Tax Changes for Individuals - 2008

Information on adoption benefits, child and dependent care credit, child's investment income, and additional child tax credit.

Adoption Benefits Increased:

For 2008, the maximum adoption credit has increased to $11,650.
Also, the maximum exclusion from income for benefits under your employer's adoption assistance program has increased  to $11,650. These amounts are phased out if your modified adjusted gross income (MAGI) is between $174,730 and  $214,730. You cannot claim the credit or exclusion if your MAGI is $214,730 or more.

Child's Investment Income:

Increase in age of children whose investment income is taxed at parent's rate. A student is a child who during any part of 5 calendar months of the year was enrolled as a full-time student at a school, or took a full-time, on-farm training course given by a school or a state, county, or local government agency. A school includes a technical, trade, or mechanical school. It does not include an on-the-job training course, correspondence school, or school offering courses only through the Internet.

The rules regarding the age of a child whose investment income may be taxed at the parent's tax rate will change for 2008.  These rules will continue to apply to a child under age 18 at the end of the year but, beginning in 2008, will also apply to A child who is age 18 at the end of the year and whose earned income is not more than half of the child's support, and a student who is under age 24 at the end of the year and whose earned income is not more than half of the child's support.

The amount of taxable investment income these children can have without it being subject to tax at the parent's rate has  increased to $1,800 for 2008. For 2007, the amount was $1,700.

For tips received for services performed after 2006, the amount of tips for any month that is used to figure the credit must be reduced by the amount by which the wages that would have been payable during that month at $5.15 an hour exceed the wages (excluding tips) paid by the employer during that month.
For tax years beginning after 2006, the credit is allowed against both the regular tax and the AMT.

The following paragraphs explain the changes to the credit for 2008.
Amount of credit increased. The maximum amount of the credit has increased. The most you can get is:
$2,917 if you have one qualifying child,
$4,824 if you have more than one qualifying child, or
$438 if you do not have a qualifying child.
Earned income amount increased. The maximum amount of income you can earn and still get the credit has increased for 2008.

For 2008, the amount of your interest exclusion is phased out (gradually reduced) if your filing status is married filing jointly or qualifying widow(er) and your modified adjusted gross income (MAGI) is between $100,650 and $130,650. You cannot take the deduction if your MAGI is $130,650 or more.
For all other filing statuses, your interest exclusion is phased out if your MAGI is between $67,100 and $82,100.

Beginning in 2008, the following changes apply to the Hope and lifetime learning (education) credits. Income limits for credit reduction increased. For 2008, the amount of your Hope or lifetime learning credit is phased out (gradually reduced) if your modified adjusted gross income (MAGI) is between $48,000 and $58,000 ($96,000 and $116,000 if you file a joint return).
You cannot claim an education credit if your MAGI is $58,000 or more ($116,000 or more if you file a joint return).

Hope credit. Beginning in 2008, the amount of the Hope credit (per eligible student) is the sum of:
100% of the first $1,200 ($2400 if a Midwestern disaster area student). of qualified education expenses you paid for the eligible student, and 50% of the next $1,200 ($2400 if a Midwestern disaster area student). of qualified education expenses you paid for that student.
The maximum amount of Hope credit you can claim in 2008 is $1,800 ($3600 if a Midwestern disaster area student) per student.

In order to claim the tuition and fees deduction, you must complete Form 8917, Tuition and Fees Deduction, and file it with Form 1040 or Form 1040A

For 2008, the amount of the student loan interest deduction is phased out (gradually reduced) if your filing status is married filing jointly and your modified adjusted gross income (MAGI) is between $115,000 and $145,000. You cannot take the deduction if your MAGI is $145,000 or more. For all other filing statuses, your student loan interest deduction is phased out if MAGI is between $55,000 and $70,000. You cannot take a deduction if your MAGI is $70,000 or more.

The Mortgage Forgiveness Debt Relief Act of 2007 allows individuals to exclude from gross income a discharge of qualified principal residence indebtedness (defined below). This exclusion applies to discharges made after 2006 and before 2010. Additionally, the basis of the principal residence must be reduced (but not below zero) by the amount excluded from gross income. To claim the exclusion, you must file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), with your tax return.

