The U.S. Congress has enacted several changes to the 2008 tax code, and International Falls accountant Randy Pozniak says residents should be aware of these updates as they prepare to file their returns over the next few months.
Reconciliation refund checks
People who received a $600 stimulus check in 2008 should know it was based on their 2007 return.
People may also recieve a reconciliation refund stimulus check of $300 or more if earnings in 2007 exceeded $4,000, and at least $600 was paid in federal taxes.
Pozniak noted that the anticipated reconciliation refund is based on 2008 income estimates and not the actual income declared on the 2008 return. If estimated income did not meet actual income reported in 2008, the individual would not be required to return any of the refund, he said.
Common inconsistencies, he added, include unforeseen unemployment, layoffs, or when dependents students enter the workforce.
“In all cases, the stimulus check is tax free,” said Pozniak.
The reconciliation refund will be listed on Line 71 of the IRS Form 1040 of the 2008 return and will have a corresponding worksheet.
The IRS reports that the most common reason for nonpayment of returns and stimulus checks was an incorrect address. Ensure that information is up to date online at www.irs.gov or by calling 800-829-1954.
2008 tax return updates
Individuals and families
• The minimum filing levels for 2008 is $8,950 for singles; $17,900 if married and filing a joint return; and $11,500 if filing as a head of household.
• A new additional standard deduction allows homeowners to deduct property tax payments and mortgage interest of up to $500 for individual or $1,000 to married couples.
• The IRS now requires receipts for all charitable donations claimed at the time of filing.
• A $7,500 refundable credit is a basically an IRS interest-free loan incentive to buy a home. Pozniak said it helps some people get financing for a home. The IRS recovers the loan through $500 annual payments on tax returns over 15 years.
• The health savings account deduction limit is now $2,900 for individuals and $5,800 for families. Individuals over age 54 can deduct an additional $900 in “catch up” payments.
Managed, interest bearing health savings accounts are made of personal contributions and matching funds. They are linked to high deductible health insurance policies, which arranges authorized tax-free health payments on behalf of individuals. The remaining annual savings are rolled over and enduring amounts can transfer to retirement accounts.
“The health savings accounts are becoming a more popular alternative to health insurance, and more employers are switching to these arrangements,” said Pozniak.
• The standard mileage rates increased for the second half of 2009.
The business and employment driving rate for January through June was 50.5-cents per mile and increases to 58.5 cents rate for July through December.
The standard driving rate for medical purposes was 19-cents per mile for January through June, and increased to 27 cents for July through December.
The driving rate for charitable purposes remains fixed at 14-cents per mile.
Elderly
• The maximum annual contribution for individuals over age 50 to IRA accounts increased to $6,000, and $20,500 to 401K accounts.
• The earning ceiling for retirees collecting Social Security is now $13,560.
• The Social Security Tax threshold is $102,000. Wages over $102,000 are subject only to Medicare.
Businesses
• The business equipment expensing election allows a company the option to deduct the full cost of equipment purchases up to $250,000, which is double the 2007 rate.
“This is an incentive to buy equipment to get the economy going again,” said Pozniak.
The credit also allows a 50 percent bonus depreciation on equipment. If a company buys $450,000 worth of equipment, he said the first $250,000 is an immediate credit, with 50 percent credit for the next $200,000, and the remainder depreciated over seven years.
“You can write off $350,000 right away,” he said. “That is a huge tax savings for businesses.”
• A business leasehold improvement bonus depreciation allows business tenants that pay for remodeling to deduct 50 percent immediately, with the remainder on the standard schedule.
• Koochiching County businesses are still eligible for the federal work opportunity tax credit if they hire eligible individuals. The credit is determined by a lost population ratio with each Census.
Investments
• The “kiddie tax” special rate for unearned investment income of up to $1,800, had its age limits increased to 19, or dependent full time students to age 24.
Pozniak said this prevents wealthier parents from shifting the tax burden of interest bearing accounts to their dependents.
• Individuals filing in a 15 percent or less tax bracket now have a tax-free, zero percent long term capital gains rate on stock or real estate held for a year or more. The credit applies to the sale of recreational property but does not allow the deduction for sale of a personal residence, he said.
Pozniak noted that one qualified couple sold a hunting cabin this year for $40,000. The couple saved $2,000 more than if the cabin had sold in 2007, under the five percent capital gains.
• The costs of installing alternative power sources for the home, including geothermal, solar and wind, now earns a 30 percent credit, or up to $2,000.
• The stock loss deduction remains limited to $3,000 per tax return. Losses greater than $3,000, including mutual funds, equity stocks, or real estate, can be forwarded under the same limitations to future returns.
• Tax free debt relief is now available up to $2 million for acquiring and remodeling debt but not to home equity loans. One example of when this occurs, said Pozniak, is when lenders want to liquidate loans and ask borrowers to refinance at a lower rate with another lender.
Credits often overlooked
• Earned Income Credit for single taxpayers with dependent children could exceed $4,000.
• Child and Dependent Care Credit: $3,000 for one and $6,000 for more two or more dependents.
• Child Tax Credit: $1,000 credit for qualifying children under age 17.
• Hope Credit of up to $1,650 on half time or higher college tuition and fees that was paid by first and second year students or parents.
• Lifetime Learning Credit of up to $2,000 for part time college tuition and fees.
• Foreign Tax Credit allows deductions of nonresident taxes on overseas investments.
