 31, 2008.

IRA and Retirement Plan Deductions. The IRA deduction and contribution limits are: for most individuals, $5,000 for 2008. Those age 50 and over can contribute $6,000.
Miscellaneous. The 2008 OASDI wage base for FICA and self-employment purposes is $102,000. The 2008 wage threshold for the “Nanny Tax” reporting is $1,600.

Mileage Rates. The standard mileage rates for all business use of a car are: 50.5 cents per mile for 1/01/08 through 6/30/08; and 58.5 cents per mile for 7/01/08 through 12/31/08.
Housing Assistance. Due to the continuing slump in the housing market, Congress passed and the President signed into law the Housing and Economic Recovery Act of 2008. One key component is a credit to a first-time homebuyer who purchases a principal residence after April 8, 2008 and before July 1, 2009, up to $7,500. The credit is recaptured over 15 years, but with no interest charge. Note that this credit for first-time home buyers expires June 30, 2009 (closing/recording date) under current law.

Information provided herein is general and not intended to provide investment advice. We cannot and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues.

About Peter H. Lunding, PLLC: Lawyer, Attorney at Law, proudly offering business, tax and corporate law, and estate planning representation to clients. Serving Wake Forest, NC, Raleigh, NC, Youngsville, NC and Rolesville, NC. Also providing Tax Returns, Tax Accounting and Tax Preparation Services. Call (919) 562-5377 for an appointment to discuss protecting and preserving your business and personal assets. (919) 562-5377

[photo credits: dizznbonn and x_jamesmorris on Flickr]