Tax Edge

Like the weather, our tax laws are subject to frequent changes. Unfortunately, there continue to be many traps for the unwary and uninformed taxpayer.

Here are some highlights of changes in effect for 2008:

Personal exemption amount. This amount has increased to $3,500 per person for 2008.

Standard deductions. Standard deduction amounts have increased for 2008 as follows: singles and married filing separately, $5,450; heads of household, $8,000; married filing jointly, $10,900.

AMT exemption amount increased. Congress included an alternative minimum tax (AMT) patch in the Emergency Economic Stabilization Act of 2008. As in prior years, the patch is effective for just one year: 2008. The AMT exemption amounts are $69,950 for married couples filing jointly and surviving spouses, $46,200 for single taxpayers and heads of household, and $34,975 for married couples filing separately. In addition, taxpayers may take nonrefundable personal credits to reduce their AMT liability. The law also removes limits in the AMT on taking personal credits against regular tax liability. Personal credits include the dependent care credit and education tax credits. The adoption, child and saver's credit were already allowed in full against the AMT and regular tax.

Reporting children's income. Starting with the 2006 filing season, children under 18 and their parents face new filing requirements. Also, the "kiddie tax" rules are now much less favorable to minor children with investment income and their families.

Standard Mileage Rate. In 2008, the standard mileage rate was adjusted in mid-year, so the rate is dependent on when the expenses were incurred. For the period from January 1, 2008 to June 30, 2008, the standard mileage rate for business use of a car was 50.5 cents per mile. The rate for charitable use of a car was 14 cents a mile, and the rate for medical travel or moving was 19 cents a mile. For the period July 1, 2008 through December 31, 2008, the rates increased to 58.5 cents for business use and 27 cents per mile for medical travel or moving. The rate for charitable use of a car remained unchanged at 14 cents a mile.

Residential energy credits. The residential energy tax credit that was available in 2006 and 2007 is not available in 2008. However, it will return in 2009. The credit that individuals may claim for alternative residential energy equipment remains available. (See Changes Beyond 2008 for additional information.)

Adoption tax credit. In 2008, the maximum credit allowed for an adoption of a special needs child or other adoption is $11,650. The credit begins to phase out for taxpayers with modified adjusted gross income over $174,730 and is completely phased out at $214,730.

IRA deduction. The maximum IRA deduction allowed per person for 2008 is $5,000. However, those who are at least 50 years old can now make an additional catch-up contribution of $1,000 to their IRA in each of those years.

Retirement plan elective deferral limits. An employee's maximum salary deferral to a 401(k) plan, a tax-sheltered 403(b) annuity, a salary reduction simplified employee pension (SEP) plan, or a government-sponsored 457 plan remains to $15,500 in 2008. Those 50 years or older can make additional catch-up contributions to their plans of $5,000 in 2008.

Elective deferrals to a SIMPLE plan increase to $10,500 in 2008. SIMPLE plan participants who are age 50 and over can make additional catch-up contributions of $2,500 in 2008.

Estate taxes. The amounts that can be excluded from an estate for estate tax purposes is set at $2 million in 2007 and 2008.

Disaster Relief. Congress has enacted tax relief, similar to that provided for victims of Hurricane Katrina, to those affected by the storms that affected the Midwest. This includes residents of those parts of Arkansas, Illinois, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska and Wisconsin that were declared federal disaster areas between May 20 and August 1. In addition, the rules relating to areas that are federally declared areas in the future have been changed. The 10% of AGI floor on disaster losses is waived. In 2009 only, the $100 floor on losses is increased to $500, but will revert to $100 in 2010. Beginning in 2008, a casualty loss in a federally declared disaster area can be claimed as part of the standard deduction. This change applies to victims of Hurricane Ike, but not to victims residing in the Midwestern Disaster Area.

Where to mail your return. The IRS has changed the mailing addresses (again) for filing an income tax return in several areas, so make sure that your return gets to its proper filing location.

Changes Beyond 2008

It would easily take an entire book just to explain the many tax law changes enacted in 2001 through 2005 that will be phased in through 2010. The following, however, are some of the highlights you can look forward to in the years to come:

Personal exemption amount. This amount will increase to $3,650 per person in 2009. The personal exemption amount begins to phase out at $250,000 for joint filers and surviving spouses, $208,500 for heads of households, $166,800 for unmarried individuals, and $125,000 for married people filing individual returns. The maximum phaseout is reached when income reaches $372,700 for joint filers and surviving spouses, $331,000 for heads of households, $289,300 for unmarried individuals, and $186,350 for married people filing individual returns.

Standard deductions. Standard deduction amounts will increase for 2009 as follows: singles and married filing separately, $5,700; heads of household, $8,350; married filing jointly, $11,400. The additional standard deduction amount for the aged and blind will increase to $1,100. It will increase to $1,400 if the person is unmarried and not a surviving spouse.

Itemized deductions. For 2009, otherwise allowable itemized deductions will begin to be reduced when adjusted gross income reaches $166,800, (or $83,400 for a separate return filed by a married individual).

Standard mileage rate. The standard mileage rate for determining your deduction for the business use of a car has increased to 55 cents per mile in 2009. Those using their car for charitable purposes in 2009 can deduct 14 cents per mile. Cars used for deductible medical travel or moving can deduct 24 cents per mile in 2009.

Residential energy credits. In a somewhat unusual move, Congress has renewed the residential energy credit, but only for 2009. Thus, expenditures made in 2008 will not yield any tax benefit, even though expenditures made in 2006 and 2007 did qualify for the credit. On the other hand, the credit for residential alternative energy equipment remains available for 2008 and has been extended through 2016. This credit is 30 percent of the cost of eligible solar water heaters, solar electricity equipment, fuel cell plants, small wind energy and geothermal heat pumps. The last two categories were added as part of the Emergency Economic Stabilization Act of 2008. That Act also eliminated the annual maximum credit limitation on qualified solar electric property expenditures. However, limits were place on wind property and geothermal heat pumps. The wind property credit is equal to 30 percent of expenditures limited to $500 per kilowatt hour, not to exceed $4,000 annually. For geothermal heat pump property, the credit is 30 percent of expenditures, limited to $2,000 per year.

Equipment expensing election. For 2009, the expensing limit is $133,000 and investment limitation is the $530,000.

Adoption tax credit. In 2009, the maximum credit allowed for an adoption of a special needs child or other adoption increases to $12,150. The credit begins to phase out for taxpayers with modified adjusted gross income over $182,180 and is completely phased out at $222,180.

Retirement plan elective deferral limits. An employee's maximum salary deferral to a 401(k) plan, a tax-sheltered 403(b) annuity, a salary reduction simplified employee pension (SEP) plan, or a government-sponsored 457 plan will increase to $16,500 in 2009. Those 50 years or older can make additional catch-up contributions to their plans of $5,500 in 2009.

Elective deferrals to a SIMPLE plan increases to $11,500 in 2009. SIMPLE plan participants who are age 50 and over can make additional catch-up contributions of $2,500 in 2009.

Estate taxes. The amounts that can be excluded from an estate for estate tax purposes increase to $3.5 million in 2009. Estate taxes will be repealed for those dying in 2010, but may return in 2011 unless Congress acts to make the repeal permanent.