Individual Tax Law Refresher for 2009 

The 2009 tax season is here and as usual there are quite a few changes in the tax laws. This year’s changes seem to benefit the taxpayer in most cases although there are a few that don’t such as the changes in the taxation of unearned income of children. Following is a brief recap of the major changes you will need to know when preparing 2008 federal individual taxes.

IRA Deductions
The maximum allowed IRA deduction has been increased to $5,000, if under age 50 at the end of 2008 or $6,000, if age 50 or older but under age 70 1⁄2 at the end of 2008.

Section 179
The amount that can be claimed as a section 179 deduction has been increased 250,000. In 2007 this amount was 125,000. The amount that can be claimed is reduced dollar for dollar by the amount total expenditures exceeded 800,000. This has been increased from 500,000 in 2007.

Bonus First Year Depreciation
Bonus depreciation was brought back also. Under bonus depreciation one half of the cost of qualified items placed into service in 2008 can be expensed in the first year after the amount claimed for the 179 deduction. In order to qualify for this special deduction the property must be newly placed in service in 2008.

Personal Exemptions
The exemption amount has gone up to 3500. The amount of phase out of exemptions for persons with adjusted gross income above certain limits has been reduced. Under the new rules the maximum amount that can be phased out is 1167 or 1/3 of the exemption amount. Taxpayers will be able to deduct at least 2,333 per exemption regardless of how high their AGI is.

Itemized Deductions
Phase out of itemized deductions for persons with adjusted gross income above $159,950 ($79,975) if married filing separately has also been reduced by 1/2 of the amount that would have been phased out under 2007 rules.

Dividends and Capital Gains Tax
The 5% tax rate on qualified dividends and capital gains has been reduced to 0.

Alternative Minimum Tax
The AMT exemption amounts have been adjusted for inflation by the 2008 Extenders Act. Also included in this act were the extension of the provision allowing all non refundable personal credits to be used to offset AMT. The Act also changed the way the minimum tax credit is calculated. The new calculation which replaces the 20% per year amount has been changed to 50% should allow taxpayers who qualify to recoup this credit quicker.

Recovery rebate credit.
This credit is for people who did not qualify for last year’s economic stimulus payment or had to claim a limited amount of the credit. This credit will be reported in the payments section of form 1040, 1040A or 1040EZ. The IRS has a 2 page 29 line worksheet for figuring who qualifies and for what amount they qualify.

First time homebuyers Credit
As part of the Housing and Economic Recovery Act of 2008, a new credit of up to $7500 will be allowed for first-time home buyers on purchases made after April 8, 2008. This credit is based upon 10% of the purchase price of the home up to the $7500 limit. Homeowners who buy through July 1, 2009, can still claim the credit on their 2008 tax returns.  This credit will be reported on the new form 5405. Homeowners who are expecting to purchase a home after April 15 but before July 1 should be advised to either file an extension or if they are expecting a refund which they need to first file the return without the credit and then to file an amended return to claim the credit. If it can be reasonable assumed the credit will give them a bigger benefit in 2009 they can wait and claim the credit on their 2009 tax return.

Items to be considered about this credit are:

• This credit is phased out for single taxpayers with adjusted gross income over $75,000 or $150,000 for married filing joint taxpayers. At an income level of $95,000 or $170,000, the credit is no longer allowed.
• To qualify, a taxpayer doesn’t really need to be a first time homebuyer, but must have not owned a home for the past three years.
• This “credit” is actually more like a loan, as it must be repaid to the IRS in the form of a recapture tax over 15 years (or 6 2/3% per year).
• If the property is sold, the credit will be recaptured completely in the year of sale.

Residential Energy Credit
The residential energy credit for energy efficient home improvements (windows, doors, roofs, insulation, HVAC, and non-solar water heaters) was scheduled to expire at the end of 2007. The Emergency Economic Stabilization Act of 2008 extended this credit in an unusual way it was extended but only for 2009. Any improvements or expenditures made in 2008 do not qualify for this credit.

Changes to Standard Deductions
There is a new provision for taxpayers who do not itemize deductions but pay state or local property taxes.  Traditionally if the taxpayer does not itemize deductions, they will not get any deduction for property taxes paid. Under the new provision, they can claim a small amount for property taxes paid even if they are using the standard deduction. The amount, which will be added to the standard deduction, will be the lesser of $1000 ($500 if unmarried) or the actual taxes. There will not be a separate line for this deduction on form 1040 it is just added to the standard deduction and a box is checked to indicate to the IRS the additional deduction is being claimed.

Casualty Losses
The deduction for people who sustained losses from a federally declared disaster has been increased by making these losses no longer subject to the 10% of adjusted gross income floor. People who do not itemize will also benefit from this change as the amount which is calculated on a new line of form 4684 (18a) can be added to the standard deduction.

Automobile Standard Mileage Rate
The standard mileage rate changed in midyear for 2008. The amount is 50.5 cents per mile before July 1, 2008 and 58.5 cents per mile after June 30,2008  The amount allowed for medical deductions is 19 cents per mile and was raised to 27 cents per mile after June 30, 2008. The amount for miles driven for charity remain the same.

Tax for Children Under Age 18 With Investment Income
This form used to be called tax on children under 14 but once again the name of this form will have to change as now “children” from the ages of 18 through 23 may be subject to it. The kiddie tax (form 8615) has been expanded to include children in the 19-23 age groups who are full time students and children who turned 18 during 2008 (even if they are not full time students).  The tax only applies if the earned income of the child (wages and self-employment income) does not exceed one-half of the child’s support for the tax year.

Extended Tax Credits and Deductions
There are several items that were scheduled to expire in 2008 that have been extended. 

1)    The itemized deduction for state and local sales taxes instead of state and local income taxes was extended.

2)    The itemized deduction for mortgage insurance premiums paid on a qualified residence has been extended.

3)    The above the line deduction for up to $4,000 of higher education expenses was extended.