Recent-Tax-Changes

Recent Tax Changes

These are the newly-enacted tax law and other changes for 2008 and 2009 tax years.

Contents:

Tax Changes for

Individuals
Businesses
Disaster Losses
Estate and Trusts
Foreign Taxes
IRAs and Other Retirement Plans

Tax Changes for Individuals

Alternative Minimum Tax (AMT)
There are several changes affecting Alternative Minimum Tax for 2008 and 2009.

Child-Related Tax Changes
Information on adoption benefits, child's investment income, and additional child tax credit.

Credit for Prior Year Minimum Tax
There are several changes to the credit for prior year minimum tax.

Decreased Estimated Tax Payment for Qualified Individuals With Small Businesses
For 2009, qualified individuals with small businesses may be eligible to make smaller estimated tax payments.

Deduction for Credit or Debit Card Convenience Fees
If you pay your income tax (including estimated tax payments) by credit or debit card, you may be able to deduct convenience fees.

Deduction for Sales and Excise Taxes Imposed on Purchase of New Motor Vehicles
In 2009, you can deduct the state or local sales and excise taxes imposed on the purchase of a qualified motor vehicle after February 16, 2009, and before January 1, 2010.

Definition of "Qualified Military Benefit" Expanded
The definition of "qualified military benefit" is expanded.

Earned Income Credit
The earned income credit amounts have increased for 2008 and 2009.

Economic Recovery Payment
Information on new economic recovery payments and credits.

Education-Related Tax Changes
Information on education savings bond exclusion, hope and lifetime learning credits, tuition and fees deduction, and student loan interest deduction.

Exclusion of Income for Volunteer Firefighters and Emergency Medical Responders
For tax years beginning after 2007 and before 2011, gross income ...

Income Averaging for Farmers and Fisherman
New rules apply for averaging farming and fishing income. Information on settlements from Exxon Valdez litigation.

Health/Medical-Related Tax Changes
Information on Archer Medical Savings Accounts (MSAs), Health Savings Accounts(HSAs), and long-term care premiums.

Home/Residence-Related Tax Changes
Information on mortgage insurance premiums, residential energy credits, and sale of main home by employees of intelligence communities.

Increase in Limit on Long-Term Care and Accelerated Death Benefits Exclusion
New limits on exclusion payments made under a long-term care insurance contract.

Itemized Deductions
The itemized deduction phaseout income limits have increased for 2008 and 2009.

Like-Kind Exchanges
The exchange of stock in a mutual ditch, reservoir, or irrigation company may qualify for nonrecognition of gain or loss under section 1031.

Maximum Tax Rate on Qualified Dividends and Net Capital Gain Reduced
There are changes to the maximum tax rate on qualified dividends and net capital gain.

New Rules for Children of Divorced or Separated Parents
For tax years beginning after July 2, 2008 (the 2009 calendar year for most taxpayers), new rules apply to allow the custodial parent to revoke a release of claim to exemption that was previously released to the noncustodial parent on Form 8332 or similar form.

Penalty for Failure to File Income Tax Return Increased
The failure to file penalty has increased.

Personal Exemptions
The deduction amount and phaseout income levels have increased for 2008 and 2009.

Recovery Rebate Credit
See if you are eligible for the recovery rebate credit.

Residential Energy Credits
Information on residential energy credits.

Social Security and Medicare Taxes
The maximum amount of wages subject to the social security tax and Medicare tax has increased for 2008.

Special Limitation Period for Retroactively Excluding Military Retirement Pay
If you retire from the armed services based on years of service and are later given a retroactive service-connected disability rating by the VA, your retirement pay for the retroactive period is excluded from income up to the amount of VA disability benefits you would have been entitled to receive.

Special Rules for Individuals Impacted by Hurricanes Katrina, Rita, and Wilma
Did you claim a casualty or theft loss deduction?

Standard Deduction Increased
The standard deduction increased for 2008.

Standard Mileage Rate
The standard mileage rate for business use of your vehicle, medical and move- related use and charitable use has increased for 2008.

Unemployment Compensation
A portion of unemployment compensation received is excludable.

Wage Threshold for Household Employees
The social security and Medicare wage threshold for household employees is...

(Last Reviewed or Updated: June 02, 2009)

Alternative Minimum Tax (AMT)

2008 Changes
The following changes to the AMT went into effect for 2008. For more information, see Form 6251, Alternative Minimum Tax --Individuals, and its instructions.

