8. "Kiddie" taxBefore 529 plans and other dedicated education savings accounts were around, parents used to open investment accounts in their children's names. It also provided a way for the earnings to be taxed at the child's lower tax bracket rates.
That loophole came to an end with the creation of the "kiddie" tax. This levy kicks in when a child's account earns more than a certain amount ($1,800 in 2008, $1,900 in 2009) and requires that excess earnings be taxed at the parents' highest marginal tax rate, which could be as high as 35 percent. That rule lasts until the child reaches a certain age, at which time the youngster's lower rates then apply.
Originally, the kiddie tax applied until a child turned 14. For the last few years, however, lawmakers have been pushing that age upward. For 2008 tax purposes, the parents' higher rates will be collected on investment earnings until the dependent child turns 19, or 24 if the youngster is a full-time student.
Part of the reason for the change was to prevent wealthier parents from taking advantage of another 2008 tax-law change, the zero percent capital gains on lower-income investors.
9. Required retirementThe stock market downturn has caused problems for a lot of investors. Particularly hard hit are retirees who depend upon their investments to help meet day-to-day living expenses. Investors age 70½ or older also must factor in mandatory withdrawals, known as required minimum distributions, or RMDs, from their tax-deferred retirement accounts, such as traditional IRAs or 401(k)s.
To help these older investors weather the market downturn, lawmakers enacted a measure to remove the distribution requirement for 2009. They did not, however, extend the tax relief to septagenarians who had to make RMDs in 2008.
Because tax rules allow for a retirement plan owner's first required minimum distribution to be delayed until April 1 of the year following the one in which they turn 70½, some taxpayers will be making their 2008 withdrawals this year. Don't be confused by the law exempting 2009 required minimum distributions; your 2008 RMD, even if you take it in 2009, is still due.
You do, however, get one break. Usually deferment of the first RMD means that you end up taking two distributions in the same year, the one you postponed until April and the current year's distribution due by Dec. 31. But with 2009's withdrawal suspended, you'll only have to take out the 2008 amount.
10. Expiring tax breaks revivedAmong the most persistent recurring tax laws are those known as extenders. The name comes from the fact that these tax breaks technically are temporary. But Congress usually extends a handful of particularly popular provisions for another year or two. Last year was no exception.
The laws that were given new life in 2008 include:
- Tuition and fees deduction -- Up to $4,000 of qualified college tuition and fees paid last year can be deducted.
- Educator deduction -- Teachers and other qualified educators can get a tax deduction for up to $250 spent in 2008 on classroom supplies.
- State and local sales tax write-off -- If you paid more state and local sales taxes than state income tax last year, the option to deduct the sales tax amount as an itemized expense also was extended.
Although these deductions are still temporary, when Congress renewed them in 2008, they also extended the tax breaks through 2009. So this year at least, we won't have to wait for Capitol Hill to rewrite this part of the usual tax script.
Finally, in addition to the new 2008 tax code changes and prior year carryovers, many pre-existing laws have new dollar amounts this filing year, thanks to inflation adjustments.