Pay Less in Taxes
Here are ten new tax breaks on your 2008 return.
The tax rules are constantly changing because of new laws and cost-of-living adjustments. Here are 10 new breaks for your 2008 federal income tax return:
1. First-time homebuyer credit. If you bought a home after April 9, 2008 (and before July 1, 2009, when this break ends) and did not own a home within the past three years, you can claim a tax credit of up to $7,500. A tax credit reduces your taxes dollar for dollar, so a $7,500 credit saves you $7,500 in taxes. The money must be repaid ratably over 15 years, starting in 2010, although no interest is charged on this repayment.
2. Zero tax rate on capital gains and qualifying dividends. Those who are in the 10 percent or 15 percent tax bracket pay no tax on gains from the sale of securities held more than one year or on qualifying dividends. A married couple can have taxable income (income after deductions and personal exemptions) up to $65,100 before going over the 15 percent tax bracket; a single filer can have taxable income up to $32,550 before going into a higher tax bracket.
3. Higher IRA contributions. The maximum contribution to deductible IRAs and Roth IRAs in 2008 is $5,000 (the limit for 2007 was $4,000). If you will be at least 50 years old by the end of 2008, you can add another $1,000 (total contribution limit is $6,000). Watch income limits on eligibility to contribute to deductible IRAs if you participate in a 401(k) or other employer-sponsored plan; there are also income limits for contributing to a Roth IRA even if you aren't covered by another retirement plan.
4. Home sale exclusion for surviving spouses. If you sold your home in 2008 and you are a surviving spouse (meaning your husband died within two years of the sale), you can exclude the gain up to $500,000 (instead of the usual $250,000 that applies to single home-sellers).
5. Rebate recovery credit. If you didn't receive an economic stimulus check from the government in 2008, which was based on your 2007 income tax return, you may still be eligible for one. Check the worksheet in the instructions to the return to determine whether the government owes you money – up to $600 for singles or $1,200 on a joint return. You won't receive a separate check when you claim this credit; instead it decreases what you owe or increases your tax refund.
6. AMT patch. The alternative minimum tax, a shadow tax system designed to ensure that high-income taxpayers pay at least some tax, has been catching more and more middle-class individuals. This year, however, under a one-year fix, the exemption amounts have been hiked so that about 25 million taxpayers won't owe any AMT. Also, personal nonrefundable tax credits, such as the dependent care credit and education credits, can offset both regular tax and AMT.
7. Increased mileage deduction. If you use your personal car for business, you can deduct this driving as a business expense. The IRS-fixed rate is 50.5 cents per mile for the first half of 2008 and 58.5 cents per mile for the second half of the year (the rate in 2007 was 48.5 cents per mile). Keep careful records of your driving as required by tax rules.
8. Increased retirement plan contributions. Businesses and self-employed individuals can shelter profits through qualified retirement plans. For example, if you use a SEP (simplified employee pension) plan, the deduction for 2008 can be up to $46,000 ($1,000 higher than in 2007). You have until the extended due date of your return to set up and make your 2008 contribution to a SEP; other types of qualified retirement plans, such as 401(k) plans, must be set up by the end of 2008 to accept deductible contributions for 2008, although contributions are permitted until the extended due date of your return.
9. Increased expensing deduction. If you buy computers, furniture, machinery and other equipment for your business and place the property in service before the end of 2008, you can opt to deduct the cost (called "first-year expensing") rather than depreciating the cost over five or seven years (the depreciation period is fixed by law). The dollar limit on expensing is the cost of new or preowned equipment totaling $250,000 in 2008 (in 2009 the limit declines to $133,000). The dollar limit starts to phase out once total equipment purchases for 2008 exceed $800,000 in most locations (special rules apply to certain disaster areas).
10. Bonus depreciation. New equipment purchased by a business and placed in service in 2008 can qualify for 50 percent depreciation in the first year. Bonus depreciation can be combined with first-year expensing, enabling a business to write off a sizable investment in new equipment.
If you didn't receive an economic stimulus check from the government in 2008, which was based on your 2007 income tax return, you may still be eligible for one.
