Tax Planning Tips for 2008 Tax Returns

William E. Hesch

William E Hesch CPAs, LLC

January 25, 2009

1)  First-Time Homebuyer Credit

• First-time homebuyers who buy principal residences in 2008, and claim a $7,500 credit, will pay it back starting with the 2010 tax return they file in 2011, and ending with the 2024 return they file in 2025, at the rate of $500 per year.
• In general, the payback of the credit is accelerated if you sell the principal residence (or stop using the home as your principal residence) before the end of the pay-back period.
• An election is provided to treat a home purchased in the eligible period in 2009 as if purchased on December 31, 2008 for purposes of claiming the credit on the 2008 tax return and for establishing the beginning of the recapture period.
• Taxpayers may amend their returns for this purpose.
• The provision is effective for qualifying home purchases on or after April 9, 2008 and before July 1, 2009 (without regard to whether or not there was a binding contract to purchase prior to April 9, 2008).

2)  Additional standard deduction for state and local real property taxes

• The provision increases an individual taxpayer’s standard deduction for a taxable year beginning in 2008 by the lesser of:
• (1) the amount allowable to the taxpayer as a deduction for State and local, real property taxes, or
• (2) $500 ($1,000 in the case of a married individual filing jointly).

• Reduced home sale exclusion for some sellers

• After 2008, some home sellers who don’t use their properties as principal residences for their entire ownership period may wind up paying more of a tax bill than they would under current rules (or pay tax when none would be owed currently).
• For sales after 2008, the home sale exclusion will be reduced proportionately for the period of time a home wasn’t used as a principal residence after 2008. The prime example is a vacation home that is turned into a principal residence by its owners, but the new rule also can hit individuals who use a property as a main home for a while, rent it out for a period of time, and then move back in.

4)  Miscellaneous Provisions

• College Tuition Deduction for college tuition and related fees for up to $4,000, was retroactively restored for 2008 and extended thru 2009.
• Exclusion of debt relief from taxable income on qualified principle residence is extended through 2012.
• Income exclusion for charitable transfers up to $100,000 from an IRA was retroactively restored for 2008 and extended thru 2009.
• NEW for 2009
• An employer can add to a qualified non-taxable transportation fringe benefit... a $20 per month reimbursement of bike commuting.  Includes bike purchase, repairs, accessories, and storage.

5)  Kiddie Tax now applies to college students

• The kiddie tax age rises in 2008 to 19.
• For full-time college students whose earned income is less than half their support, the age increases to age 24.
• Under the kiddie tax rules, dependent children who have interest, dividends and capital gains in excess of $1,800 are taxed at their parents tax rates, which are usually higher.

• IRA Planning for 2008 tax returns

• Individual Retirement Accounts (IRAs), Roth IRAs and Simplified Employer Pension plans (SEPs) can be set up on or before April 15, 2009 and contributions paid in by April 15, 2009 can be deducted on the 2008 tax returns.  The IRA contribution limits are $5,000 per taxpayer and $6,000 for taxpayers who were 50 or older in 2008.
• Beware, if you or your spouse is a participant in a company sponsored qualified retirement plan, then income limitations may apply and you may not be allowed to make a tax deductible IRA contribution.  Roth IRAs also have income limitations.  If these income limitations apply, non-deductible IRA contributions are allowable.