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Publication 553 2008 Tax Year

1.   Tax Changes for Individuals

Table of Contents

Some of the changes listed in this section apply to both individuals and businesses.

2007 Changes

Economic Stimulus Payment

You may be entitled to an economic stimulus payment of up to $600 ($1,200 if married filing jointly). To get your payment, you only need to file a 2007 individual income tax return (Form 1040, 1040A, or 1040EZ). The IRS will determine whether you are eligible, figure the amount, and send you the payment. The IRS will begin sending the one-time payments in May 2008. The economic stimulus payment is in addition to any 2007 income tax refund, which will be made separately from this one-time payment.

Generally, the payment cannot be more than your 2007 net income tax liability (your regular tax liability plus any alternative minimum tax (AMT), minus any nonrefundable credits you claimed other than the child tax credit). However, your payment will be at least $300 ($600 if married filing jointly) if you meet either of the following two conditions:

  1. The total of your earned income, social security benefits (including social security disability payments), tier 1 railroad retirement benefits, certain veterans benefits, and nontaxable combat pay you elect to include in earned income is at least $3,000, or

  2. Your total income (Form 1040, line 22; Form 1040A, line 15; or Form 1040EZ, line 4) is more than $8,750 if your filing status is single or married filing separately ($11,250 if head of household; $14,100 if qualifying widow(er); $17,500 if married filing jointly), and your net income tax liability is more than zero.

If you meet either of these conditions, you can also get an additional $300 for each of your children who is a qualifying child for the child tax credit.

You may be eligible to get a payment of $300 ($600 if married filing jointly) even if you are not required to file a return. However, you must file a return to get your payment.

To be eligible, you and your spouse each must have a valid social security number. To get the additional $300 payment for a child, the child must have a valid social security number. You are not eligible to get a payment if you can be claimed as a dependent of another taxpayer, or if you file Form 1040NR, 1040NR-EZ, 1040-PR, or 1040-SS.

If your 2007 adjusted gross income (AGI) is more than $75,000 ($150,000 if married filing jointly), your payment will be reduced by 5% of your AGI in excess of that amount.

If you qualify to receive an economic stimulus payment, you will receive a notice shortly before the payment is made. For more information, visit the IRS website at www.irs.gov and click on “Rebate Questions?” at the top of the page.

Alternative Minimum Tax (AMT)

The following changes to the AMT went into effect for 2007. For more information, see Form 6251, Alternative Minimum Tax—Individuals, and its instructions.

AMT exemption amount increased.   The AMT exemption amount has increased to $44,350 ($66,250 if married filing jointly or qualifying widow(er); $33,125 if married filing separately).

AMT exemption amount for a child increased.   The AMT exemption amount for a child under age 18 has increased to $6,300.

Hurricane Katrina additional exemption expired.   The additional exemption for taxpayers who provide housing for a person displaced by Hurricane Katrina has expired. Therefore, the additional exemption amount (formerly line 6 of Form 8914) is no longer allowable for the AMT.

Deduction for qualified mortgage insurance premiums allowed for the AMT.   In most cases, no AMT adjustment is required for the deduction of qualified mortgage insurance premiums.

Foreign Earned Income Tax Worksheet revised.   The Foreign Earned Income Tax Worksheet in the Form 6251 instructions has been revised to reflect changes made by the Tax Technical Corrections Act of 2007.

Certain credits still allowed against AMT.   The special rule that allows the credit for child and dependent care expenses, credit for the elderly or the disabled, education credits, residential energy credits, mortgage interest credit, and the District of Columbia first-time homebuyer credit to be applied against the AMT was scheduled to expire at the end of 2006. However, Congress has extended the special rule through 2007, so those credits can be applied against the AMT for 2007.

Standard Mileage Rate

Business-related mileage.   For 2007, the standard mileage rate for the cost of operating your car for business use is 48½ cents per mile.

Car expenses and use of the standard mileage rate are explained in chapter 4 of Publication 463, Travel, Entertainment, Gift, and Car Expenses.

Medical- and move-related mileage.   For 2007, the standard mileage rate for the cost of operating your car for medical reasons or as part of a deductible move is 20 cents per mile. See Transportation under What Medical Expenses Are Includible in Publication 502, Medical and Dental Expenses (Including the Health Coverage Tax Credit) or Travel by car under Deductible Moving Expenses in Publication 521, Moving Expenses.

Charitable-related mileage.   For 2007, the standard mileage rate for the cost of operating your car for charitable purposes remains 14 cents per mile.

Earned Income Credit (EIC) Amounts Increased

The following paragraphs explain the changes to the credit for 2007. For details, see Publication 596, Earned Income Credit (EIC).

Amount of credit increased.   The maximum amount of the credit has increased. The most you can get is:
  • $2,853 if you have one qualifying child,

  • $4,716 if you have more than one qualifying child, or

  • $428 if you do not have a qualifying child.

Earned income amount increased.   The maximum amount of income you can earn and still get the credit has increased. You may be able to take the credit if:
  • You have more than one qualifying child and you earned less than $37,783 ($39,783 if married filing jointly),

  • You have one qualifying child and you earned less than $33,241 ($35,241 if married filing jointly), or

  • You do not have a qualifying child and you earned less than $12,590 ($14,590 if married filing jointly).

The maximum amount of AGI you can have and still get the credit also has increased. You may be able to take the credit if your AGI is less than the amount in the above list that applies to you.