Qualified principal residence indebtedness

This is a mortgage you took out to buy, build, or substantially improve your principal residence. It also must be secured by your principal residence. If the amount of your original mortgage is more than the cost of your principal residence plus the cost of any substantial improvements, only the debt that is not more than the cost of your principal residence plus improvements is qualified principal residence indebtedness. Any debt that is secured by your principal residence you use to refinance qualified principal residence indebtedness is treated as qualified principal residence indebtedness, but only up to the amount of the old mortgage principal just before the refinancing. Any additional debt you used to substantially improve your principal residence is also treated as qualified principal residence indebtedness.

Your principal residence is the home where you ordinarily live most of the time. You can have only one principal residence at any one time.

Amount eligible for the exclusion.

The maximum amount you can treat as qualified principal residence indebtedness in $2 million ($1 million if married filing separately). You cannot exclude from gross income discharge of qualified principal residence indebtedness if the discharge was for services performed for the lender or on account of any other factor not directly related to a decline in the value of your residence or to your financial condition.

Ordering rule
If only a part of a loan is qualified principal residence indebtedness, the exclusion applies only to the extent the amount discharged exceeds the amount of the loan (immediately before the discharge) that is not qualified principal residence indebtedness. For example, assume your principal residence is secured by a debt of $1 million, of which $800,000 is qualified principal residence indebtedness. If your residence is sold for $700,000 and $300,000 of debt is discharged, only $100,000 of the debt discharged may be excluded (the $300,000 that was discharged minus the $200,000 of nonqualified debt).

For sales after 2007, the maximum exclusion on the sale of a main home by an unmarried surviving spouse is $500,000 if the sale occurs no later than 2 years after the date of the other spouse's death. However, this rule applies only if the requirements for joint filers relating to ownership and use were met immediately before the date of such death, and during the 2-year period ending on the date of such death, there was no sale or exchange of a main home by either spouse which qualified for the exclusion.

The limit on the exclusion for payments made on a per diem or other periodic basis under a long-term care insurance contract increases for 2008 to $270 per day. The limit applies to the total of these payments and any accelerated death benefits made on a per diem or other periodic basis under a life insurance contract because the insured is chronically ill.

Under this limit, the excludable amount for any period is figured by subtracting any reimbursement received (through insurance or otherwise) for the cost of qualified long-term care services during the period from the larger of the following amounts.

The cost of qualified long-term care services during the period.
The dollar amount for the period ($270 per day for any period in 2008).

If your adjusted gross income is above a certain amount, you may lose part of your itemized deductions. In 2008, this amount is increased to $159,950 ($79,975 if married filing separately). Beginning in 2008, the amount by which these itemized deductions are reduced is only of the amount of the reduction that otherwise would have applied.

For tax years beginning after 2007, the 5% maximum tax rate on qualified dividends and net capital gain (the excess of net long-term capital gain over net short-term capital loss) is reduced to 0%. The 15% maximum tax rate on qualified dividends and net capital gain has not changed.

If you were an employee but your employer treated you as an independent contractor, use new Form 8919, Uncollected Social Security and Medicare Tax on Wages, to figure and report your share of uncollected social security and Medicare taxes due on your wages. By using Form 8919, your social security and Medicare taxes also will be credited to your social security record.
Do not use Form 4137, Social Security and Medicare Tax on Unreported Tip Income, for this purpose.

If you do not file your return by the due date (including extensions) you may have to pay a failure-to-file penalty. For income tax returns required to be filed after 2008, the failure-to-file penalty for returns filed more than 60 days after the due date (including extensions) is increased. In this situation, the minimum penalty is the smaller of $135 or 100% of the unpaid tax.

The IRS has published a list of positions that are identified as frivolous. The penalty for filing a frivolous tax return is $5,000. A frivolous return is one that does not include enough information to figure the correct tax or that contains information clearly showing that the tax you reported is substantially incorrect. You will have to pay the penalty if you filed this kind of return because of a frivolous position on your part or a desire to delay or interfere with the administration of federal income tax laws. Also, the $5,000 penalty applies to other specified frivolous submissions. For more information and a list of positions identified as frivolous, see Notice 2008-14, 2008-4 I.R.B. 310.

The amount you can deduct for each exemption has increased to $3,500 for 2008.

