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INCOME TAX LAW CHANGES
Overview of 2008 Income Tax Law Changes
Tax Rate on Net Capital Gain and Qualified Dividends :
Maximum tax rate on net capital gain and qualified dividends is reduced from 5% to 0% for taxpayers in the lowest two tax brackets for tax years after 2007.
The 15% rate remains unchanged.
The 0% rate applies for both regular tax and the Alternative Minimum Tax (AMT).
IRA Contribution Limit
The contribution limits for traditional and Roth Individual Retirement Accounts (IRAs) has increased to the lesser of:
• $5,000 ($6,000 for taxpayers age 50 or older at the end of the year), or
• Taxable compensation.
If modified Adjusted Gross Income (AGI) exceeds the applicable limit in Rev. Proc. 2007-66and 2007-45 IRB970, the maximum traditional IRA deduction and maximum Roth IRA contribution may be limited.
Rollovers to Roth IRAs
After 2007, rollovers from the following plans can be made to a Roth IRA (in addition to a traditional, SEP, or SIMPLE IRA):
A qualified pension, profit-sharing or stock bonus plan (including a 401(k) plan),
An annuity plan,
A tax shelter annuity plan (section 403(b) plan), or
A deferred compensation plan of a state or local government (section 457 plan).
The rollover is subject to the same rules that apply for converting a traditional IRA into a Roth IRA.
Phaseout of Reductions of Personal Exemptions and Itemized Deductions For 2008, the amount by which these amounts can be reduced is only one-half of the amount that would otherwise apply. Example. The maximum reduction for the $3,500 personal exemption for 2008 is $1,167. The minimum exemption allowed after the phaseout is $2,333.
Kiddie Tax Rules
The "kiddie tax" rules (reflected on Forms 8615 and 8814) are expanded to cover:
A child who is age18 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.
Exclusion on Sale of Main Home
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 two years after the date of the other spouse's death,
The ownership and use requirements for joint filers were met immediately before the date of such death, and
During the two-year period ending on the date of such death, there was no sale or exchange of a main home by either spouse that qualified for the exclusion.
Individuals can elect to postpone the running of the five-year test period for ownership and use for up to 10 years starting in 2008 while the individual or his or her spouse is serving outside of the United States in the Peace Corps.
For sales and exchanges after June 17, 2008, members of the intelligence community that elect to postpone the running of the five-year test period no longer are required to move to a duty station outside the United States.
Exclusion for Emergency Responder
For tax years 2008 through 2010, gross income does not include the following, if provided by a state or local government:
Rebates or reductions of property or income taxes for providing services as a member of a qualified emergency response organization.
Qualified payments (up to $30 per month) for providing services as a member of a qualified emergency response organization.
The excluded income reduces any related tax or contribution deduction.
Recovery Rebate Credit
For tax years beginning after 2007, taxpayers can claim a refundable credit figured in the same manner as the economic stimulus payment, except that the amounts are based on tax year 2008 instead of tax year 2007.
The amount of the credit is reduced by any economic stimulus payment received in 2008. If the credit is less than the payment received, the difference does not have to be repaid.
Special Depreciation Allowance
New 50% additional first-year special depreciation allowance applies to most new property purchased and placed in service after 2007.
To be eligible, the property must have a recovery period of 20 years or less, off-the-shelf computer software, qualified leasehold property, or water utility property. The special allowance does not apply if the ADS method is required.
The taxpayer may elect out for any class of property.
The allowance is figured after the section 179 deduction and before regular depreciation.
If the special allowance applies, the limit on depreciation and the section 179 deduction for automobiles is increased by $8,OOO.
Section 179 Expense Deduction
Maximum increases to $250,000 ($285,000 for enterprise zone and renewal community businesses; $350,000 if qualified section 179 Gulf Opportunity Zone property).
Phaseout begins when section 179 property exceeds $8OO,OOO ($1.4 million if qualified section 179 Gulf Opportunity Zone property).
Self-Employment Tax
Thresholds for farm and nonfarm optional methods increased to allow electing taxpayers to secure four credits of coverage each year. For 2008, lower limit increased from $1,600 to $4,200, and upper limit increased from $2,400 to $6,300.
Conservation Reserve Program payments excluded from net SE earnings for farmers receiving social security benefits.
Increase in Meal Expense Limit for Certain Transportation Workers
For 2008, workers who are subject to the Department of Transportation hours of service limits can deduct 8O% of business meals consumed during, or incident to, any period of duty when those limits are in effect. This includes certain air transportation workers, interstate truck operators, interstate bus drivers, certain railroad workers, and certain merchant mariners.
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