Investment income amount increased.   The maximum amount of investment income you can have and still get the credit has increased to $2,900.

Advance payment of the credit.   If you get advance payments of the credit from your employer with your pay, the total advance payments you get during 2007 can be as much as $1,712.

Standard Deduction Amount Increased

The standard deduction for people who do not itemize deductions on Schedule A (Form 1040) is, in most cases, higher for 2007. The amount depends on your filing status, whether you are 65 or older or blind, and whether an exemption can be claimed for you by another person. The 2007 Standard Deduction Tables are shown in Publication 501, Exemptions, Standard Deduction, and Filing Information.

Personal Exemptions

The following changes apply for 2007.

Exemption amount increased.   The amount you can deduct for each exemption has increased to $3,400 for 2007.

  You lose part of the benefit of your exemptions if your AGI is above a certain amount. The amount at which the phaseout begins depends on your filing status. For 2007, the phaseout begins at:
  • $117,300 for married persons filing separately,

  • $156,400 for single individuals,

  • $195,500 for heads of household, and

  • $234,600 for married persons filing jointly or qualifying widow(er)s.

  You can lose no more than ⅔ of the dollar amount of your exemptions. In other words, each exemption cannot be reduced to less than $1,133.

  If your AGI is more than the amount shown for your filing status, use the Deduction for Exemptions Worksheet in the Form 1040 or Form 1040A instructions to figure the amount you can deduct for exemptions.

Qualifying relative clarified.   A child is not the qualifying child of any other taxpayer and so may qualify as your qualifying relative if the child's parent (or other person for whom the child is defined as a qualifying child) is not required to file an income tax return and either:
  • Does not file an income tax return, or

  • Files a return only to get a refund of income tax withheld.

For details and examples, see Qualifying Relative in Publication 501.

  This clarification of the definition of qualifying relative applies to 2005 and later years. If you did not claim an exemption you could have claimed in 2005 or 2006, you can claim it by filing Form 1040X. Generally, you must file Form 1040X within 3 years after the date you filed your original return or within 2 years after you paid the tax, whichever is later. See Form 1040X and its separate instructions.

Exclusion From Income for Certain Cancellation of Debt on Principal Residence

You may be able to exclude from gross income a discharge of qualified principal residence indebtedness (defined below). This exclusion applies to discharges made after 2006 and before 2010. Additionally, the basis of your principal residence must be reduced (but not below zero) by the amount excluded from gross income. To claim the exclusion, you must file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), with your tax return.

Qualified principal residence indebtedness.   This is a mortgage you took out to buy, build, or substantially improve your principal residence. It also must be secured by your principal residence. If the amount of your original mortgage is more than the cost of your principal residence plus the cost of any substantial improvements, only the debt that is not more than the cost of your principal residence plus improvements is qualified principal residence indebtedness. Any debt that is secured by your principal residence you use to refinance qualified principal residence indebtedness is treated as qualified principal residence indebtedness, but only up to the amount of the old mortgage principal just before the refinancing. Any additional debt you used to substantially improve your principal residence is also treated as qualified principal residence indebtedness.

Principal residence.   Your principal residence is the home where you ordinarily live most of the time. You can have only one principal residence at any one time.

Amount eligible for the exclusion.   The maximum amount you can treat as qualified principal residence indebtedness is $2 million ($1 million if married filing separately). You cannot exclude from gross income discharge of qualified principal residence indebtedness if the discharge was for services performed for the lender or on account of any other factor not directly related to a decline in the value of your residence or to your financial condition.

Ordering rule.   If only a part of a loan is qualified principal residence indebtedness, the exclusion applies only to the extent the amount discharged exceeds the amount of the loan (immediately before the discharge) that is not qualified principal residence indebtedness. For example, assume your principal residence is secured by a debt of $1 million, of which $800,000 is qualified principal residence indebtedness. If your residence is sold for $700,000 and $300,000 of debt is discharged, only $100,000 of the debt discharged may be excluded (the $300,000 that was discharged minus the $200,000 of nonqualified debt).

Charitable Contributions

The following paragraphs explain the changes to charitable contributions for 2007. For details, see Publication 526, Charitable Contributions.

New recordkeeping requirements for cash contributions.   You cannot deduct a cash contribution, regardless of the amount, unless you keep as a record of the contribution a bank record (such as a canceled check, a bank copy of a canceled check, or a bank statement containing the name of the charity, the date, and the amount) or a written communication from the charity. The written communication must include the name of the charity, date of the contribution, and amount of the contribution.

Contributions to donor advised funds.   You cannot deduct a contribution to a donor advised fund after February 13, 2007, if the sponsoring organization is a war veterans' organization, a fraternal society, or a nonprofit cemetery company. There are also other circumstances in which you cannot deduct your contribution to a donor advised fund. Generally, a donor advised fund is a fund or account in which a donor can, because of being a donor, advise the fund how to distribute or invest amounts held in the fund.

Filing fee for easements on buildings in historic districts.   A new $500 filing fee must be paid for each qualified conservation contribution after February 12, 2007, that is an easement on a building in a registered historic district, if the claimed deduction is more than $10,000. See Form 8283-V, Payment Voucher for Filing Fee Under Section 170(f)(13).

New Form 8917, Tuition and Fees Deduction

Beginning in 2007, in order to claim the tuition and fees deduction, you must complete Form 8917 and file it with Form 1040 or Form 1040A. Previously, a worksheet was provided to help taxpayers figure the amount of the deduction. See Form 8917 and chapter 6 of Publication 970, Tax Benefits for Education, for more information about the tuition and fees deduction.

