Tax Law Changes : Tax-Year 2008 Individuals
Pick a topic from the list below to learn about the tax changes:
- Recovery Rebate Credit
- Alternative Minimum Tax (AMT)
- Maximum Tax Rate on Qualified Dividends and Net Capital Gain Reduced
- Investment Income of Children Under a Certain Age
- Standard Mileage Rate
- Earned Income Credit
- Standard Deduction Amount Increased
- Personal Exemption Amount Increased
- Income Limits Increased for Student Loan Interest Deduction
- Hope and Lifetime Learning Credits
- Earned Income for Additional Child Tax Credit
- Limits Increased for Itemized Deductions
- Exclusion on Sale of Main Home by Surviving Spouse
- Health Savings Accounts (HSAs)
- Adoption Benefits Increased
- Income Limits Increased for Reduction of Education Savings Bond Exclusion
- Increase in Deductible Limit for Long-Term Care Premiums
- Increase in Limit on Long-Term Care and Accelerated Death Benefits Exclusion
- Archer Medical Savings Accounts (MSAs) Limits Increased
- Credit for Prior Year Minimum Tax
- Exclusion of Income for Volunteer Firefighters and Emergency Medical Responders
- Social Security and Medicare Taxes
- Wage Threshold for Household Employees
- Expired Tax Benefits
For 2008, you generally can claim a recovery rebate credit of up to $600 ($1,200 if married filing jointly). Generally, the credit cannot be more than your 2008 net income tax liability (your regular tax liability plus any AMT, minus any nonrefundable credits you claimed other than the child tax credit). However, your credit will be at least $300 ($600 if married filing jointly) if you meet either of the following two conditions:
- The total of your earned income, social security benefits (including social security disability payments), tier 1 railroad retirement benefits, certain veterans benefits, and nontaxable combat pay you elect to include in earned income is at least $3,000, or
- Your total income is more than $8,950 if your filing status is single or married filing separately ($11,500 if head of household; $14,400 if qualifying widow(er); $17,900 if married filing jointly), and your net income tax liability is more than zero.
If you meet either of these conditions, you can also get an additional $300 for each of your children who is a qualifying child for the child tax credit.
To be eligible, you and your spouse each must have a valid social security number. To get the additional $300 credit for a child, the child must have a valid social security number. You are not eligible to get a payment if you can be claimed as a dependent of another taxpayer, or if you file Form 1040NR, 1040NR-EZ, 1040-PR, or 1040-SS.
If your 2008 AGI is more than $75,000 ($150,000 if married filing jointly), your credit will be reduced by 5% of your AGI in excess of that amount.
Credit reduced or eliminated by economic stimulus payment. Your credit is reduced by any economic stimulus payment you received in 2008. However, if your credit is less than the stimulus payment you received, you do not have to repay the difference.
The following changes to the AMT went into effect for 2008.
AMT exemption amount decreased. The AMT exemption amount has decreased to $33,750 ($45,000 if married filing jointly or qualifying widow(er); $22,500 if married filing separately).
AMT exemption amount for a child increased. The AMT exemption amount for a child whose unearned income is taxed at the parent's tax rate has increased to $6,400.
Certain credits no longer allowed against the AMT. The credit for child and dependent care expenses, credit for the elderly or the disabled, education credits, residential energy credits, mortgage interest credit, and the District of Columbia first-time homebuyer credit are no longer allowed against the AMT, and a new tax liability limit applies. This limit is your regular tax minus any tentative minimum tax (figured without any AMT foreign tax credit).
Recent legislation modified earlier law changes. The legislation made the AMT exemption amount $46,200 ($69,950 if married filing jointly or qualifying widow(er); $34,975 if married filing separately). In addition, the legislation restored the credits mentioned above to be able to offset the AMT and returned the limitation of the tax for the credits to what it previously was.
For tax years beginning after 2007, the 5% maximum tax rate on qualified dividends and net capital gain (the excess of net long-term capital gain over net short-term capital loss) is reduced to 0%. This reduction applies for both regular tax and AMT. The 15% maximum tax rate on qualified dividends and net capital gain has not changed.
Increase in age of children whose investment income is taxed at parent's rate. The rules regarding the age of a child whose investment income may be taxed at the parent's tax rate will change for 2008. Form 8615 is used to figure the child's tax. These rules will continue to apply to a child under age 18 at the end of the year but, beginning in 2008, will also apply to:
- A child who is age 18 at the end of the year and whose earned income is not more than half of the child's support, and
- A student who is under age 24 at the end of the year and whose earned income is not more than half of the child's support.
These rules also apply to parents who elect on Form 8814 to report their children's income on their own returns.
A student is a child who during any part of 5 calendar months of the year was enrolled as a full-time student at a school, or took a full-time, on-farm training course given by a school or a state, county, or local government agency. A school includes a technical, trade, or mechanical school. It does not include an on-the-job training course, correspondence school, or school offering courses only through the Internet.
