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Changes to Tax Law in 2008


As if our federal tax code isn’t complicated enough, the Internal Revenue Service goes and changes it every year. And 2008 was no different. The IRS adjusted tax brackets, exemptions, and standard deductions for inflation and added new credits. Here’s a quick rundown of some of the 2008 tax changes most likely to impact twenty-somethings.

Adjustments for Inflation

The personal exemption you claim for yourself and each dependent is $100 more in 2008; now $3,500. The standard deduction, used by filers that don’t itemize deductions, also went up. Single filers will see a $100 increase, to $5,450. For married couples filing jointly, the deduction went up $200 to $10,900. For heads of household, the standard deduction is up $150 to $8,000. Finally, the minimum income levels required to trigger each tax bracket have gone up approximately 2%. All of these adjustments for inflation mean that if you made the exact same money in 2008 as in 2007, your tax bill will go down.

Other 2008 Tax Changes

  • $7,500 Tax Credit for First-Time Home Buyers. If you bought a home after April 8, 2008, you may be eligible to take a new first-time home buyer tax “credit” of 10% of the purchase price, up to $75,000. I put credit in quotes because it’s actually an interest-free loan that must be repaid over your next fifteen tax returns.
  • IRAs Have Higher Income Limits. The maximum incomes allowed to take a full deduction for a traditional IRA contributions have increased to $53,000 for single filers and $85,000 for married joint filers. Partial deductions are allowed for single filers making $73,000 or less and married joint filers earning $105,000 or less. Contribute to a Roth IRA? The amounts you can contribute to a Roth begin to be phased out above incomes of $101,000 (single) and $159,000 (married/joint).
  • Property Taxes Standard Deduction. If you paid property taxes in 2008, you can claim a deduction of up to $1,000 (joint) and $500 (single) for real estate taxes paid, even if you don’t itemize.
  • State and Local Sales Tax Deduction. Filers have a choice of deducting state and local income taxes or the state sales tax. Although the option to deduct state sales tax was set to expire this year, it was reinstated for 2008.
  • Income Earned Abroad. The maximum amount of foreign-earned income you can exclude is up to $87,600 from $85,700.
  • Teacher’s Deduction. The educator’s deduction for up to $250 of classroom supplies purchased by teachers will be in effect in 2008. This deduction is set to disappear after 2009.
  • Tuition and Fees Deduction. Another deduction that was set to expire in 2008, the deduction for up to $4,000 of college tuition and fees will remain in effect in 2008 and 2009.

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

  1. You may be able to take “credit” out of quotation marks. There was a story this weekend about the payback requirement being removed.

    http://www.startribune.com/homes/buy/38151584.html?elr=KArksLckD8EQDUoaEyqyP4O:DW3ckUiD3aPc:_Yyc:aUnciatkEP7DhUsl

    From the article:
    “On Jan. 15, the House Democratic leadership outlined its $825 billion economic stimulus package, loaded with $275 billion in tax cuts […] Tucked away in the tax section was a significant improvement to last July’s congressional effort to stimulate home sales. […] Though final details on a revised credit are still subject to negotiations between the House and Senate, and to passage of the economic stimulus package itself, there’s a good chance that buyers who sought the credit in 2008, and new purchasers in 2009, will be relieved of the repayment requirement.”

    I am thrilled by this and just submitted my taxes this weekend. Hopefully this goes through and those who qualify will be able to keep the money, which is going mostly into home improvements for me.

  2. I hadn’t heard that yet—thanks for pointing it out! That makes a nice tax perk even better.

  3. Who can help me answer this? I am a first time homeowner who closed in Jan. 08. Why should I not be afforded the same opportunity as a first time homeowner who closed in APR? It just doesnt seem fair.

  4. I agree! I closed on my house on April 8, 2008. I am not positive yet, but I’m pretty sure I’m SOL as well. Who is to say those who bought a home after April 9, 2008 are feeling the woes of the economy any more than those of us who closed a few days, weeks, or months before. It should be changed to Jan. 1, 2008!