Income Limits Increased for Student Loan Interest Deduction

For 2007, the amount of the student loan interest deduction is phased out (gradually reduced) if your filing status is married filing jointly or qualifying widow(er) and your modified AGI is between $110,000 and $140,000. You cannot take the deduction if your modified AGI is $140,000 or more.

For all other filing statuses, your student loan interest deduction is phased out if modified AGI is between $55,000 and $70,000. You cannot take a deduction if your modified AGI is $70,000 or more. For more information, see chapter 4 in Publication 970.

Income Limits Increased for Hope and Lifetime Learning Credits

For 2007, the amount of your Hope or lifetime learning credit is phased out (gradually reduced) if your modified AGI is between $47,000 and $57,000 ($94,000 and $114,000 if you file a joint return). You cannot claim an education credit if your modified AGI is $57,000 or more ($114,000 or more if you file a joint return). For more information, see chapters 2 and 3 in Publication 970.

Earned Income for Additional Child Tax Credit

For 2007, the minimum earned income amount used to figure the additional child tax credit has increased to $11,750.

Mortgage Insurance Premium Deduction

You may be able to deduct mortgage insurance premiums you paid after 2006 and before 2011. The mortgage insurance must be paid in connection with home acquisition debt and the mortgage insurance contract must have been issued after 2006. You can deduct mortgage insurance premiums on Schedule A (Form 1040), line 13.

Limit on deduction.   If your AGI is more than $100,000 ($50,000 if married filing separately), the amount of your mortgage insurance premiums that are otherwise deductible is reduced. You cannot deduct any mortgage insurance premiums if your AGI exceeds $109,000 ($54,500 if married filing separately).

For more information, see the instructions for Schedule A (Form 1040).

Limits Increased for Itemized Deductions

If your AGI is above a certain amount, you may lose part of your itemized deductions. In 2007, this amount is increased to $156,400 ($78,200 if married filing separately). See the instructions for Schedule A (Form 1040), line 29, for more information on figuring the amount you can deduct.

Health Savings Accounts (HSAs)

For more information on HSAs, see Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.

High deductible health plan (HDHP).    For HSA purposes, the minimum annual deductible of an HDHP increased to $1,100 ($2,200 for family coverage) and the maximum annual deductible and other out-of-pocket expenses limit increased to $5,500 ($11,000 for family coverage).

Limit on contributions.   Your contributions to your HSA are no longer limited to your annual health plan deductible. The maximum HSA contribution increased to $2,850 ($5,650 for family coverage). The maximum additional contribution for individuals age 55 or older increased to $800.

Last-month rule.    If you are an eligible individual on the first day of the last month of your tax year, you are treated as an eligible individual for the entire year for purposes of computing the amount you can contribute to your HSA.

Transfers from a health reimbursement arrangement (HRA) or health flexible spending arrangement (FSA) to an HSA.   You may be able to request that your employer make a one-time transfer of the balance in your HRA or health FSA to your HSA.

Transfers from an individual retirement account (IRA) to an HSA.   You may be able to exclude from your income a one-time qualified HSA funding distribution from your IRA.

Comparable contributions by an employer.   For purposes of making contributions to the HSA of an employee who is not highly compensated, a comparable participating employee does not include a highly compensated employee.

Child and Dependent Care Credit

The following paragraphs explain the changes to the credit for 2007. For details, see Publication 503, Child and Dependent Care Expenses.

New definition of earned income.    When you figure your credit, your earned income can no longer include nontaxable employee compensation, such as voluntary salary deferrals or military basic quarters allowances. Generally, only taxable compensation is included. However, you can elect to include any nontaxable combat pay in earned income to figure your credit.

  
tip
You can choose to include your nontaxable combat pay in earned income when figuring your credit, even if you choose not to include it in earned income for the earned income credit (EIC) or the exclusion or deduction for dependent care benefits.

Temporary absence from work.   You can figure your credit using expenses for care during a short, temporary absence from work, such as for a vacation or minor illness, provided the care-giving arrangement requires you to pay for care during the absence. An absence of 2 weeks or less is a short, temporary absence. An absence of more than 2 weeks may be considered a short, temporary absence, depending on the circumstances.

Part-time work.   If you work part-time and have to pay for care weekly, monthly, or in another way that includes both days worked and days not worked, you can figure your credit including the expenses paid for days not worked. Any day when you work at least 1 hour is a day of work.

Adoption Benefits Increased

For 2007, the maximum adoption credit has increased to $11,390. Also, the maximum exclusion from income for benefits under your employer's adoption assistance program has increased to $11,390. These amounts are phased out if your modified AGI is between $170,820 and $210,820. You cannot claim the credit or exclusion if your modified AGI is $210,820 or more. See Form 8839, Qualified Adoption Expenses, and its instructions for more information.

Income Limits Increased for Reduction of Education Savings Bond Exclusion

For 2007, the amount of your interest exclusion is phased out (gradually reduced) if your filing status is married filing jointly or qualifying widow(er) and your modified AGI is between $98,400 and $128,400. You cannot take the deduction if your modified AGI is $128,400 or more.

For all other filing statuses, your interest exclusion is phased out if your modified AGI is between $65,600 and $80,600. You cannot take a deduction if your modified AGI is $80,600 or more. For more information, see chapter 9 in Publication 970.