AMT exemption amount increased. The AMT exemption amount has increased to $46,200 ($69,950 if married filing jointly or qualifying widow(er); $34,975 if married filing separately

AMT exemption amount for a child. The AMT exemption amount is now limited for certain children under age 24. (Before 2008, the limit applied to children under 18.) The minimum exemption amount for a child has increased to $6,400.

Certain credits still allowed against the 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 efficient property credit, 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 2007. However, Congress has extended this special rule through 2008, so those credits can be applied against the AMT for 2008.

Tax-exempt interest on certain housing bonds exempt from AMT. Tax-exempt interest on the following bonds is not an item of tax preference and therefore is not subject to the AMT if the bonds were issued after July 30, 2008.

An exempt facility bond for which 95 percent or more of the net proceeds are to be used to provide qualified residential rental projects.
A qualified mortgage bond.
A qualified veterans' mortgage bond.
This treatment also applies to interest on any refunding bond if the bond being refunded (or, in the case of a series of refunded bonds, the original bond) is one of the bonds listed above issued after July 30, 2008.

Special depreciation allowance for qualified disaster assistance property allowed against AMT. No AMT adjustment is required for depreciation of qualified disaster assistance property that is eligible for the special depreciation allowance.

Qualified disaster loss. The 90% limit on the alternative tax net operating loss deduction (ATNOLD) does not apply to the portion of an ATNOLD attributable to qualified disaster losses.

Increase in standard deduction for net disaster loss allowed for AMT. If you claimed the standard deduction for the regular tax and it includes a net disaster loss attributable to a federally declared disaster, that net disaster loss is also allowable as a deduction for the AMT.

Kansas disaster area. The following benefits for the Kansas disaster area apply to the AMT.

No AMT adjustment is required for depreciation of qualified recovery assistance property that is eligible for the special depreciation allowance.
The 90% limit on the alternative tax net operating loss deduction (ATNOLD) does not apply to the portion of an ATNOLD attributable to qualified recovery assistance losses.
Midwestern disaster areas. The following benefits for the Midwestern disaster areas apply to the AMT.

The exemption amount on Form 8914 that is allowable for the regular tax if you provided housing for a person displaced by the Midwestern severe storms, tornadoes, and flooding is also allowable for the AMT.
The interest on qualified Midwestern disaster area bonds is not a tax preference item. Do not include it on Form 6251, line 12.
The 90% limit on the alternative tax net operating loss deduction (ATNOLD) does not apply to the portion of an ATNOLD attributable to qualified disaster recovery assistance losses.
2009 Changes
The following changes to the AMT went into effect for 2009.

AMT exemption amount increased. The AMT exemption amount has increased to $46,700 ($70,950 if married filing jointly or qualifying widow(er); $35,475 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 $6,700.

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, 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 2008. However, Congress has extended the special rule through 2009, so those credits can be applied against the AMT for 2009. This special rule is also expanded to include the personal use part of the alternative motor vehicle credit. It also applies to the nonbusiness energy property credit.

Qualified motor vehicle tax allowed against AMT. If you claim the standard deduction for the regular tax and it includes any state or local sales or excise tax on the purchase of a qualified motor vehicle, that tax is also allowed as a deduction for the AMT.

Tax-exempt interest on specified private activity bonds issued in 2009 or 2010 exempt from AMT. Tax-exempt interest on specified private activity bonds issued in 2009 or 2010 is not an item of tax preference and therefore is not subject to the AMT. A refunding bond is treated as issued on the date of the issuance of the refunded bond (or, in the case of a series of refundings, the original bond). However, tax-exempt interest on a specified private activity bond issued in 2009 or 2010 to currently refund a private activity bond issued after 2003 and before 2009 is not an item of tax preference.

(Last Reviewed or Updated: May 05, 2009)

Child-Related Tax Changes

Adoption Benefits Increased
For 2008 and 2009, the maximum adoption credit and maximum exclusion from income under your employer’s adoption assistance program have increased.

Child's Investment Income
For 2008, new rules apply for children between the ages of 18 and 23 with investment income. The taxable investment income amount has increased for 2008 and 2009.

Definition of Qualifying Child Revised
For 2009, changes have been made to the definition of a qualifying child.

Earned Income for Additional Child Tax Credit
The amount your earned income must exceed to claim the additional child tax credit has decreased for 2008 and 2009.