You lose part of the benefit of your exemptions if your AGI is above a certain amount. The amount at which the phase out begins depends on your filing status. For 2008, the phase out begins at:

$119,975 for married persons filing separately,
$159,950 for single individuals,
$199,950 for heads of household, and
$239,950 for married persons filing jointly or qualifying widow(er)s.
Beginning in 2008, you can lose no more than 1/3 of the dollar amount of your exemptions. In other words, each exemption cannot be reduced to less than $2,333.

Qualifying relative clarified.

A child is not the qualifying child of any other taxpayer and so may qualify as your qualifying relative if the child's parent (or other person for whom the child is defined as a qualifying child) is not required to file an income tax return and either:

Does not file an income tax return, or files a return only to get a refund of income tax withheld. For detail and examples, see Qualifying Relative in Publication 501, Exemptions, Standard Deduction, and Filing Information.    
This clarification of the definition of qualifying relative applies to 2005 and later years. If you did not claim an exemption you could have claimed in 2005 or 2006, you can claim it by filing Form 1040X, Amended U.S. Individual Income Tax Return. Generally, you must file Form 1040X within 3 years after the date you filed your original return or within 2 years after you paid the tax, whichever is later. See Form 1040X and its separate instructions

For 2008, you generally can claim a recovery rebate credit of up to $600 ($1,200 if married filing jointly). Generally, the credit cannot be more than your 2008 net income tax liability (your regular tax liability plus any alternative minimum tax (AMT), minus any nonrefundable credits you claimed other than the child tax credit). However, your credit will be at least $300 ($600 if married filing jointly) if you meet either of the following two conditions:

The total of your earned income, social security benefits (including social security disability payments), tier 1 railroad retirement benefits, certain veterans benefits, and nontaxable combat pay you elect to include in earned income is at least $3,000, or your total income (Form 1040, line 22; Form 1040A, line 15; or Form 1040EZ, line 4) is more than $8,950 if your filing status is single or married filing separately ($11,500 if head of household; $14,400 if qualifying widow(er); $17,900 if married filing jointly), and your net income tax liability is more than zero. If you meet either of these conditions, you can also get an additional $300 for each of your children who is a qualifying child for the child tax credit.

To be eligible, you and your spouse each must have a valid social security number. To get the additional $300 credit for a child, the child must have a valid social security number. However, a valid social security number is not required for you, your spouse, or any qualifying child(ren) if you file a joint return and either you or your spouse was a member of the U.S. Armed Forces at any time during 2008.

You are not eligible for the credit if you can be claimed as a dependent of another taxpayer, or if you file Form 1040NR, 1040NR-EZ, 1040-PR, or 1040-SS.

If your 2008 AGI is more than $75,000 ($150,000 if married filing jointly), your credit will be reduced by 5% of your AGI in excess of that amount.

Credit reduced or eliminated by economic stimulus payment. Your credit is reduced by any economic stimulus payment you received in 2008. However, if your credit is less than the stimulus payment you received, you do not have to repay the difference.

The maximum amount of wages subject to the social security tax for 2008 is $102,000. There is no limit on the amount of wages subject to the Medicare tax.

For 2008, the standard mileage rate for the cost of operating your car for business use is:

50.5 cents per mile for the period January 1 through June 30, 2008, and
58.5 per mile for the period July 1 through December 31, 2008.
Car expenses and use of the standard mileage rate are explained in chapter 4 of Publication 463, Travel, Entertainment, Gift, and Car Expenses.

Medical- and move-related mileage. For 2008, the standard mileage rate for the cost of operating your car for medical reasons or as part of a deductible move is:

19 cents per mile for the period January 1 through June 30, 2008, and
27 cents per mile for the period July 1 through December 31, 2008.

Charitable-related mileage. For 2008, the standard mileage rate for the cost of operating your car for charitable purposes remains 14 cents per mile.  

For 2009, the standard mileage rate for the cost of operating your car for business use is 55 cents per mile.

You may qualify to exclude from income gain from the sale of vacant land you owned and used as part of your main home that was destroyed by Hurricanes Katrina, Rita, or Wilma, if you sell the vacant land within 3 years (instead of 2 years) from the date of destruction.

The social security and Medicare wage threshold for household employees is $1,600 for 2008. This means that if you pay a household employee cash wages of less than $1,600 in 2008, you do not have to report and pay social security and Medicare taxes on that employee's 2008 wages.