Increase in Deductible Limit for Long-Term Care Premiums

For 2007, the maximum amount of qualified long-term care premiums you can include as medical expenses has increased. You can include qualified long-term care premiums, up to the amounts shown below, as medical expenses on Schedule A (Form 1040).

  • Age 40 or under - $290.

  • Age 41 to 50 - $550.

  • Age 51 to 60 - $1,110.

  • Age 61 to 70 - $2,950.

  • Age 71 or over - $3,680.

The limit is for each person.

Increase in Limit on Long-Term Care and Accelerated Death Benefits Exclusion

The limit on the exclusion for payments made on a per diem or other periodic basis under a long-term care insurance contract increased for 2007 to $260 per day. The limit applies to the total of these payments and any accelerated death benefits made on a per diem or other periodic basis under a life insurance contract because the insured is chronically ill.

Under this limit, the excludable amount for any period is figured by subtracting any reimbursement received (through insurance or otherwise) for the cost of qualified long-term care services during the period from the larger of the following amounts.

  • The cost of qualified long-term care services during the period.

  • The dollar amount for the period ($260 per day for any period in 2007).

See Section C of Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, and its instructions for more information.

Archer Medical Savings Accounts (MSAs) Limits Increased

For MSA purposes, the minimum annual deductible of a high deductible health plan increased to $1,900 ($3,750 for family coverage). The maximum annual deductible of a high deductible health plan increased to $2,850 ($5,650 for family coverage). The maximum out-of-pocket expenses limit increased to $3,750 ($6,900 for family coverage).

Credit for Prior Year Minimum Tax

The following changes to the credit for prior year minimum tax went into effect for 2007. For more information, see Form 8801, Credit for Prior Year Minimum Tax—Individuals, Estates, and Trusts, and its instructions.

Refundable credit for prior year minimum tax.   If you have any unused minimum tax credit carryforward from 2004 or earlier years, you may qualify for a refund of part or all of that credit amount, even if the amount of your current year credit is more than your total tax liability. To figure your current year refundable credit, complete Part IV of Form 8801. Estates and trusts may not claim the refundable credit.

Foreign Earned Income Tax Worksheet.   If you claimed the foreign earned income exclusion or the housing exclusion for 2006 on Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion, you must use the Foreign Earned Income Tax Worksheet on page 2 of the Instructions for Form 8801 to figure the amount to enter on Form 8801, line 11.

New Form 8919, Uncollected Social Security and Medicare Tax on Wages

If you were an employee but your employer treated you as an independent contractor, use new Form 8919 to figure and report your share of uncollected social security and Medicare taxes due on your wages. Do not use Form 4137, Social Security and Medicare Tax on Unreported Tip Income, for this purpose. By using Form 8919, your social security and Medicare taxes also will be credited to your social security record. For more information, see Form 8919.

Social Security and Medicare Taxes

The maximum amount of wages subject to the social security tax for 2007 is $97,500. There is no limit on the amount of wages subject to the Medicare tax.

Federal Telephone Excise Tax Credit

This credit was available only on your 2006 return. If you filed but did not request it on your 2006 return, file Form 1040X, Amended U.S. Individual Income Tax Return, using a simplified procedure explained in its instructions to amend your 2006 return. If you were not required to file a 2006 return, see the 2006 Form 1040EZ-T, Request for Refund of Federal Telephone Excise Tax.

Changes to the Instructions for Form 1040 and Form 1040NR

As a result of the Tax Technical Corrections Act of 2007, the following instructional changes apply when completing the 2007 Form 1040 (or Form 1040NR). The paper and online versions of Form 1040 (and Form 1040NR) and instructions will not be revised.

  • The tax from Form 8889, Health Savings Accounts (HSAs), Part III (relating to health savings accounts) that was to be reported on Form 1040, line 44 (or Form 1040NR, line 41), using checkbox “c” must instead be included in the total on Form 1040, line 63 (or Form 1040NR, line 58), as an additional write-in tax. On the dotted line next to Form 1040, line 63 (or Form 1040NR, line 58), enter “HDHP” and the amount of this tax.

  • The additional tax on recapture of a charitable contribution of a fractional interest in tangible personal property that was to be included on Form 1040, line 44 (or Form 1040NR, line 41), must instead be included in the total on Form 1040, line 63 (or Form 1040NR, line 58), as an additional write-in tax. On the dotted line next to Form 1040, line 63 (or Form 1040NR, line 58), enter “FITPP” and the amount of this tax.

  • All filers of Forms 2555 or 2555-EZ must figure their tax using the Foreign Earned Income Tax Worksheet at the top of the next page instead of the worksheet on page 34 of the Instructions for Form 1040.

Foreign Earned Income Tax Worksheet— Line 44

Before you begin:

  • If Form 1040, line 43, is zero, do not complete this worksheet.