(Last Reviewed or Updated: May 05, 2009)

Adoption Benefits Increased

2008
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. See Form 8839, Qualified Adoption Expenses, and its instructions for more information.

2009
For 2009, the maximum adoption credit has increased to $12,150. Also, the maximum exclusion from income for benefits under your employer's adoption assistance program has increased to $12,150. These amounts are phased out if your modified AGI is between $182,180 and $222,180. You cannot claim the credit or exclusion if your modified AGI is $222,180 or more.

(Last Reviewed or Updated: March 07, 2009)

Child's Investment Income

2008
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 have changed for 2008. These rules continue to apply to a child under age 18 at the end of the year but, beginning in 2008, will also apply in certain cases to a child who either:

Was age 18 at the end of 2008 and did not have earned income that was more than half of the child's support, or
Was a full-time student over age 18 and under age 24 at the end of 2008 and did not have earned income that was more than half of the child's support.
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.

Form 8615 is used to figure the child's tax. These rules also apply to parents who elect on Form 8814 to report their child's income on the parents' return.

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.

2009
The amount of taxable investment income a child can have without it being subject to tax at the parent's rate has increased to $1,900 for 2009.

(Last Reviewed or Updated: March 07, 2009)

Definition of Qualifying Child Revised

For 2009, the following changes have been made to the definition of a qualifying child.

To be your qualifying child, the child must be younger than you.
A child cannot be your qualifying child if he or she files a joint return, unless the return was filed only as a claim for refund.
If the parents of a child can claim the child as a qualifying child but no parent so claims the child, no one else can claim the child as a qualifying child unless that person's AGI is higher than the highest AGI of any parent of the child.
Your child is a qualifying child for purposes of the child tax credit only if you can and do claim an exemption for him or her.

(Last Reviewed or Updated: May 05, 2009)

Earned Income for Additional Child Tax Credit

2008
For 2008, the amount your earned income must exceed to claim the additional child tax credit is reduced to $8,500.

2009
For 2009, the amount your earned income must exceed to claim the additional child tax credit is reduced to $3,000.

(Last Reviewed or Updated: April 29, 2009)

Credit for Prior Year Minimum Tax

The following changes to the credit for prior year minimum tax went into effect for 2008. For more information, see Form 8801, Credit for Prior Year Minimum Tax-- Individuals, Estates, and Trusts, and its instructions.

Decrease in credit for abatement of alternative minimum tax (AMT) related to incentive stock options (ISOs). If you owed AMT for 2007 or any prior year due to the AMT adjustment for the exercise of ISOs (Form 6251, line 13, for 2007), the amount of any such tax that you still owed as of October 3, 2008, has been abated. This means that your debt has been forgiven and you no longer owe this tax. However, you must reduce the amount of your credit for prior year minimum tax.

Increase in credit for interest and penalties related to ISO adjustments. If you paid interest and penalties on AMT for 2007 or any prior year due to the AMT adjustment for the exercise of ISOs, the amount of your prior year minimum tax that is eligible for the credit is increased for the first 2 years beginning after 2007 by 50% of the total of any such interest and penalties you paid before October 3, 2008.

Refundable credit for prior year minimum tax. The calculation of the tentative refundable credit (Form 8801, Part IV) has been revised to reflect changes made by the Tax Extenders and Alternative Minimum Tax Relief Act of 2008.

Foreign Earned Income Tax Worksheet revised. The Foreign Earned Income Tax Worksheet on page 2 of the Instructions for Form 8801 has been revised to reflect changes made by the Tax Technical Corrections Act of 2007.

(Last Reviewed or Updated: March 07, 2009)

Decreased Estimated Tax Payment for Qualified Individuals With Small Businesses

For 2009, qualified individuals with small businesses may be eligible to make smaller estimated tax payments. If you qualify, your required annual payment for 2009 is the smaller of 90% of the tax shown on your 2008 tax return or 90% of the tax shown on your 2009 tax return. You must check box F in Part II on Form 2210 or box C on Form 2210-F to certify that you qualify.

You are a qualified individual if:

More than 50% of your gross income was from a business that had an average of fewer than 500 employees in 2008, and
Your adjusted gross income in 2008 was less than $500,000 ($250,000 if you are filing married filing separately for 2009).

