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Income Tax Tips for 2008 Returns
Economic Stimulus Payments Tax Free
Economic stimulus payments are not taxable, and they
are not reported on 2008 tax returns. However, the stimulus
payment does affect whether a taxpayer can claim the
Recovery Rebate Credit and how much credit he or she
can get. The credit is figured like last year's economic
stimulus payment except that the amounts are based on
tax year 2008 instead of 2007. A taxpayer may qualify
for the Recovery Rebate Credit if, for example, she
did not get an economic-stimulus payment or had a child
in 2008. See Fact Sheet 2009-3 for details. In most
cases, the IRS can figure the credit. The instructions
for Forms 1040, 1040A and 1040EZ have more information.
Standard Deduction Increased for Most Taxpayers
Nearly two out of three taxpayers choose to take the
standard deduction rather than itemizing deductions
such as mortgage interest and charitable contributions.
The basic standard deduction is:
$10,900 for married couples filing a joint return
and qualifying widows and widowers, a $200 increase
over 2007
$5,450 for singles and married individuals filing
separate returns, up $100 and
$8,000 for heads of household, up $150
Higher amounts apply to blind people and senior citizens.
The standard deduction is often reduced for a taxpayer
who qualifies as someone else’s dependent.
New this year, taxpayers can claim an additional standard
deduction, based on the state or local real-estate taxes
paid in 2008. Taxes paid on foreign or business property
do not count. The maximum deduction is $500, or $1,000
for joint filers.
Also new for 2008, a taxpayer can increase his standard
deduction by the net disaster losses suffered from a
federally declared disaster. A worksheet is available
in the instructions for Forms 1040 and 1040A.
First-Time Homebuyer Credit
Those who bought a main home recently or are considering
buying one may qualify for the first-time homebuyer
credit. Normally, a taxpayer qualifies if she didn't
own a main home during the prior three years. This unique
credit of up to $7,500 works much like a 15-year interest-free
loan. It is available for a limited time only -- on
homes bought from April 9, 2008, to June 30, 2009. It
can be claimed on new Form 5405 and is repaid each year
as an additional tax. Income limits and other special
rules apply.
Contribution Limits Rise for IRAs and Other
Retirement Plans
This filing season, more people can make tax-deductible
contributions to a traditional IRA. The deduction is
phased out for singles and heads of household who are
covered by a workplace retirement plan and have modified
adjusted gross incomes (AGI) between $53,000 and $63,000,
compared to $52,000 and $62,000 last year.
For married couples filing jointly, in which the spouse
who makes the IRA contribution is covered by a workplace
retirement plan, the income phase-out range is $85,000
to $105,000, up from $83,000 to $103,000 last year.
Where an IRA contributor who is not covered by a workplace
retirement plan is married to someone who is covered,
the deduction is phased out if the couple's income is
between $159,000 and $169,000, up from $156,000 and
$166,000 in 2007.
The phase-out range remains $0 to $10,000 for a married
individual filing a separate return who is covered by
a retirement plan at work.
The worksheet in the instructions for Form 1040 Line
32 or Form 1040A Line 17 can help a taxpayer figure
the IRA deduction.
For 2008, the elective deferral (contribution) limit
for employees who participate in 401(k), 403(b) and
most 457 plans remains unchanged at $15,500. This limit
rises to $16,500 in 2009. The catch-up contribution
limit for those aged 50 to 70-½ remains at $5,000 in
2008 but rises to $5,500 in 2009.
The AGI phase-out range for taxpayers who contribute
to a Roth IRA is $159,000 to $169,000 for joint filers
and qualifying widows and widowers, compared to $156,000
to $166,000 in 2007. For singles and heads of household,
the comparable phase-out range is $101,000 to $116,000,
compared to $99,000 to $114,000 in 2007.
Standard Mileage Rates Adjusted for 2008
The standard mileage rate for business use of a car,
van, pick-up or panel truck is 50.5 cents per mile from
Jan. 1, 2008, to June 30, 2008, up 2 cents from 2007.
The rate is 58.5 cents for each mile driven during the
rest of 2008.
From Jan. 1, 2008, to June 30, 2008, the standard mileage
rate for the cost of operating a vehicle for medical
reasons or as part of a deductible move is 19 cents
per mile, down a penny from 2007. The rate is 27 cents
from July 1 to Dec. 31.
The standard mileage rate for using a car to provide
services to charitable organizations is set by law and
remains at 14 cents a mile. As noted earlier, special
rates apply to the Midwest disaster area.
Exemptions Rise
The value of each personal and dependency exemption
is $3,500, up $100 from 2007. Most taxpayers can take
personal exemptions for themselves and an additional
exemption for each eligible dependent. An individual
who qualifies as someone else's dependent cannot claim
a personal exemption, and though personal and dependency
exemptions are phased out for higher-income taxpayers,
the phase-out rate is slower than in past years.
Earned Income Tax Credit Rises
The maximum earned income tax credit (EITC) is:
$4,824 for people with two or more qualifying children,
up from $4,716 in 2007
$2,917 for those with one child, up from $2,853 last
year and
$438 for people with no children, up from $428 in
2007.
Available to low and moderate income workers and working
families, the EITC helps taxpayers whose incomes are
below certain income thresholds, which in 2008 rise
to:
$41,646 for those with two or more children
$36,995 for people with one child and
$15,880 for those with no children
Taxes Lowered for Many Investors
The five-percent tax rate on qualified dividends and
net capital gains is reduced to zero. In general, this
reduction applies to investors whose taxable income
is below:
$65,100, if married filing jointly or qualifying widow
or widower
$32,550, if single or married filing separately or
$43,650, if head of household.
Note that taxable income is normally less than total
income. The worksheet for Form 1040 Line 44, Form 1040A
Line x or Schedule D and its instructions provide details.
Kiddie Tax Revised
The tax on a child's investment income applies if the
child has investment income greater than $1,800 and
is:
Under 18 old
18 years of age and had earned income that was equal
to or less than half of his or her total support in
2008 or
Over 18 and under 24, a student and during 2008 had
earned income that was equal to or less than half of
his or her total support.
Previously, the tax only applied to children under
age 18. Form 8615 is used to figure this tax.
Self-Employment Tax Changes
For those who receive Social Security Retirement or
disability benefits, any Conservation Reserve Program
(CRP) payments are now exempt from the 15.3-percent
social security self-employment tax. Schedule SE and
its instructions and Publication 225, Farmer's Tax Guide,
have the details.
More farmers and self-employed people this year can
choose the optional methods for figuring and paying
the self-employment tax. These optional methods allow
those with net losses or small amounts of business income
a way to obtain up to four credits of Social Security
coverage. The income thresholds for both the farm optional
method and the non farm optional method are increased
for 2008 and indexed for inflation in future years.
Choosing an optional method may increase a taxpayer's
self-employment tax but it may also qualify him for
the earned income tax credit, additional child tax credit,
child and dependent care credit or self-employed health
insurance deduction. Schedule SE and its instructions
have details.
Resource: U.S. Treasury Department, Internal Revenue
Service.
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