1. Enter the amount from Form 1040, line 43 1.  
2. Enter the amount from your (and your spouse's, if filing jointly) Form 2555, line 45, or Form 2555-EZ, line 18 2.  
3. Add lines 1 and 2 3.  
4. Tax on the amount on line 3. Use the Tax Table, Tax Computation Worksheet, Qualified Dividends and Capital Gain Tax Worksheet*, Schedule D Tax Worksheet*, or Form 8615, whichever applies. See the instructions for Form 1040, line 44, to see which tax computation method applies 4.  
5. Tax on the amount on line 2. Use the Tax Table or Tax Computation Worksheet, whichever applies 5.  
6. Subtract line 5 from line 4. Enter the result. If zero or less, enter -0-. Also include this amount on Form 1040, line 44 6.  
*Enter the amount from line 3 above on line 1 of the Qualified Dividends and Capital Gain Tax Worksheet or Schedule D Tax Worksheet if you use either of those worksheets to figure the tax on line 4 above. Complete the rest of that worksheet through line 6 (line 10 if you use the Schedule D Tax Worksheet). Next, you must determine if you have a capital gain excess. To find out if you have a capital gain excess, subtract Form 1040, line 43, from line 6 of your Qualified Dividends and Capital Gain Tax Worksheet (line 10 of your Schedule D Tax Worksheet). If the result is more than zero, that amount is your capital gain excess.
If you do not have a capital gain excess, complete the rest of either of those worksheets according to the worksheet's instructions. Then complete lines 5 and 6 above.
If you have a capital gain excess, complete a second Qualified Dividends and Capital Gain Tax Worksheet or Schedule D Tax Worksheet (whichever applies) as instructed above but in its entirety and with the following additional modifications. Then complete lines 5 and 6 above. These modifications are to be made only for purposes of filling out the Foreign Earned Income Tax Worksheet above.
1. Reduce the amount you would otherwise enter on line 3 of your Qualified Dividends and Capital Gain Tax Worksheet or line 9 of your Schedule D Tax Worksheet (but not below zero) by your capital gain excess.
2. Reduce the amount you would otherwise enter on Form 1040, line 9b, (but not below zero) by any of your capital gain excess not used in (1) above.
3. Reduce the amount on your Schedule D (Form 1040), line 18, (but not below zero) by your capital gain excess.
4. Include your capital gain excess as a loss on line 16 of your Unrecaptured Section 1250 Gain Worksheet on page D-9 of the Instructions for Schedule D (Form 1040).

Capital Asset Treatment for Self-Created Musical Works

Musical compositions and copyrights in musical works are generally not capital assets. However, you can elect to treat these types of property as capital assets if you sell or exchange them in tax years beginning after May 17, 2006, and:

  • Your personal efforts created the property, or

  • You acquired the property under circumstances (for example, by gift) entitling you to the basis of the person who created the property or for whom it was prepared or produced.

See chapter 4 in Publication 550, Investment Income and Expenses.

Whistleblower Fees

If you receive an award from the IRS for information you provided after December 19, 2006, that substantially contributes to the detection of violations of tax laws by the IRS, you may be able to deduct attorney fees and court costs paid by you in connection with the award as an adjustment to income, up to the amount of the award includible in your gross income.

Vacant Land Used as Part of Main Home Destroyed by a Hurricane

You may qualify to exclude from income gain from the sale of vacant land you owned and used as part of your main home that was destroyed by Hurricanes Katrina, Rita, or Wilma, if you sell the vacant land within 3 years (instead of 2 years) from the date of destruction. For more information, see Publication 523, Selling Your Home.

Special Rules for Owners of Cooperative Apartments

If you own a cooperative apartment, you generally receive the same tax treatment as other homeowners. However, some special rules apply to you. In order for you to deduct your share of the corporation's deductible real estate taxes, the cooperative housing corporation in which you own shares must meet certain conditions. Those conditions were expanded for tax years ending after December 20, 2007. For those conditions, see Special Rules for Cooperatives in Publication 530, Tax Information for First-Time Homeowners.

Sale of Main Home by Employees of the Intelligence Community

If you are an employee of the intelligence community, you may be able to exclude from income a gain from selling your main home, even if you did not live in it for the required 2 years during the 5-year period ending on the date of sale. You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve on qualified official extended duty as an employee of the intelligence community at a duty station located outside of the United States. This choice applies to any sale of a main home after December 20, 2006. For more information, see Members of the uniformed services or Foreign Service or employees of the intelligence community under Period of Ownership and Use in Publication 523.

Conflict-of-Interest Sales

If you are a judicial officer and you sell property at a gain after December 20, 2006, according to a certificate of divestiture issued by the Judicial Conference of the United States (or its designee) and purchase replacement property (permitted property) within 60 days after the sale, you may elect to defer part or all of the realized gain. This election also applies to sales by certain persons related to the judicial officer and to sales by trustees of certain trusts in which the judicial officer or related person has a beneficial interest.

Judicial officer.   Judicial officers are the following.
  1. Chief Justice of the United States.

  2. Associate Justices of the Supreme Court.

  3. Judges of the:

    1. United States courts of appeals,

    2. United States district courts, including the district courts in Guam, the Northern Mariana Islands, and the Virgin Islands,

    3. Court of Appeals for the Federal Circuit,

    4. Court of International Trade,

    5. Tax Court,

    6. Court of Federal Claims,

    7. Court of Appeals for Veterans Claims,

    8. Court of Appeals for the Armed Forces, and

    9. Any court created by an Act of Congress, the judges of which are entitled to hold office during good behavior.

Permitted property.   Permitted property is any obligation of the United States or any diversified investment fund approved by regulations issued by the Office of Government Ethics.

Reporting of sales.   Report these sales on Part IV of Form 8824, Like-Kind Exchanges. You can also see Form 8824 for additional information.

Penalty for Filing Erroneous Claim for Refund or Credit

You may have to pay a penalty if, after May 25, 2007, you file an erroneous claim for refund or credit. The penalty is equal to 20% of the disallowed amount of the claim, unless you can show a reasonable basis for the way you treated an item. The penalty will not be figured on any part of the disallowed amount of the claim that relates to the earned income credit or on which the accuracy-related or fraud penalties are charged.