(Last Reviewed or Updated: May 14, 2009)

Deduction for Credit or Debit Card Convenience Fees

If you pay your income tax (including estimated tax payments) by credit or debit card, you can deduct the convenience fee you are charged by the card processor to pay using your credit or debit card. The deduction is claimed for the year in which the fee was charged to your card as a miscellaneous itemized deduction on line 23 of Schedule A (Form 1040) (and is subject to the 2% of adjusted gross income floor).

(Last Reviewed or Updated: May 14, 2009)

Deduction for Sales and Excise Taxes Imposed on Purchase of New Motor Vehicles

In 2009, you can deduct the state or local sales and excise taxes imposed on the purchase of a qualified motor vehicle after February 16, 2009, and before January 1, 2010. A qualified motor vehicle includes a passenger automobile, light truck, or motorcycle, the original use of which begins with that purchaser and that has a gross vehicle weight rating of 8,500 pounds or less. A qualified motor vehicle also includes a motor home, the original use of which begins with that purchaser. The amount of tax you are able to deduct is limited to the tax that is imposed on the first $49,500 of the purchase price of the vehicle. The deduction is phased out over a $10,000 range that begins when modified adjusted gross income is more than $125,000 ($250,000 if married filing a joint return). No deduction is allowed when modified adjusted gross income is equal to or more than $135,000 ($260,000 if married filing a joint return). The new deduction can be used to increase the amount of your standard deduction or you can take it as an itemized deduction (if you are not electing to take the state and local general sales tax deduction).

(Last Reviewed or Updated: May 14, 2009)

Definition of "Qualified Military Benefit" Expanded

A "qualified military benefit" generally means any excludable allowance or other in-kind benefit (other than personal use of a vehicle) received by a member or former member of the uniformed services of the United States or the dependent of such a member because of the member's status or service as a member of such services. The definition of qualified military benefit has been expanded to include payments by a state or a political subdivision thereof to a member or former member of the uniformed services of the United States or to a dependent of such a member if the payments are made only because of the member's service in a combat zone. See Publication 3, Armed Forces' Tax Guide, for more information about qualified military benefits.

(Last Reviewed or Updated: May 14, 2009)

Earned Income Credit

2008
The following paragraphs explain the changes to the credit for 2008. 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 for 2008 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 adjusted gross income (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.

Nontaxable combat pay election. You can elect to include your nontaxable combat pay in earned income when you figure your earned income credit for 2008. This election was due to expire at the end of 2007 but has been extended to all years after 2007.

2009
The following paragraphs explain the changes to the credit for 2009.

Amount of credit increased. The maximum amount of the credit has increased. The most you can get for 2009 is:

$3,043 if you have one qualifying child,
$5,028 if you have two qualifying children,
$5,657 if you have three or more qualifying children, or
$457 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 2009. You may be able to take the credit if:

You have three or more qualifying children and you earn less than $43,279 ($48,279 if married filing jointly)
You have two qualifying children and you earn less than $40,295 ($45,295 if married filing jointly),
You have one qualifying child and you earn less than $35,463 ($40,463 if married filing jointly), or
You do not have a qualifying child and you earn less than $13,440 ($18,440 if married filing jointly).
The maximum amount of adjusted gross income (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 $3,100 for 2009.

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 2009 can be as much as $1,826.

(Last Reviewed or Updated: April 29, 2009)

Economic Recovery Payment

Any economic recovery payment you receive during 2009 is not taxable. These $250 payments are being made to most people who:

Receive social security benefits, supplemental security income (SSI), railroad retirement benefits, or veterans disability compensation or pension benefits, and
Live in a U.S. state, the District of Columbia, Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa, or the Northern Mariana Islands.
If you are married and you and your spouse both meet these requirements, each of you may get a $250 payment.

If you are entitled to a payment, you will get it automatically. You do not need to apply for it.

Making Work Pay and Government Retiree Credits
Two new credits you may be able to take for 2009 are the:

Making work pay credit, and
Government retiree credit.
Making work pay credit. You may be able to take this credit if you have earned income from work. Even if your federal income tax withholding is reduced during 2009 because of the credit, you must claim the credit on your return to benefit from it.

