It’s not yet the last minute, but tax season has more than arrived.
While every year brings changes in the tax code, there’s even more to keep up with for taxpayers given last year’s economic upheavals. Among the changes this year are new tax credits for first-time homebuyers, a larger standard deduction, and a tax break for those who had mortgage debt forgiven through a foreclosure.
Meanwhile, though the recently passed economic stimulus plan will have little effect on your current tax returns, it will show up in the coming year – in paychecks, as one-time payments to retirees and the disabled, and in tax breaks for buying new homes and vehicles, among other places. Plenty of other changes will be in place for next year’s tax return.
Here’s a primer on changes you should consider as you prepare your 2008 taxes, compiled from news services, financial experts and government sources. It’s a general guideline, and for making decisions about your specific situation you should turn to the financial adviser or software of your choice.
Home sweet home. Under the economic stimulus plan President Obama signed earlier this month, first-time homebuyers who purchase a home between Jan. 1 and Dec. 1 will be eligible for a tax credit of 10 percent of the value of the home, up to $8,000. They would have to repay the credit if they sold their homes within three years. First-time buyers are defined as those who haven’t owned a house for at least three years.
Silver lining. Good news for people in the lowest two tax brackets – your capital-gains tax rate is 0 percent. The rate, for investors with taxable incomes of up to $32,550 for individuals or $65,100 for joint filers, runs through 2010. And if you sold stocks at a loss during the year, they can be used to offset gains, if you had any, or to reduce your taxable income. If you lost more than $3,000, you can carry those losses over to future tax years. If you found yourself with stock worth literally nothing, you can write off the loss.
Offset losses. It may be cold comfort, but there are some tax advantages if you’ve lost a job or a home. If you collected unemployment benefits last year, the income is taxable, but some of the cost of a job search or medical care is deductible – including COBRA premiums. Those who have had mortgage debt forgiven by a lender don’t have to pay taxes on up to $2million of the forgiven debt.
Family matters. The so-called “kiddie tax” grew some new restrictions last year. The age of the tax has been raised, to prevent parents from transferring securities to their adult kids – in lower tax brackets – to get around capital gains taxes. Now, children’s unearned income over $1,800 will be taxed at the parents’ rate until age 18, or until 23 if they’re full-time students. New rules also give widows and widowers more time to sell the family home before losing a big tax break – the exclusion of $500,000 in profit from taxes.
Common mistakes. Kiplinger.com outlined the most commonly overlooked deductions in a recent article. Among them: state sales tax (this is particularly true for residents of states with no income tax, like Washington); out-of-pocket charitable contributions, such as the cost of baked goods for a fundraiser or the gas used in doing good works; moving expenses to take your first job; a child-care credit; points paid to refinance your home.
Speaking the language. Advanced earned income credit. Hobby loss. Modified adjusted gross income. The tax code speaks a different language than the rest of us. For a good roundup of terms and definitions, try these sites: Bankrate.com, FindLaw.com, or irs.gov. Search for glossary or definitions.
Think about next year. Plenty of changes are in the works for tax year 2009. Allowable contributions to 401(k) plans are being raised by $1,000 to $16,500 per employee – and you can also contribute more to a health savings plan. The income limit to deduct student loan interest is being raised to $60,000 for singles and $120,000 for couples. The limit for income earned before owing taxes by children under 18 is being raised to $950, and the limit for the amount of Social Security income that isn’t taxed is rising for those who have retired before full retirement age.
Stimuli. The fiscal stimulus plan recently passed by Congress includes a wide range of actions that could affect people’s financial lives. A payroll tax credit will put money back into paychecks for the next two years – up to $400 a year for singles and $800 for couples. More unemployment benefits will be excluded from taxes. More people will qualify for the earned income tax credit. New incentives have been added for purchases of new cars or homes. And the tax credit for home improvements that improve efficiency is going up.