Dishonored Check Penalty Increased

If your check or money order for payment of tax is not honored by your bank (or other financial institution) and the IRS does not receive the funds, you still owe the tax. In addition, you may be subject to a dishonored check penalty equal to 2 percent of the amount of the check. However, if the check is less than $1,250, then the penalty is the lesser of $25 or the amount of the check.

Penalty for Frivolous Tax Submissions Increased

The IRS has published a list of positions that are identified as frivolous. The penalty for filing a frivolous tax return is $5,000. A frivolous return is one that does not include enough information to figure the correct tax or that contains information clearly showing that the tax you reported is substantially incorrect. You will have to pay the penalty if you filed this kind of return because of a frivolous position on your part or a desire to delay or interfere with the administration of federal income tax laws. Also, the $5,000 penalty applies to other specified frivolous submissions. For more information and a list of positions identified as frivolous, see Notice 2008-14, 2008-4 I.R.B. 310, available at
www.irs.gov/irb/2008-04_IRB/ar12.html.

Expired Tax Benefits

Relief granted for Hurricanes Katrina, Rita, and Wilma.   The following tax benefits have expired and will not apply for 2007.
  • Tax-favored treatment of qualified hurricane distributions from eligible retirement plans.

  • Increased limits and delayed repayment on loans from qualified employer plans.

  • Special rules so a temporary relocation did not affect whether you provided more than half of an individual's support, whether you furnished more than half the cost of keeping up a household, and whether you could treat an individual as a student.

  • Increased limits and an expanded definition of qualified education expenses for the Hope and lifetime learning credits.

  • Additional exemption for housing individuals displaced by Hurricane Katrina.

  • Exclusion from income for discharge of nonbusiness debt by reason of Hurricane Katrina.

Qualified electric vehicle credit.   You cannot claim this credit for any vehicle you placed in service after 2006.

2008 Changes

Recovery Rebate Credit

For 2008, you generally can claim a recovery rebate credit of up to $600 ($1,200 if married filing jointly). Generally, the credit cannot be more than your 2008 net income tax liability (your regular tax liability plus any AMT, minus any nonrefundable credits you claimed other than the child tax credit). However, your credit will be at least $300 ($600 if married filing jointly) if you meet either of the following two conditions:

  1. The total of your earned income, social security benefits (including social security disability payments), tier 1 railroad retirement benefits, certain veterans benefits, and nontaxable combat pay you elect to include in earned income is at least $3,000, or

  2. Your total income is more than $8,950 if your filing status is single or married filing separately ($11,500 if head of household; $14,400 if qualifying widow(er); $17,900 if married filing jointly), and your net income tax liability is more than zero.

If you meet either of these conditions, you can also get an additional $300 for each of your children who is a qualifying child for the child tax credit.

To be eligible, you and your spouse each must have a valid social security number. To get the additional $300 credit for a child, the child must have a valid social security number. You are not eligible to get a payment if you can be claimed as a dependent of another taxpayer, or if you file Form 1040NR, 1040NR-EZ, 1040-PR, or 1040-SS.

If your 2008 AGI is more than $75,000 ($150,000 if married filing jointly), your credit will be reduced by 5% of your AGI in excess of that amount.

Credit reduced or eliminated by economic stimulus payment.   Your credit is reduced by any economic stimulus payment you received in 2008. However, if your credit is less than the stimulus payment you received, you do not have to repay the difference.

Alternative Minimum Tax (AMT)

The following changes to the AMT went into effect for 2008.

AMT exemption amount decreased.   The AMT exemption amount has decreased to $33,750 ($45,000 if married filing jointly or qualifying widow(er); $22,500 if married filing separately).

AMT exemption amount for a child increased.   The AMT exemption amount for a child whose unearned income is taxed at the parent's tax rate has increased to $6,400.

Certain credits no longer allowed against the AMT.   The credit for child and dependent care expenses, credit for the elderly or the disabled, education credits, residential energy credits, mortgage interest credit, and the District of Columbia first-time homebuyer credit are no longer allowed against the AMT, and a new tax liability limit applies. This limit is your regular tax minus any tentative minimum tax (figured without any AMT foreign tax credit).

Maximum Tax Rate on Qualified Dividends and Net Capital Gain Reduced

For tax years beginning after 2007, the 5% maximum tax rate on qualified dividends and net capital gain (the excess of net long-term capital gain over net short-term capital loss) is reduced to 0%. This reduction applies for both regular tax and AMT. The 15% maximum tax rate on qualified dividends and net capital gain has not changed.

Investment Income of Children Under a Certain Age

Increase in age of children whose investment income is taxed at parent's rate.   The rules regarding the age of a child whose investment income may be taxed at the parent's tax rate will change for 2008. Form 8615 is used to figure the child's tax. These rules will continue to apply to a child under age 18 at the end of the year but, beginning in 2008, will also apply to:
  • A child who is age 18 at the end of the year and whose earned income is not more than half of the child's support, and

  • A student who is under age 24 at the end of the year and whose earned income is not more than half of the child's support.

These rules also apply to parents who elect on Form 8814 to report their children's income on their own returns.

  A student is a child who during any part of 5 calendar months of the year was enrolled as a full-time student at a school, or took a full-time, on-farm training course given by a school or a state, county, or local government agency. A school includes a technical, trade, or mechanical school. It does not include an on-the-job training course, correspondence school, or school offering courses only through the Internet.

