The Top Ten Changes to Tax Law 2008

Written by admin on May 17th, 2011

Top Ten 2008 Income Tax Law Changes

 

By David Roberts

 

 

Every year for whatever reason whether it be political or an exchange of favors for lobbyists, our Congress adds additional changes to our already complicated tax law. Sometimes these changes are beneficial, sometimes they are not, but this article will briefly examine the changes that have been made for this 2008 Tax Year.

 

First, the tax rate on net capital gains and qualified dividends has been reduced! For those tax payers in the lowest two tax brackets who were formally paying 5% in capital gains tax will in the next few years pay 0%. For those interested in the effect on the Alternative Minimum Tax, yes, the 0% rate will apply for both regular tax and the AMT. This is great news and should help encourage those in the lower tax brackets to invest. Of course this begs the question of where are lower income tax bracket tax payers going to get the extra money to invest?

 

Perhaps if those who actually HAVE money to invest were given a reduction they might see fit to invest MORE money in hopes for a higher return! These increased investments would then benefit those who don’t have the ability to invest because this investment activity would create jobs. For more information, Google ‘Reaganomics’ or the ‘trickle down economics’.

 

Second, the IRA contribution limit for both traditional and Roth IRA’s have increased to 00. (00 for taxpayers over 50 who are playing ‘catch-up’). This is going to encourage more people to save more for retirement. The subject of which kind of IRA is best for you is a little long for this article. The short version is that a traditional IRA lets you invest money pre-tax and reduce current tax liability. The Roth IRA is after tax but upon retirement the individual can withdraw the funds tax free. So it comes down to do you want to be taxed on 00 now and pull it out when it’s 000 tax free, (Roth) or would you rather avoid the taxes on the 00 now and pay them when the amount is at 000 when you pull it out? (traditional)

 

Three, for those who wish to make the decision to rollover their traditional IRAs to Roth IRAs you can now rollover funds from:

 

•a. A qualified pension, profit-sharing or stock bonus plan (including a 401(k) plan.)

 

•b. An annuity plan.

 

•c. A tax shelter annuity plan (section 403(b) plan) or

 

•d. A deferred compensation plan of a state or local government (section 457 plan)

 

 

Although there would be a 10% additional tax on early distributions, there would be the benefit of these funds growing tax free from this point on.

 

Four, the phase out of reductions of Personal exemptions and itemized deductions. For those of us who are fortunate enough to have this problem, it means that the government feels that we are making WAY too much money to deserve our standard deductions and itemized deductions, which in the past have been phased out because we are of the fortunate ones and we need to be punished with ever increasing taxes for our achievements. THIS year however, this amount is only 1/3 of the amount that would otherwise apply. That means that even though we will not get the standard 00 for a personal exemption, that we will at least get a personal exemption of 67. Isn’t our government generous?

 

Five, the Kiddie Tax Rules are now expanded to include any child who is over 18 at the end of the year and whose earned income is not more than half of the child’s support. And, any 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. Both groups of children will still be taxed at the parent’s tax rate and this does NOT apply to those who are full time students at a strictly online college or institution. This is a good reason to make sure your new college students are concentrating on studies and NOT on making money! Of course that may not be an option for some.

 

Six, a First-time Homebuyer Credit of 00! First, let’s define a first time homebuyer according to our IRS. A first time homebuyer is someone who hasn’t owned a home for three consecutive years before the purchase date. Second, how does this credit work? Honestly this credit is more like a loan than it is a tax credit. The homebuyer will receive the benefit of a 00 credit the year of the purchase of the home, which will then be repaid, beginning the second year after the purchase of the home, in increments of 1/15 for 15 years. If the home is sold at anytime during those 15 years the balance must be repaid all at once. This information will be reported on the new IRS Form 5405.

 

Seven, the exclusion on the Sale of Main Home. Now those widows and widowers will be able to exclude the full 0000 from the gain of the sale of their home IF: the sale occurs no later than 2 years after the date of their spouses’ death, and if the ownership requirements were met before the date of the death. This is of course, unless there was a sale of a main home by either spouse less than 2 years prior to the death occurring. Situation: Rita Smith and Evan Josephs meet and decide to marry. She sells her home with a gain of over 0000 and within two years she passes away, Evan cannot sell his home with the exclusion because the exclusion has already been taken by his wife. If she had waited to die until the third year, he would be free to claim the full exclusion of 0000.

 

Eight, this is actually a good one! Due to the ever increasing gas prices, the Congress has decided to allow 58 cents per mile for business miles driven during the later half of 2008. And, the medical mileage has increased to 27.5 cents per mile for the latter half of 2008. Accurate records is a must for this one, because the IRS is NOT going to believe that you drove 100% of your miles beginning in June!

 

Nine, our local heroes, the emergency responders will be receiving rebates or reductions of property and income taxes! They will also be receiving qualified payments of up to per month for providing emergency responder services.

 

Ten, the Recovery Rebate Credit. Taxpayers will receive a refundable credit that will be figured in the same manner as the 2007 Economic Stimulus Payment, except that the amounts will be based on tax year 2008 instead of 2007. If there is a difference and the credit is less than the payment received, the difference does not have to be repaid! So this is completely unlike the initial stimulus package passed in 2001 in that they won’t ask us for this one back!

 

The next article will explore the remaining changes to the tax law for 2008.

 

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