Increase in investment income amount. The amount of taxable investment income these children can have without it being subject to tax at the parent's rate has increased to $1,800 for 2008.
Business-related mileage. For 2008, the standard mileage rate for the cost of operating your car for business use is 50½ cents per mile.
Car expenses and use of the standard mileage rate are explained in chapter 4 of Publication 463.
Medical- and move-related mileage. For 2008, the standard mileage rate for the cost of operating your car for medical reasons or as part of a deductible move is 19 cents per mile. See Transportation under What Medical Expenses Are Includible in Publication 502 or Travel by car under Deductible Moving Expenses in Publication 521.
Charitable-related mileage. For 2008, the standard mileage rate for the cost of operating your car for charitable purposes remains 14 cents per mile.
The following paragraphs explain the changes to the credit for 2008.
Amount of credit increased. The maximum amount of the credit has increased. The most you can get is:
- $2,917 if you have one qualifying child,
- $4,824 if you have more than one qualifying child, or
- $438 if you do not have a qualifying child.
Earned income amount increased. The maximum amount of income you can earn and still get the credit has increased for 2008. You may be able to take the credit if:
- You have more than one qualifying child and you earn less than $38,646 ($41,646 if married filing jointly),
- You have one qualifying child and you earn less than $33,995 ($36,995 if married filing jointly), or
- You do not have a qualifying child and you earn less than $12,880 ($15,880 if married filing jointly).
The maximum amount of AGI you can have and still get the credit also has increased. You may be able to take the credit if your AGI is less than the amount in the above list that applies to you.
Investment income amount increased. The maximum amount of investment income you can have and still get the credit has increased to $2,950 for 2008.
Advance payment of the credit. If you get advance payments of the credit from your employer with your pay, the total advance payments you get during 2008 can be as much as $1,750.
Nontaxable combat pay election. The election to include your nontaxable combat pay in earned income when you figure your credit has expired and will not apply for 2008.
The standard deduction for people who do not itemize deductions on Schedule A (Form 1040) is, in most cases, higher for 2008 than it was for 2007. The amount depends on your filing status, whether you are 65 or older or blind, and whether an exemption can be claimed for you by another person. The 2008 Standard Deduction Tables are shown in Publication 505, Tax Withholding and Estimated Tax.
The amount you can deduct for each exemption has increased to $3,500 for 2008.
You lose part of the benefit of your exemptions if your AGI is above a certain amount. The amount at which the phaseout begins depends on your filing status. For 2008, the phaseout begins at:
- $119,975 for married persons filing separately,
- $159,950 for single individuals,
- $199,950 for heads of household, and
- $239,950 for married persons filing jointly or qualifying widow(er)s.
Beginning in 2008, you can lose no more than 1/3 of the dollar amount of your exemptions. In other words, each exemption cannot be reduced to less than $2,333.
See Publication 505 for more information on figuring the amount you can deduct.
For 2008, the amount of the student loan interest deduction is phased out (gradually reduced) if your filing status is married filing jointly or qualifying widow(er) and your modified AGI is between $115,000 and $145,000. You cannot take the deduction if your modified AGI is $145,000 or more.
For all other filing statuses, your student loan interest deduction is phased out if modified AGI is between $55,000 and $70,000. You cannot take a deduction if your modified AGI is $70,000 or more. For more information, see chapter 4 in Publication 970.
Beginning in 2008, the following changes apply to the Hope and lifetime learning (education) credits. For more information, see chapters 2 and 3 in Publication 970.
Income limits for credit reduction increased. For 2008, the amount of your Hope or lifetime learning credit is phased out (gradually reduced) if your modified AGI is between $48,000 and $58,000 ($96,000 and $116,000 if you file a joint return). You cannot claim an education credit if your modified AGI is $58,000 or more ($116,000 or more if you file a joint return).
Hope credit. Beginning in 2008, the amount of the Hope credit (per eligible student) is the sum of:
- 100% of the first $1,200 of qualified education expenses you paid for the eligible student, and
- 50% of the next $1,200 of qualified education expenses you paid for that student.
The maximum amount of Hope credit you can claim in 2008 is $1,800 per student.
For 2008, the minimum earned income amount used to figure the additional child tax credit has increased to $12,050.
If your AGI is above a certain amount, you may lose part of your itemized deductions. In 2008, this amount is increased to $159,950 ($79,975 if married filing separately). Beginning in 2008, the amount by which these itemized deductions are reduced is only 1/3 of the amount of the reduction that otherwise would have applied. See Publication 505 for more information on figuring the amount you can deduct.
For sales after 2007, the maximum exclusion on the sale of a main home by an unmarried surviving spouse is $500,000 if the sale occurs no later than 2 years after the date of the other spouse's death. However, this rule applies only if the requirements for joint filers relating to ownership and use were met immediately before the date of such death, and during the 2-year period ending on the date of such death, there was no sale or exchange of a main home by either spouse which qualified for the exclusion.