Increase in investment income amount.   The amount of taxable investment income these children can have without it being subject to tax at the parent's rate has increased to $1,800 for 2008.

Standard Mileage Rate

Business-related mileage.   For 2008, the standard mileage rate for the cost of operating your car for business use is 50½ cents per mile.

  Car expenses and use of the standard mileage rate are explained in chapter 4 of Publication 463.

Medical- and move-related mileage.   For 2008, the standard mileage rate for the cost of operating your car for medical reasons or as part of a deductible move is 19 cents per mile. See Transportation under What Medical Expenses Are Includible in Publication 502 or Travel by car under Deductible Moving Expenses in Publication 521.

Charitable-related mileage.   For 2008, the standard mileage rate for the cost of operating your car for charitable purposes remains 14 cents per mile.

Earned Income Credit

The following paragraphs explain the changes to the credit for 2008.

Amount of credit increased.   The maximum amount of the credit has increased. The most you can get is:
  • $2,917 if you have one qualifying child,

  • $4,824 if you have more than one qualifying child, or

  • $438 if you do not have a qualifying child.

Earned income amount increased.   The maximum amount of income you can earn and still get the credit has increased for 2008. You may be able to take the credit if:
  • You have more than one qualifying child and you earn less than $38,646 ($41,646 if married filing jointly),

  • You have one qualifying child and you earn less than $33,995 ($36,995 if married filing jointly), or

  • You do not have a qualifying child and you earn less than $12,880 ($15,880 if married filing jointly).

The maximum amount of AGI you can have and still get the credit also has increased. You may be able to take the credit if your AGI is less than the amount in the above list that applies to you.

Investment income amount increased.   The maximum amount of investment income you can have and still get the credit has increased to $2,950 for 2008.

Advance payment of the credit.   If you get advance payments of the credit from your employer with your pay, the total advance payments you get during 2008 can be as much as $1,750.

Nontaxable combat pay election.   The election to include your nontaxable combat pay in earned income when you figure your credit has expired and will not apply for 2008.

Standard Deduction Amount Increased

The standard deduction for people who do not itemize deductions on Schedule A (Form 1040) is, in most cases, higher for 2008 than it was for 2007. The amount depends on your filing status, whether you are 65 or older or blind, and whether an exemption can be claimed for you by another person. The 2008 Standard Deduction Tables are shown in Publication 505, Tax Withholding and Estimated Tax.

Personal Exemption Amount Increased

The amount you can deduct for each exemption has increased to $3,500 for 2008.

You lose part of the benefit of your exemptions if your AGI is above a certain amount. The amount at which the phaseout begins depends on your filing status. For 2008, the phaseout begins at:

  • $119,975 for married persons filing separately,

  • $159,950 for single individuals,

  • $199,950 for heads of household, and

  • $239,950 for married persons filing jointly or qualifying widow(er)s.

Beginning in 2008, you can lose no more than ⅓ of the dollar amount of your exemptions. In other words, each exemption cannot be reduced to less than $2,333.

See Publication 505 for more information on figuring the amount you can deduct.

Income Limits Increased for Student Loan Interest Deduction

For 2008, the amount of the student loan interest deduction is phased out (gradually reduced) if your filing status is married filing jointly or qualifying widow(er) and your modified AGI is between $115,000 and $145,000. You cannot take the deduction if your modified AGI is $145,000 or more.

For all other filing statuses, your student loan interest deduction is phased out if modified AGI is between $55,000 and $70,000. You cannot take a deduction if your modified AGI is $70,000 or more. For more information, see chapter 4 in Publication 970.

Hope and Lifetime Learning Credits

Beginning in 2008, the following changes apply to the Hope and lifetime learning (education) credits. For more information, see chapters 2 and 3 in Publication 970.

Income limits for credit reduction increased.   For 2008, the amount of your Hope or lifetime learning credit is phased out (gradually reduced) if your modified AGI is between $48,000 and $58,000 ($96,000 and $116,000 if you file a joint return). You cannot claim an education credit if your modified AGI is $58,000 or more ($116,000 or more if you file a joint return).

Hope credit.   Beginning in 2008, the amount of the Hope credit (per eligible student) is the sum of:
  1. 100% of the first $1,200 of qualified education expenses you paid for the eligible student, and

  2. 50% of the next $1,200 of qualified education expenses you paid for that student.

The maximum amount of Hope credit you can claim in 2008 is $1,800 per student.

Earned Income for Additional Child Tax Credit

For 2008, the minimum earned income amount used to figure the additional child tax credit has increased to $12,050.

Limits Increased for Itemized Deductions

If your AGI is above a certain amount, you may lose part of your itemized deductions. In 2008, this amount is increased to $159,950 ($79,975 if married filing separately). Beginning in 2008, the amount by which these itemized deductions are reduced is only ⅓ of the amount of the reduction that otherwise would have applied. See Publication 505 for more information on figuring the amount you can deduct.

Exclusion on Sale of Main Home by Surviving Spouse

For sales after 2007, the maximum exclusion on the sale of a main home by an unmarried surviving spouse is $500,000 if the sale occurs no later than 2 years after the date of the other spouse's death. However, this rule applies only if the requirements for joint filers relating to ownership and use were met immediately before the date of such death, and during the 2-year period ending on the date of such death, there was no sale or exchange of a main home by either spouse which qualified for the exclusion.

