7 tax changes for 2008

1. Home-buyer credit

Usually, once the year ends there's not much you can do to change that year's tax bill, other than making certain retirement-plan contributions. But in 2009, first-time home buyers eligible for the new $8,000 tax credit can opt to use that credit on their 2008 return. Prepare to be confused, however. Since the new $8,000 credit was signed into law in the stimulus bill this month, the 2008 tax forms won't reflect the change.

Last year, Congress enacted a $7,500 credit for first-time buyers who purchased a home after April 8, 2008 and before July 1, 2009. That credit must be repaid. If you purchased your first home in 2008 (after April 8), then that's the credit you'll take and the IRS instructions and forms will reflect the rules for that credit.

But the recent stimulus bill changed the terms of that credit for 2009. Now, first-time buyers who purchase a house from Jan. 1 through Nov. 30, 2009, are eligible for an $8,000 credit that does not need to be repaid (unless you sell the home within three years of purchase). And they can claim that perk on their 2008 return, tax experts said.

There's the $7,500 credit from 2008 that was supposed to be good through this coming June. Even properties you bought today could have been filed under that $7,500 credit for 2008, now there's this newer credit with more money that you don't have to pay back, but that's nowhere mentioned in any of the instructions for the forms.

See this IRS page for more on the $7,500 tax credit.

2. Forgiven debt

People who lose their homes to foreclosure are often shocked at tax time to find that their forgiven mortgage debt is considered taxable income. But that's not the case for taxpayers who face foreclosure from 2007 through 2012.

Under most circumstances, the forgiveness of debt that you owe to somebody else is considered taxable income to you in that year, but as a result of recent legislation, you get an exclusion of up to $2 million of [mortgage] debt.

To qualify for this tax break, the mortgage debt forgiven had to be on your principal residence, and had to be used "to buy, build or substantially improve your principal residence" or was a refinance loan for that purpose, according to the IRS. See this IRS page for more.
Even though you don't owe the tax, you can't ignore this situation on your tax return. Fill out Form 982, though probably not the entire form, according to the IRS. "If you are using the form only to report the exclusion of forgiveness of qualified principal residence indebtedness as the result of foreclosure on your principal residence," the IRS said, "you only need to complete lines 1e and 2. If you kept ownership of your home and modification of the terms of your mortgage resulted in the forgiveness of qualified principal residence indebtedness, complete lines 1e, 2, and 10b."

Also, taxpayers who file bankruptcy generally do not have to include debt forgiven in that situation as taxable. See this IRS page for other questions related to financial crisis.

3. That other stimulus payment

Fully 15% of filers made a mistake related to the "recovery rebate credit," according to an IRS review of returns filed early this year. This credit is available to taxpayers who are eligible to receive additional money from the fiscal stimulus enacted by the Bush administration in 2008.
Some filers are claiming more money than they're eligible for; others are entering on their tax return the amount of the stimulus payment they received in 2008. That's wrong -- the space on the tax return is for claiming additional money.

Most people who got a stimulus payment last year won't get more money this year, the IRS said.
"The recovery rebate credit is on the tax form to help those taxpayers whose financial situation changed in 2008 and they may be due more money. For example, they may have had a child born last year. Or, someone may have been a dependent on another's tax return in 2007 but was not in 2008," said Nancy Mathis, an IRS spokeswoman, in an email interview.

See this IRS page for more on the recovery rebate credit.

4. Tax breaks that didn't expire

As you do your 2008 taxes, don't forget that some tax breaks were renewed for 2008 and 2009. Those include the deduction for state and local sales taxes (for those who don't deduct state income taxes), the expense deduction for teachers who pay out-of-pocket for classroom materials, and the tuition and fees deduction for education costs (keep in mind for next year's filing that the recent stimulus bill created a new education credit for 2009 and 2010). See related story.

5. Standard deductions on the rise

The 2008 standard deduction rose to $10,900 for married-filing-jointly, $5,450 for single and married-filing-separate, and $8,000 for head-of-household filers. Also, taxpayers can claim an added standard deduction based on real-estate taxes paid in 2008. This applies to "any state or local real-estate taxes you paid that would be deductible on Schedule A if you were itemizing deductions, up to $500 ($1,000 if married filing jointly)," the IRS said. Also, a taxpayer can increase her standard deduction by the net disaster losses suffered from a federally declared disaster. See this IRS page for more on the standard deduction.

6. Kiddie tax

Be careful when it comes to the "kiddie tax" -- the levy whereby children's investment income is taxed at the parents' rate. This tax used to apply to children younger than 18. Now it applies to investment income greater than $1,800 for children who are younger than 18, or 18-years-old and with earned income that was less than half of their total support in 2008, or students older than 18 and younger than 24 who in 2008 had earned income that was less than half their total support, according to the IRS.

7. Withdrawing retirement savings early

No doubt some taxpayers last year found themselves forced to pull money earlier than expected from their retirement plans. Be sure to report that as income on your tax return.
"The retirement plan will send the IRS a Form 1099-R. They will send you a copy as well. It will be your responsibility to report that as income on your return. Generally, early withdrawals are assessed a 10% penalty, though exceptions apply for certain hardships. See IRS publication 575 and see "tax on early distributions."

John R. Dundon, EA - www.1040.com/jd - Taxpayer Advocate - Enrolled with the United States Department of Treasury to Practice before the IRS - Under contract with the United States Department of Treasury as a Certified ITIN Acceptance Agent - Direct phone # 720-234-1177