High deductible health plan (HDHP). For HSA purposes, the minimum annual deductible of an HDHP remains at $1,100 ($2,200 for family coverage) and the maximum annual deductible and other out-of-pocket expenses limit increases to $5,600 ($11,200 for family coverage).
Limit on contributions. The maximum HSA contribution increases to $2,900 ($5,800 for family coverage). The maximum additional contribution for individuals age 55 or older increases to $900.
For 2008, the maximum adoption credit has increased to $11,650. Also, the maximum exclusion from income for benefits under your employer's adoption assistance program has increased to $11,650. These amounts are phased out if your modified AGI is between $174,730 and $214,730. You cannot claim the credit or exclusion if your modified AGI is $214,730 or more.
For 2008, the amount of your interest exclusion is phased out (gradually reduced) if your filing status is married filing jointly or qualifying widow(er) and your modified AGI is between $100,650 and $130,650. You cannot take the deduction if your modified AGI is $130,650 or more.
For all other filing statuses, your interest exclusion is phased out if your modified AGI is between $67,100 and $82,100. You cannot take a deduction if your modified AGI is $82,100 or more. For more information, see chapter 9 in Publication 970.
For 2008, the maximum amount of qualified long-term care premiums you can include as medical expenses has increased. You can include qualified long-term care premiums, up to the amounts shown below, as medical expenses on Schedule A (Form 1040).
- Age 40 or under - $310.
- Age 41 to 50 - $580.
- Age 51 to 60 - $1,150.
- Age 61 to 70 - $3,080.
- Age 71 or over - $3,850.
The limit is for each person.
The limit on the exclusion for payments made on a per diem or other periodic basis under a long-term care insurance contract increases for 2008 to $270 per day. The limit applies to the total of these payments and any accelerated death benefits made on a per diem or other periodic basis under a life insurance contract because the insured is chronically ill.
Under this limit, the excludable amount for any period is figured by subtracting any reimbursement received (through insurance or otherwise) for the cost of qualified long-term care services during the period from the larger of the following amounts.
- The cost of qualified long-term care services during the period.
- The dollar amount for the period ($270 per day for any period in 2008).
For Archer MSA purposes for 2008, the minimum annual deductible of a high deductible health plan increases to $1,950 ($3,850 for family coverage). The maximum annual deductible of a high deductible health plan increases to $2,900 ($5,800 for family coverage). The maximum out-of-pocket expenses limit increases to $3,850 ($7,050 for family coverage).
The following changes to the credit for prior year minimum tax go into effect for 2008.
Refundable credit for prior year minimum tax. Beginning in 2008, your current year refundable credit (before the AGI phaseout) cannot be less than your prior year refundable credit (before the AGI phaseout). For 2007, your refundable credit before the AGI phaseout is on line 55 of Form 8801.
Foreign Earned Income Tax Worksheet revised. The Foreign Earned Income Tax Worksheet in the Form 8801 instructions will be revised to reflect changes made by the Tax Technical Corrections Act of 2007.
For tax years beginning after 2007 and before 2011, gross income does not include:
- Rebates or reductions of property or income taxes provided by a state or local government for providing services as a member of a qualified emergency response organization (defined below). Any such rebate or reduction reduces the amount of the income tax deduction for such taxes.
- Qualified payments made by a state or local government for providing services as a member of a qualified emergency response organization. The exclusion is limited to $30 multiplied by the number of months the member performs such services. A charitable deduction for expenses paid by the member in connection with performing such services must be reduced by any payment excluded from income.
A qualified volunteer emergency response organization is any volunteer organization organized and operated to provide firefighting or emergency medical services for persons in a state or local jurisdiction and required by written agreement with that state or local jurisdiction to furnish such services.
The maximum amount of wages subject to the social security tax for 2008 is $102,000. There is no limit on the amount of wages subject to the Medicare tax.
The social security and Medicare wage threshold for household employees is $1,600 for 2008. This means that if you pay a household employee cash wages of less than $1,600 in 2008, you do not have to report and pay social security and Medicare taxes on that employee's 2008 wages. For more information, see Social security and Medicare wages in Publication 926, Household Employer's Tax Guide.
In addition to those mentioned earlier, the following tax benefits have expired and will not apply for 2008.
- Deduction for educator expenses in figuring AGI.
- Tuition and fees deduction.
- Deduction for state and local general sales taxes.
- District of Columbia first-time homebuyer credit (for homes purchased after 2007).
- Nonbusiness energy property credit.
- The increased limit on a deduction for a qualified conservation contribution from 30% of AGI to 50% of AGI (100% of AGI for certain farmers and ranchers).
Caution! At the time this publication went to print, Congress was expected to consider legislation that would reinstate many of these benefits. To find out if legislation is enacted, go to www.irs.gov, click on More Forms and Publications, and then on What's Hot in forms and publications.