Capital Gains Exclusion

Personal Residence Capital Gain Exclusion

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Summary of Federal Tax Changes 2008

Summary of Federal Tax Law Changes for 2008 - 2017

Tax breaks in recent tax-relief bills were designed to be phased in over a number of years, or are indexed to inflation. This article explains the changes scheduled to come into effect through 2017 to help you determine how these tax laws affect your long-term plans.

Tax Year Changes

2008 2010 2011 2011 2013 2017

Starting in 2008
Tax Credit of Up to $7,500 for First-time Homebuyers

If you purchased a primary residence in 2008 after April 8, and are a “first-time” homebuyer, you can qualify for a new tax credit equal to 10 percent of up to $75,000 of the purchase price. To be eligible, you must not have owned a residence in the U.S. in the previous three years. The credit phases out between $150,000 and $170,000 of Adjusted Gross Income for joint filers, and $75,000 to $95,000 for single filers. It is refundable to the extent it exceeds your regular tax liability, which means that if it more than offsets your tax liability, you’ll get a refund check. But it does not offset the Alternative Minimum Tax.

Beware: This credit is more like an interest-free loan from Uncle Sam, because it will be repaid over 15 years. The repayment period starts two years after the year the credit is claimed. Thus, if you claim a $7,500 tax credit for a purchase in 2008, you will have to pay an extra $500 of income tax in 2011, and in later years.

If you sell the residence before the credit is fully repaid, the balance is due in the year of the sale. (If your profit on the sale is less than the credit amount outstanding, though, the amount due is limited to the amount of your profit.)

Higher Income Limits for Deductible IRAs and for Roth IRAs

If you are covered by a retirement plan at work, you can take a full IRA deduction if your modified Adjusted Gross Income is less than $85,000 (married filing jointly) or $53,000 (single or head of household). A partial deduction is allowed until your Adjusted Gross Income reaches $105,000 if you are married filing jointly, or $73,000 if you are single or a head of household. Also, the opportunity to contribute to a Roth IRA is now phased out as your modified Adjusted Gross Income rises between $159,000 and $169,000 if you are married filing jointly, or $101,000 to $116,000 if you are single or a head of household.

Indexed Tax Brackets

Thanks to inflation in the past year, the 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent tax brackets all kick in at approximately 2 percent higher levels of income than in 2007.

Larger Personal Exemptions

For 2008, each personal exemption you can claim is worth $3,500—up by $100 from 2007.

Higher Standard Deductions

For 2008, the standard deduction for married filing jointly rises to $10,900, up by $200 from 2007. For single filers, the amount increases to $5,450 in 2008, up by $100 over 2007. And heads of household can claim $8,000 in 2008, a jump of $150 from 2007.

Additional Standard Deduction Amount for Property Taxes Paid

Non-itemizers who pay real estate taxes can claim even larger standard deductions. Joint filers can add in up to $1,000 of property taxes paid to the amounts shown above. Singles can add in up to $500 of real estate tax payments.

Reduction in Itemized Deductions and Personal Exemptions for High-Income Taxpayers

Currently, itemized deductions and personal exemptions are phased out as your income rises. In 2008, the reduction of itemized deductions occurs once your Adjusted Gross Income exceeds $159,950, regardless of your filing status. Your itemized deductions are reduced by 1 percent of the amount by which your AGI exceeds $159,950, but you can never lose more than 80 percent of your itemized deductions.

Also, your medical expenses, investment interest deduction, deductible gambling losses and any casualty and theft losses are not subject to the cut. Personal exemptions are reduced by 2 percent for each $2,500 of Adjusted Gross Income over $239,950 for marrieds filing jointly, $199,950 for heads of households and $159,950 for singles, but the reduction cannot exceed $1,167 per exemption.

Increased Section 179 Expense Deduction

Thanks to a new law, the maximum amount of equipment placed in service in 2008 that businesses can expense increases to $250,000, a $125,000 increase from 2007. The annual investment limit increases to $800,000 in 2008, up from $500,000 the year before. Thus, you won't lose the benefit of expensing until you place more than $800,000 of assets in service in 2008.

