What's New for Tax Savings?
Here are the 2008 tax law changes you need to know.
By Kevin McCormally, Editorial Director, Kiplinger.com
December 2008
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What’s new for your 2008 tax return? A lot. For starters, tax brackets, personal exemptions and standard deductions have been adjusted for inflation. First-time home buyers get extra help from Uncle Sam, and there is more relief for disaster victims.
Let’s take a closer look . . .
Adjusting the tax law for inflation means that if your 2008 income remained the same from 2007, your tax bill will decline. The higher standard deduction and exemption amounts and the inflation-adjusted tax brackets will trigger a $130 savings for a single person who earns $50,000 and claims the standard deduction. A married couple who earned $100,000 in 2007 and '08 and who have two children will enjoy a $310 savings thanks to the inflation adjustments. With these numbers, you'll reap tax savings -- when you file your 2008 return this spring.
The personal exemption -- which you claim for yourself and each dependent -- is $3,500 for 2008, up $100 from the previous tax year. For folks in the 25% bracket, that will save 25 bucks for each exemption claimed. For a husband and wife with two kids, the savings will add up to $100.
The standard deduction -- which is used by nearly two-thirds of all taxpayers -- 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, $200 more than they claimed on 2007 returns. The standard deduction for heads of household who do not itemize deductions increases $150, to $8,000.
The tax brackets have become broader; meaning more of your income is taxed at lower rates. Thanks to inflation in the past year, the 10%, 15%, 25%, 28%, 33%, and 35% tax brackets all 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. See our 2008 Tax Tables.
More 2008 Tax Law Changes and Savings
In addition to annual inflation adjustments, other sections of the tax code have been updated.
Tax Credit of Up to $7,500 for First-time Home Buyers. If you purchased a primary residence after April 8, 2008, and are a "first-time" home buyer, you can qualify for a new tax credit equal to 10% of up to $75,000 of the purchase price.
To be eligible, you must not have owned a residence in the U.S. in the previous three years. The credit phases out between $150,000 and $170,000 of adjusted gross income for joint filers and $75,000 to $95,000 for single filers. It is refundable to the extent it exceeds your regular tax liability –- which means that if it more than offsets your tax liability, you'll get a refund check -- but does not offset the alternative minimum tax.
Beware, though: This credit is more like an interest-free loan from Uncle Sam because it will be recaptured ratably over 15 years. The recapture period starts two years after the year the credit is claimed. Thus, if you claim a $7,500 tax credit for a purchase in 2008, you will have to pay an extra $500 of income tax in 2010 and in later years. If you sell the residence before the credit is fully repaid, the balance is due in the year of the sale. (If your profit on the sale is less than the unrecaptured credit, though, the amount due is limited to the amount of your profit.)
Higher Income Limits for Deductible IRAs and for Roth IRAs. If you are covered by a retirement plan at work, you can take a full IRA deduction if your modified adjusted gross income is less than $85,000 (married filing jointly) or $53,000 (single or head of household). A partial deduction is allowed until your adjusted gross income reaches $105,000 if you are married filing jointly or $73,000 if you are single or a head of household.
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 are married filing jointly or $101,000 to $116,000 if you are single or a head of household.
Additional Standard Deduction Amount for Property Taxes Paid. Non-itemizers who pay real estate taxes can claim even larger standard deductions. Joint filers can add in up to $1,000 of property taxes paid to the amounts shown above. Singles can add in up to $500 of real estate tax payments.
Reduction in Itemized Deductions and Personal Exemptions for High-Income Taxpayers. Currently, itemized deductions and personal exemptions are phased out as your income rises. In 2008, the reduction of itemized deductions occurs once your adjusted gross income exceeds $159,950, regardless of your filing status. Your itemized deductions are reduced by 1% of the amount by which your AGI exceeds $159,950, but you can never lose more than 80% of your itemized deductions. Also, your medical expenses, investment interest deduction, deductible gambling losses and any casualty and theft losses are not subject to the cut.