So, what do you need to know for 2009 (tax year 2008)? Below are up-to-date highlights of key federal income tax law changes for individuals and families, and links to more information on these changes direct from the Internal Revenue Service (IRS). If you do not want to tackle these tax law changes yourself contact Taxes Plus LLC!
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.
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.
This is one of more than three dozen individual and business tax provisions that are adjusted each year to keep pace with inflation. A complete rundown of these changes can be found in 2008 Inflation Adjustments Widen Tax Brackets, Change Tax Benefits, from the IRS.
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. (See more Home/Residence Related Tax Changes)
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 1/2 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. (See more Tax Law Changes Related to IRAs and Other Retirement Plans)
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
- $15,880Â for those with no children
One in six taxpayers claim the EITC, which, unlike most tax breaks, is refundable, meaning that individuals can get it even if they owe no tax and even if no tax is withheld from their paychecks.
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.
Child-Related Tax Changes:
Education-Related Tax Changes:
Health and Medical-Related Tax Changes:
Tax Law Changes Related to Penalties:
More Tax Law Changes for 2009:
Some content reproduced from the Internal Revenue Service (http://www.IRS.gov/).