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Important changes for annual tax returns

Updated codes and rebates for 2008 filings

Posted: January 14, 2009 10:21 p.m.
Updated: January 15, 2009 4:55 a.m.
 
Editor's note: Second of three parts on new tax laws. Taxpayers and tax preparers will find significant changes when they fill out 2008 tax returns. Some of the changes are outlined below. For other parts of the series, visit www.the-signal.com

The value of each personal and dependency exemption is $3,500, up $100 from 2007. Most taxpayers can take personal exemptions for themselves and an additional exemption for each eligible dependent. An individual who qualifies as someone else's dependent cannot claim a personal exemption, and though personal and dependency exemptions are phased out for higher-income taxpayers, the phase-out rate is slower than in past years.

This is one of more than three dozen individual and business tax provisions that are adjusted each year to keep pace with inflation. A complete rundown of these changes can be found in 2008 Inflation Adjustments Widen Tax Brackets, Change Tax Benefits.

Tax credit rises
The maximum earned income tax credit (EITC) is:

$4,824 for people with two or more qualifying children, up from $4,716 in 2007.
n  $2,917 for those with one child, up from $2,853 last year.
n  $438 for people with no children, up from $428 in 2007.

Available to low and moderate income workers and working families, the EITC helps taxpayers whose incomes are below certain income thresholds, which in 2008 rise to:

$41,646 for those with two or more children.
$36,995 for people with one child.
$15,880 for those with no children.

One in six taxpayers claim the EITC, which, unlike most tax breaks, is refundable, meaning that individuals can get it even if they owe no tax and even if no tax is withheld from their paychecks.

Lowered for investors
The 5-percent tax rate on qualified dividends and net capital gains is reduced to zero. In general, this reduction applies to investors whose taxable income is below:

n
$65,100, if married filing jointly or qualifying widow or widower.
n $32,550, if single or married filing separately.
n $43,650, if head of household.

Note that taxable income is normally less than total income. The worksheet for Form 1040 Line 44, Form 1040A Line x or Schedule D and its instructions provide details.

Kiddie tax revised
The tax on a child's investment income applies if the child has investment income greater than $1,800 and is:

n Under 18 years old.
n 18 years of age and had earned income that was equal to or less than half of his or her total support in 2008.
n Over 18 and under 24, a student and during 2008 had earned income that was equal to or less than half of his or her total support.

Previously, the tax only applied to children under age 18. Form 8615 is used to figure this tax.

For the self-employed
For those who receive Social Security Retirement or disability benefits, any Conservation Reserve Program (CRP) payments are now exempt from the 15.3-percent social security self-employment tax. Schedule SE and its instructions and Publication 225, Farmer's Tax Guide, have the details.

More farmers and self-employed people this year can choose the optional methods for figuring and paying the self-employment tax. These optional methods allow those with net losses or small amounts of business income a way to obtain up to four credits of Social Security coverage.

The income thresholds for both the farm optional method and the nonfarm optional method are increased for 2008 and indexed for inflation in future years. Choosing an optional method may increase a taxpayer's self-employment tax, but it may also qualify him for the earned income tax credit, additional child tax credit, child and dependent care credit or self-employed health insurance deduction. Schedule SE and its instructions have details.

More information about these and other changes can be found on IRS.gov and in various IRS documents, including the Instructions for Form 1040.

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