Tax-free Parking for Employees

Starting in 2008, employees are not taxed on up to $220 a month of employer-paid parking, up $5 per month from 2007. The cap on tax-free transit passes their employers can give rises to $115 a month, up $5 a month from 2007.

Exemptions for the Alternative Minimum Tax

Congress increased the AMT exemptions for 2008 to prevent millions of additional taxpayers from having to pay the minimum tax. For 2008, the exemptions are $46,200 for single taxpayers and heads of households, $69,950 for married couples filing joint returns, and $34,975 for married couples filing separately. Unless Congress acts in 2010, the exemption levels will drop to $45,000 for married filing jointly, $33,750 for singles and heads of household, and $22,500 for married couples filing separately.

Income Earned Abroad

The maximum foreign earned income exclusion is increased to $87,600 this year (up from $85,700).

Tougher Kiddie Tax

Beginning in 2008, Congress gave the kiddie tax more bite. In 2007, a child's unearned income over $1,700, such as gains and dividends, was taxed at the parents' marginal rate until the year the child is 18. The threshold increases to $1,800 in 2008, but the age is raised to 19. For full-time students whose earned income is less than half their support, it increased to 24. This change prevents families from shifting appreciated assets to their kids to take advantage of the zero percent rate on capital gains, which is discussed below.

Reduction in Capital Gains Tax Rates

Prior to 2008, long-term capital gains from the sale of assets held longer than one year were taxed at a maximum rate of 5 percent, to the extent the seller was in the 10 percent or 15 percent tax brackets. In 2008, the 5 percent maximum rate drops to zero percent through 2011. The 15 percent maximum tax rate on long-term capital gains for taxpayers in higher brackets stays the same.

Reduction in Dividend Tax Rates

Similarly, in 2008 the special 5 percent maximum rate on dividends of taxpayers in the 10 percent and 15 percent tax brackets drops to zero percent through 2011.

State and Local Sales Tax Deduction

The opportunity for itemizers to choose to deduct their state sales tax payments instead of deducting state and local income taxes was reinstated for 2008. This break is now set to expire after 2010.

Educators' Deduction

This deduction for up to $250 of classroom supplies purchased by educators was revived for 2008. It is now scheduled to lapse after 2010.

Nontaxable Combat Pay Allowed for Earned Income Tax Credit (EITC)


The election to include nontaxable combat pay in the calculation of earned income for the Earned Income Tax Credit was extended to apply again for 2008 and 2010.

Tuition and Fees Deduction

The deduction for up to $4,000 of college tuition and fees was reinstated by Congress for 2008 and 2010.

Direct Donations of IRAs to Charity

For 2008 and 2010, IRA owners age 70 ½ and older can donate up to $100,000 of their IRAs to charity without having to report the withdrawal as income and deduct the donation as a charitable contribution. Thus, their deductions will not be limited by the Adjusted Gross Income cap on charitable contributions or the itemized deduction phaseout. Keeping IRA distributions out of adjustable gross income in the first place can also have other benefits. Amounts donated in this way count as all or part the IRA owner’s required minimum distribution.

Refundable Child Tax Credit

The $12,050 income threshold needed to qualify to claim the child tax credit if it exceeds your regular income tax bill is lowered to $8,500 for 2008.

Tax Relief for Victims of the Floods in the Midwest

Victims of the spring 2008 floods in 10 Midwestern states (Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska and Wisconsin) are eligible for a slew of tax breaks:

Itemizers can deduct all their uninsured losses, without regard to the $100 floor or 10 percent of Adjusted Gross Income offset.
Victims can withdraw up to $100,000 from an IRA or company plan without penalty, and pay tax on the payouts over three years. Any amounts that are recontributed during that time will be treated as rollovers, and any tax paid can be refunded by filing Form 1040-X.
Victims can borrow the lesser of $100,000 or their vested benefit from company plans.
Anyone housing flood victims for 60 days or more gets a $500 exemption for each one, up to a maximum of $2,000.
The standard mileage rate for flood-related charitable driving in 2008 is 36 cents per mile for driving done before July 1, and 41 cents per mile for driving done after June 30.
The $1,800 and $2,000 maximums for the Hope and Lifetime Learning credits, respectively, are doubled for 2008 and 2010 for students in colleges in the disaster area.

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