You cannot take the credit if:

Your modified AGI is $95,000 ($190,000 if married filing jointly) or more,
You are a nonresident alien, or
You can be claimed as a dependent on someone else's return.
The credit is 6.2% of your earned income but cannot be more than $400 ($800 if married filing jointly). The credit will be reduced if:

You receive a $250 economic recovery payment (described earlier) during 2009,
Your modified AGI is more than $75,000 ($150,000 if married filing jointly), or
You take the government retiree credit discussed next.
Government retiree credit. You can take this credit if you receive a pension or annuity payment in 2009 for service performed for the U.S. Government or any U.S. state or local government (or any instrumentality of one or more of these) and the service was not covered by social security. The credit is $250 ($500 if married filing jointly and both you and your spouse receive a qualifying pension or annuity). However, you cannot take the credit if you receive a $250 economic recovery payment during 2009. If you file a joint return, both you and your spouse receive a qualifying pension or annuity, and both of you receive an economic recovery payment, no government retiree credit is allowed; if only one of you receives an economic recovery payment, the credit is $250.

Social security number. To take either credit, you must include your social security number (if filing a joint return, the number of either you or your spouse) on your return. A social security number does not include an identification number issued by the IRS.

Schedule M. Generally, you will use new Schedule M (Form 1040A or 1040) to figure both the making work pay credit and the government retiree credit. Both credits are refundable, which means they are treated like payments you made and may give you a refund even if you had no tax withheld from your pay or your pension. If you are filing Form 1040EZ, you can take the making work pay credit on that form and do not have to file Schedule M.

More information. If you want to figure now the amount you can expect from these credits, see Worksheet 2-9 in Publication 505, Tax Withholding and Estimated Tax.

(Last Reviewed or Updated: May 01, 2009)

Education-Related Tax Changes

Education Savings Bond Exclusion
Modified adjusted gross income phaseout amounts have increased for 2008 and 2009.

Expanded Definition of Qualified Expenses for Qualified Tuition Programs
For tax years 2009 and 2010, the definition of qualified higher education expenses is expanded.

Hope and Lifetime Learning Credits
The amount of the education credits and the income phaseout limits have increased for 2008. The Hope Credit has been expanded for 2009 and 2010.

Student Loan Interest Deduction
For 2008 and 2009, the modified adjusted gross income phaseout amounts have increased.

Tuition and Fees Deduction
To claim the tuition and fees deduction, you must complete Form 8917, Tuition and Fees Deduction, and file it with Form 1040 or Form 1040A.

(Last Reviewed or Updated: May 06, 2009)

Education Savings Bond Exclusion

2008
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 adjusted gross income (MAGI) is between $100,650 and $130,650. You cannot take the deduction if your MAGI is $130,650 or more.

For all other filing statuses, your interest exclusion is phased out if your MAGI is between $67,100 and $82,100. You cannot take a deduction if your MAGI is $82,100 or more.

2009
For 2009, 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 adjusted gross income (AGI) is between $104,900 and $134,900. You cannot take the exclusion if your modified AGI is $134,900 or more.

For all other filing statuses, your interest exclusion is phased out if your modified AGI is between $69,950 and $84,950. You cannot take the exclusion if your modified AGI is $84,950 or more. For more information, see chapter 10 in Publication 970, Tax Benefits for Education.

(Last Reviewed or Updated: February 17, 2009)

Expanded Definition of Qualified Expenses for Qualified Tuition Programs

The definition of qualified higher education expenses for tax-free distributions from a qualified tuition program is expanded to include amounts paid in 2009 or 2010 for the purchase of computer software, any computer or related peripheral equipment, fiber optic cable related to computer use, and Internet access (including related services) that are to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is enrolled at an eligible educational institution.

For more information, including restrictions on qualifying software, see chapter 8 of Publication 970.

(Last Reviewed or Updated: June 07, 2009)

Hope and Lifetime Learning Credits

2008 Changes
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 adjusted gross income (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 maximum amount of Hope credit you can claim is $1,800 ($3,600 if a student in a Midwestern disaster area) per student. The amount of the credit for each eligible student is the sum of:

100% of the first $1,200 ($2,400 if a student in a Midwestern disaster area) of qualified education expenses you paid for the eligible student, and
50% of the next $1,200 ($2,400 if a student in a Midwestern disaster area) of qualified education expenses you paid for that student.
Students in Midwestern disaster areas. The following rules apply only to students attending an eligible educational institution in the Midwestern disaster areas in the states of Arkansas, Illinois, Indiana, Iowa, Missouri, Nebraska, and Wisconsin. See Table 3-2 near the end of chapter 3 in Publication 970, Tax Benefits for Education, for a list of counties.

