3. Standard property tax deductionThe same law that created the first-time homebuyer credit also provides a new home-related deduction for taxpayers who don't itemize their expenses.
Up to $500 for single homeowners, double that for joint filers, can be added to the taxpayer's standard deduction amount. This option will help homeowners who don't have enough deductions to itemize, but who paid property tax for their personal residence in 2008.
The standard property tax deduction originally was for the 2008 tax year only. However, as part of another tax bill enacted a few months later, the tax break was extended to 2009.
4. Home sale exclusion for surviving spouseOne of life's most difficult decisions is whether to keep or sell a home after the death of a spouse. It also often posed a costly tax dilemma for a widow or widower. Usually, a married couple can exclude up to $500,000 in profit on the sale of their home. When a husband or wife died, the house had to be sold in the year of death for that full exclusion amount to apply.
Now, however, a tax law that took effect in 2008 will allow the surviving spouse to claim the $500,000 exclusion as long as he or she sells the home within two years after the spouse's date of death. The widow or widower must remain unmarried and all other tests, such as residency and ownership, also must be met.
5. Housing break holdoversDon't forget a couple of real estate-related tax break holdovers that could save eligible taxpayers some money: foreclosure debt relief and deductible private mortgage insurance payments.
In late 2007, the Mortgage Debt Forgiveness Act helped ease the double whammy of home foreclosure: losing a residence and then owing tax on any amounts of debt that were written off, or forgiven, by the lender. Now up to $2 million of that amount, known as cancellation of debt income, is not taxed. The law applies to home foreclosures, short sales or loan renegotiations from Jan. 1, 2007, through Dec. 31, 2012.
Some homeowners who must pay private mortgage insurance premiums in connection with their loans also get a tax break. They can claim some of those costs as a deduction on their 2008 returns. This deduction began with the 2007 tax year and was subsequently extended to PMI on new mortgages issued from 2008 through 2010.
6. Alternative minimum tax patchThe alternative minimum tax, or AMT, is a parallel tax system created 40 years ago to ensure that the rich had to pay at least some tax. Nowadays, however, more middle-class taxpayers find they are potential AMT payers because the tax is not indexed annually to account for inflation.
To keep these filers off the AMT roll, Congress has approved temporary fixes for the tax which increase the amount of income that is excluded from the AMT.
The 2008 patch raised the exemptions to:
- $69,950 for a married couple filing a joint return and qualifying widows and widowers, up from $66,250;
- $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.
7. Zero capital gainsCapital gains tax rates already are lower than ordinary tax bracket rates, but beginning in 2008 some investors will owe no tax on profits from the sale of long-term holdings.
Effective Jan. 1, 2008, the 5 percent tax rate on qualified dividends and capital gains that applied to taxpayers in the 10 percent and 15 percent tax brackets is zeroed out for some.
While no taxes generally are good taxes, the zero percent rate does have some limitations. Some young investors are prohibited from taking advantage of the zero-percent option. Some older taxpayers might find untaxed capital gains could produce unexpected taxes on their Social Security benefits.