Health Savings Accounts (HSAs)

High deductible health plan (HDHP).    For HSA purposes, the minimum annual deductible of an HDHP remains at $1,100 ($2,200 for family coverage) and the maximum annual deductible and other out-of-pocket expenses limit increases to $5,600 ($11,200 for family coverage).

Limit on contributions.   The maximum HSA contribution increases to $2,900 ($5,800 for family coverage). The maximum additional contribution for individuals age 55 or older increases to $900.

Adoption Benefits Increased

For 2008, the maximum adoption credit has increased to $11,650. Also, the maximum exclusion from income for benefits under your employer's adoption assistance program has increased to $11,650. These amounts are phased out if your modified AGI is between $174,730 and $214,730. You cannot claim the credit or exclusion if your modified AGI is $214,730 or more.

Income Limits Increased for Reduction of Education Savings Bond Exclusion

For 2008, the amount of your interest exclusion is phased out (gradually reduced) if your filing status is married filing jointly or qualifying widow(er) and your modified AGI is between $100,650 and $130,650. You cannot take the deduction if your modified AGI is $130,650 or more.

For all other filing statuses, your interest exclusion is phased out if your modified AGI is between $67,100 and $82,100. You cannot take a deduction if your modified AGI is $82,100 or more. For more information, see chapter 9 in Publication 970.

Increase in Deductible Limit for Long-Term Care Premiums

For 2008, the maximum amount of qualified long-term care premiums you can include as medical expenses has increased. You can include qualified long-term care premiums, up to the amounts shown below, as medical expenses on Schedule A (Form 1040).

  • Age 40 or under - $310.

  • Age 41 to 50 - $580.

  • Age 51 to 60 - $1,150.

  • Age 61 to 70 - $3,080.

  • Age 71 or over - $3,850.

The limit is for each person.

Increase in Limit on Long-Term Care and Accelerated Death Benefits Exclusion

The limit on the exclusion for payments made on a per diem or other periodic basis under a long-term care insurance contract increases for 2008 to $270 per day. The limit applies to the total of these payments and any accelerated death benefits made on a per diem or other periodic basis under a life insurance contract because the insured is chronically ill.

Under this limit, the excludable amount for any period is figured by subtracting any reimbursement received (through insurance or otherwise) for the cost of qualified long-term care services during the period from the larger of the following amounts.

  • The cost of qualified long-term care services during the period.

  • The dollar amount for the period ($270 per day for any period in 2008).

Archer Medical Savings Accounts (MSAs) Limits Increased

For Archer MSA purposes for 2008, the minimum annual deductible of a high deductible health plan increases to $1,950 ($3,850 for family coverage). The maximum annual deductible of a high deductible health plan increases to $2,900 ($5,800 for family coverage). The maximum out-of-pocket expenses limit increases to $3,850 ($7,050 for family coverage).

Credit for Prior Year Minimum Tax

The following changes to the credit for prior year minimum tax go into effect for 2008.

Refundable credit for prior year minimum tax.   Beginning in 2008, your current year refundable credit (before the AGI phaseout) cannot be less than your prior year refundable credit (before the AGI phaseout). For 2007, your refundable credit before the AGI phaseout is on line 55 of Form 8801.

Foreign Earned Income Tax Worksheet revised.   The Foreign Earned Income Tax Worksheet in the Form 8801 instructions will be revised to reflect changes made by the Tax Technical Corrections Act of 2007.

Exclusion of Income for Volunteer Firefighters and Emergency Medical Responders

For tax years beginning after 2007 and before 2011, gross income does not include:

  • Rebates or reductions of property or income taxes provided by a state or local government for providing services as a member of a qualified emergency response organization (defined below). Any such rebate or reduction reduces the amount of the income tax deduction for such taxes.

  • Qualified payments made by a state or local government for providing services as a member of a qualified emergency response organization. The exclusion is limited to $30 multiplied by the number of months the member performs such services. A charitable deduction for expenses paid by the member in connection with performing such services must be reduced by any payment excluded from income.

A qualified volunteer emergency response organization is any volunteer organization organized and operated to provide firefighting or emergency medical services for persons in a state or local jurisdiction and required by written agreement with that state or local jurisdiction to furnish such services.

Social Security and Medicare Taxes

The maximum amount of wages subject to the social security tax for 2008 is $102,000. There is no limit on the amount of wages subject to the Medicare tax.

Wage Threshold for Household Employees

The social security and Medicare wage threshold for household employees is $1,600 for 2008. This means that if you pay a household employee cash wages of less than $1,600 in 2008, you do not have to report and pay social security and Medicare taxes on that employee's 2008 wages. For more information, see Social security and Medicare wages in Publication 926, Household Employer's Tax Guide.

Expired Tax Benefits

In addition to those mentioned earlier, the following tax benefits have expired and will not apply for 2008.

  • Deduction for educator expenses in figuring AGI.

  • Tuition and fees deduction.

  • Deduction for state and local general sales taxes.

  • District of Columbia first-time homebuyer credit (for homes purchased after 2007).

  • Nonbusiness energy property credit.

  • The increased limit on a deduction for a qualified conservation contribution from 30% of AGI to 50% of AGI (100% of AGI for certain farmers and ranchers).

caution
At the time this publication went to print, Congress was expected to consider legislation that would reinstate many of these benefits. To find out if legislation is enacted, go to www.irs.gov , click on More Forms and Publications , and then on What's Hot in forms and publications .

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