Hope credit increased. The Hope credit for students in Midwestern disaster areas is 100% of the first $2,400 of qualified education expenses and 50% of the next $2,400 of qualified education expenses for a maximum credit of $3,600 per student. See chapter 2 of Publication 970 for more information.
Lifetime learning credit increased. The lifetime learning credit rate for students in Midwestern disaster areas is 40% of qualified expenses paid, with a maximum credit of $4,000 allowed on your return. See chapter 3 of Publication 970 for more information.
Definition of qualified expenses expanded. The definition of qualified education expenses for the education credits is expanded for students in Midwestern disaster areas. See chapters 2 and 3 of Publication 970 for more information.

2009 and 2010 Changes
For tax years 2009 and 2010, the following changes have been made to the Hope credit. The modified credit is also referred to as the American opportunity tax credit.

The maximum amount of the Hope credit increases to $2,500 per student. The credit is phased out (gradually reduced) if your modified adjusted gross income (AGI) is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return). Exception. For 2009, if you claim a Hope credit for a student who attended a school in a Midwestern disaster area, you can choose to figure the amount of the credit using the previous rules. However, you must use the previous rules in figuring the credit for all students for which you claim the credit.
The Hope credit can now be claimed for the first four years of post-secondary education. Previously the credit could be claimed for only the first two years of post-secondary education.
Generally, 40% of the Hope credit is now a refundable credit, which means that you can receive up to $1,000 even if you owe no taxes. However, none of the credit is refundable if the taxpayer claiming the credit is a child (a) who is under age 18 (or a student who is at least age 18 and under age 24 and whose earned income does not exceed one-half of his or her own support), (b) who has at least one living parent, and (c) who does not file a joint return.
The term "qualified tuition and related expenses" has been expanded to include expenditures for "course materials." For this purpose, the term "course materials" means books, supplies, and equipment needed for a course of study whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance.
For more information, see chapter 2 of Publication 970.

For 2009, the amount of your lifetime learning credit is phased out (gradually reduced) if your modified adjusted gross income (AGI) is between $50,000 and $60,000 ($100,000 and $120,000 if you file a joint return). You cannot claim a lifetime learning credit if your modified AGI is $60,000 or more ($120,000 or more if you file a joint return). For more information, see chapter 3 in Publication 970.

(Last Reviewed or Updated: June 07, 2009)

Student Loan Interest Deduction

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

For all other filing statuses, your student loan interest deduction is phased out if MAGI is between $55,000 and $70,000. You cannot take a deduction if your MAGI is $70,000 or more.

For more information, see chapter 4 in Publication 970, Tax Benefits for Education

2009
For 2009, the amount of the student loan interest deduction is phased out (gradually reduced) if your filing status is married filing jointly and your modified adjusted gross income (AGI) is between $120,000 and $150,000. You cannot take the deduction if your modified AGI is $150,000 or more.

For all other filing statuses, your student loan interest deduction is phased out if your modified AGI is between $60,000 and $75,000. You cannot take a deduction if your modified AGI is $75,000 or more. For more information, see chapter 4 in Publication 970.

(Last Reviewed or Updated: February 17, 2009)

Tuition and Fees Deduction

Students in Midwestern disaster areas. For tax years beginning in 2008 and 2009, the definition of qualified education expenses for the tuition and fees deduction is expanded for students attending an eligible educational institution in Midwestern disaster areas in the states of Arkansas, Illinois, Indiana, Iowa, Missouri, Nebraska, and Wisconsin. See Table 3-2 near the end of chapter 3 in Publication 970, Tax Benefits for Education, for a list of counties. For more information about the tuition and fees deduction, see chapter 6 in Publication 970.

(Last Reviewed or Updated: February 17, 2009)

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.

(Last Reviewed or Updated: March 07, 2009)

Income Averaging for Farmers and Fisherman

Exxon Valdez litigation. If you received qualified settlement income made up of interest and punitive damages in connection with the civil action In re Exxon Valdez, No. 89-095-CV (HRH) (Consolidated) (D. Alaska), you may treat this settlement payment as income from a fishing business for the purpose of income averaging. You are eligible to make this election only if you are a plaintiff in the civil action or you were a beneficiary of the estate of your spouse or a close relative who was such a plaintiff from whom you acquired the right to receive qualified settlement income. See the Instructions for Schedule J (Form 1040).

