10 new tax laws to know

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Federal lawmakers simply cannot resist tinkering with the tax code. By one estimate, more than 500 tax law changes were made last year alone.

Many of the 2008 changes were made, not surprisingly, in connection with the slowing economy in general and the housing crisis in particular. But many tax-law tweaks last year also were in areas that seem to get constant attention on Capitol Hill.

Such revisions of existing laws often leave taxpayers feeling like characters in an IRS version of the movie “Groundhog Day,” each year facing essentially the same tax challenges. The good news is that such “tax script” revisions are at least somewhat familiar. The better news is that these rewrites, as well as some totally new tax laws, offer ways to trim tax bills and provide a happier ending to your 2008 tax-filing circumstances.

Taxing matters
Several tax code changes will affect 2008 returns. Some are new. Some are revisions of long-standing laws. A few are holdovers of earlier changes. And a couple might affect your tax planning for 2009.
2008 tax law changes
  1. Rebate Recovery Credit
  2. First-time homebuyer’s credit
  3. Standard property tax deduction
  4. Surviving spouse home sale exclusion
  5. Housing tax-break holdovers
  6. AMT inflation adjustments
  7. Zero capital gains
  8. Kiddie tax toughened
  9. Required retirement distributions
  10. Expired tax breaks extended

1. Rebate Recovery Credit

In 2001, George W. Bush began his first term as U.S. president with tax legislation that offered millions of taxpayers a rebate. The 43rd president closed out his second term last year with another tax measure that distributed millions of tax rebate checks.

Bush’s tax legacy continues this filing season. Last year’s economic stimulus payments, or rebates as they were popularly called, actually were credits against 2008 income. And some people may be able to cash in on the rebates this filing season by claiming the Recovery Rebate Credit.

This new credit, available only on 2008 returns, could help filers who last year did not receive the maximum credit of up to $600 for single taxpayers, $1,200 for married couples filing jointly. Changed tax circumstances, such as a new child in the family, also could get you a bit more rebate money on your 2008 return.

The Recovery Rebate Credit can be claimed on all three versions of the 1040. You’ll need to know how much you received last year in order to calculate what you’re eligible for now.

2. First-time homebuyer credit

The dismal housing market prompted lawmakers to create several new tax breaks.

Thanks to the Housing and Economic Recovery Act of 2008, some first-time homebuyers can claim a credit of 10 percent of the home’s purchase price, up to a maximum of $7,500. You could qualify as a first-time buyer if you have not owned a home in the three years prior to the qualifying purchase.

There are, however, some limitations. The credit phases out for higher-income taxpayers. It is available only for primary homes purchased between April 9, 2008, and June 30, 2009. And it’s not a true credit. The tax break must be paid back, without interest, in equal payments over 15 years. Congress is considering expanding this first-time homebuyer credit.

3. Standard property tax deduction

The 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 spouse

One 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 holdovers

Don’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 patch

The 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 gains

Capital 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.

8. “Kiddie” tax

Before 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 retirement

The 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 revived

Among 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.