Written by John W. Mohr
Overview of 2008 US Income Tax Law Changes
The US Internal Revenue Services published its yearly Overview of 2008 Income Tax Law Changes on 1 August. In the paragraphs below we reprint with minor modifications the summary of those changes likely to affect a large number of US citizens and non-resident aliens with US tax reporting obligations. As the summer begins to wind down, it is as good a time as any to start considering tax-planning issues you have put off since finishing your 2007 taxes. And if you have not submitted your 2007 US tax return, you should do so soon. The US deadline is 15 October
Tax Rate on Net Capital Gain and Qualified Dividends
· Maximum tax rate on net capital gain and qualified dividends is reduced from 5% to 0% for taxpayers in the lowest two tax brackets for tax years after 2007.
· The 15% rate remains unchanged.
· New 0% rate applies for both regular tax and AMT.
IRA Contribution Limit
The contribution limit for traditional and Roth IRAs has increased to the lesser of:
· $5,000 ($6,000 for taxpayers age 50 or older at the end of the year), or
· Taxable compensation.
If modified AGI exceeds the applicable limit, the maximum traditional IRA deduction and maximum Roth IRA contribution may be limited.
Rollovers to Roth IRAs
After 2007, rollovers from the following plans can be made to a Roth IRA (in addition to a traditional, SEP, or SIMPLE IRA):
· A qualified pension, profit-sharing or stock bonus plan (including a 401(k) plan),
· An annuity plan,
· A tax shelter annuity plan (section 403(b) plan), or
· A deferred compensation plan of a state or local government (section 457 plan).
The rollover is subject to the same rules that apply for converting a traditional IRA into a Roth IRA.
Phase-Out of Reductions of Personal Exemptions and Itemized Deductions
For 2008, the amount by which these amounts can be reduced is only 1/3 of the amount that would otherwise apply. Example: The maximum reduction for the $3,500 personal exemption for 2008 is $1,167. The minimum exemption allowed after the phase-out is $2,333.
First-Time Homebuyer Credit
First-time homebuyers can claim a refundable tax credit of up to $7,500 ($3,750 if married filing separately) for homes purchased after April 8, 2008, and before July 1, 2009.
· Can elect to treat a 2009 purchase as a 2008 purchase and claim the credit in 2008.
· Credit is phased out ratably over a $20,000 range for taxpayers with AGI over $75,000 ($150,000 if married filing jointly).
· Functions as a 15-year interest-free loan, with 1/15th of credit recaptured annually beginning 2 years after year of purchase.
· Credit will be claimed on new Form 5405.
Exclusion on Sale of Main Home
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,
· The ownership and use requirements for joint filers 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.
Recovery Rebate Credit
For tax years beginning in 2008, taxpayers can claim a refundable credit figured in the same manner as the economic stimulus payment, except that the amounts are based on tax year 2008 instead of tax year 2007.
· The amount of the credit is reduced by any economic stimulus payment received in 2008.
· If the credit is less than the payment received, the difference does not have to be repaid.
Special Depreciation Allowance
· New 50% additional first-year special depreciation allowance applies to most new property purchased and placed in service after 2007.
· To be eligible, the property must be property with a recovery period of 20 years or less, off-the-shelf computer software, qualified leasehold property, or water utility property. The special allowance does not apply if the ADS method is required.
· The taxpayer may elect out for any class of property.
· The allowance is figured after the section 179 deduction and before regular depreciation.
· If the special allowance applies, the limit on depreciation and the section 179 deduction for automobiles is increased by $8,000.
Section 179 Expense Deduction
· Maximum increases to $250,000 (higher in some cases)
· Phase-out begins when section 179 property exceeds $800,000 (higher in some cases)
Tax on Nonresident Aliens
· The exemption from tax on certain interest-related dividends and short-term capital gain dividends paid to a nonresident alien by a regulated investment company does not apply to any tax year of the company beginning after 2007.
· U.S. citizens who relinquish their citizenship after June 16, 2008, are treated as having sold all of their property at fair market value on the day before the expatriation date. An election to defer the tax owed on the deemed sale of the property may be made if adequate security is provided.
The following individual tax benefits have expired:
· Allowance of certain personal tax credits against AMT.
· Deduction for educator expenses in figuring AGI.
· Tuition and fees deduction.
· Deduction for state and local general sales taxes.
· Nonbusiness energy property credit.
· The exclusion from income for certain IRA distributions made directly to a charity.
Please consult the IRS website at www.irs.gov to research specific tax issues.
You can find draft 2008 forms at:
and final 2008 forms at:
If you send an email to the address below we will be pleased to send you the original IRS presentation in MS PowerPoint.
CFO2GO specializes in providing outsourced accounting services to Czech-based SMEs and entrepreneurs. It also assists Czech-based businesses and individuals to fulfill Czech and U.S. tax and accounting reporting obligations. CFO2GO provides extensive interim financial management and statutory governance to small and medium-sized businesses.
The comments in this article are not intended to constitute an opinion regarding any specific tax issues because additional tax issues may exist that could affect the tax treatment of the tax issues addressed in this memo. This memorandum does not consider or reach a conclusion with respect to those additional issues and was not written and cannot be used for the purpose of avoiding penalties under US code section 6662(d).
For further information, please refer to our web site at www.cfo2goeurope.com or contact John Mohr on at john.mohr[at]cfo2goeurope.com