Tax Tips

Inflation Adjustments Could Cut Your Tax Bill

By Mary Beth Franklin, Senior Editor, Kiplinger's Personal Finance

February 9, 2009

As you get ready to tackle your 2008 federal tax return, there are plenty of changes you should know about -- and many of them could save you money. For starters, tax brackets, personal exemptions and standard deductions have all been adjusted for inflation. That means if your 2008 income was the same as your 2007 income, your tax bill will decline.

The personal exemption, which you claim for yourself and each dependent is $3,500 for 2008, up $100 from the previous tax year. If you’re in the 25% bracket that will save you $25 for each exemption you claim. So for a husband and wife and two kids, the savings will add up to $100.

The standard deduction for those taxpayers who do not itemize increases for each filing status. Singles get a $100 hike from 2007 to $5,450. Married couples filing jointly see their standard deduction rise to $10,900, up $200 from the previous year. And, the standard deduction for heads of household who do not itemize deductions increases $150 to $8,000.

Plus, there’s a new standard deduction in 2008 for homeowners who pay state and local real estate taxes but who do not itemize their deductions. Normally, these homeowners—often retirees who have paid off their mortgage and who don’t have enough other deductions to make itemizing worth while—would simply miss out on the deduction. But for 2008, individuals can increase the amount of their standard deduction by the amount of their real property taxes they paid in 2008, up to $500. Married couples filing jointly can claim an additional standard deduction of up to $1,000.

For 2008, the income tax brackets have become broader meaning more of your income is taxed at lower rates. All of the tax brackets -- 10%, 15%, 25% 28% 33% and 35% -- kick in at approximately 2% higher levels of income than in 2007. For example, the 10% bracket on 2008 joint returns covers the first $16,050 of taxable income. That’s $400 more than in 2007. Taxing that amount at 10% rather than 15% saves couples $20. The higher your income, the more you save as more dollars fall into lower brackets.

Add all the inflation-adjusted changes together, and it adds up to real tax savings. For example, the higher standard deduction and personal exemption amounts and the inflation-adjusted tax brackets will trigger a $130 savings for a single person who earned $50,000 and claims the standard deduction—which two-thirds of taxpayers do. A married couple with two children and a household income of $100,000 will save $310 on their 2008 tax return compared to the year before thanks to the inflation adjustments.

And that’s just the beginning. There are hundreds of new tax breaks for 2008 targeting homeowners, consumers, students, teachers, jobseekers and retirees. In the follow weeks, we’ll send you daily tax filing tips on how to cut your 2008 taxes to the bone.

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