New rules for averaging farming and fishing income. The four items discussed below are effective for tax years beginning after July 22, 2008. However, you may apply any of these provisions to tax years beginning after December 31, 2003, and before July 23, 2008, if those provisions are consistently applied in each tax year. For more information, see Treasury Decision (T.D.) 9417, 2008-37 I.R.B. 693.

Farming and fishing business. If you operate both a farming and fishing business, you combine the income, gains, deductions, and losses from both businesses to figure the amount of income eligible for income averaging.

Lessors of fishing boats. You are treated as being in a fishing business if you lease a boat and your lease payments are based on a share of the catch (or a share of the proceeds from the sale of the catch) from the lessee's use of the boat, but only if this manner of payment is determined under a written lease agreement entered into before the lessee begins significant fishing activities resulting in the catch.

Crew members on fishing boats. Crew members on a commercial fishing vessel are engaged in the fishing business for purposes of income averaging if their compensation is based on a share of the boat's catch or a share of the proceeds from the sale of the catch. The compensation of such a crew member is treated as income from a fishing business, whether or not he or she is treated as an employee for employment tax purposes.

Merchant Marine Capital Construction Fund (CCF) deposits. If you reduced your taxable income on Form 1040, line 43, or Form 1040NR, line 40, by any amount deposited into a CCF account, take into account the CCF reduction in figuring taxable income for income averaging purposes. Also, the CCF reduction is generally treated as a deduction attributable to your fishing business in figuring elected farm income. However, if any taxable income (without regard to the carryback of any net operating or net capital loss) from the operation of agreement vessels in the fisheries of the United States or in the foreign or domestic commerce of the United States is not attributable to your fishing business, that amount does not reduce elected farm income.

(Last Reviewed or Updated: June 02, 2009)

Health/Medical-Related Tax Changes

Archer Medical Savings Accounts (MSAs)
For 2008 and 2009, the minimum annual deductible, maximum annual deductible, and the maximum out-of-pocket expenses limit have increased.

Health Savings Accounts (HSAs)
The minimum/maximum annual deductible, out-of-pocket expenses,and maximum contribution amounts have increased for 2008 and 2009.

Long-Term Care Premiums
For 2008 and 2009, the maximum amount of qualified long-term care premiums includible as medical expenses has increased.

Health Flexible Spending Arrangements (FSAs)
A special rule allows amounts in a health FSA to be distributed to reservists ordered or called to active duty.

(Last Reviewed or Updated: February 17, 2009)

Archer Medical Savings Accounts (MSAs)

2008
Expiration of Archer MSAs. After December 31, 2007, you cannot be treated as an eligible individual for Archer MSA purposes unless:

You were an active participant for any taxable year ending before January 1, 2008, or
You become active participant for a tax year ending after December 31, 2007, by reason of coverage under a high deductible health plan of an Archer MSA participating employer.
Limits increased.For Archer MSA purposes, the minimum annual deductible of a high deductible health plan increased to $1,950 ($3,850 for family coverage). The maximum annual deductible of a high deductible health plan increased to $2,900 ($5,800 for family coverage). The maximum out-of-pocket expenses limit increased to $3,850 ($7,050 for family coverage).

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

2009
For Archer MSA purposes for 2009, the minimum annual deductible of a high deductible health plan increases to $2,000 ($4,000 for family coverage). The maximum annual deductible of a high deductible health plan increases to $3,000 ($6,050 for family coverage). The maximum out-of-pocket expenses limit increases to $4,000 ($7,350 for family coverage).

(Last Reviewed or Updated: February 17, 2009)

Health Savings Accounts (HSAs)

2008
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.

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

2009
High Deductible Health Plan (HDHP).For HSA purposes, the minimum annual deductible of an HDHP increases to $1,150 ($2,300 for family coverage) and the maximum annual deductible and other out-of-pocket expenses limit increases to $5,800 ($11,600 for family coverage).

Limits on contributions.The maximum HSA contribution increases to $3,000 ($5,950 for family coverage). The maximum additional contribution for individuals age 55 or older increases to $1,000

(Last Reviewed or Updated: February 26, 2009)

Long-Term Care Premiums

2008
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.

Note. The limit is for each person.

2009
Increase in Deductible Limit for Long-Term Care Premiums

For 2009, 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 - $320.
Age 41 to 50 - $600.
Age 51 to 60 - $1,190.
Age 61 to 70 - $3,180.
Age 71 or over - $3,980.

(Last Reviewed or Updated: February 17, 2009)

Health Flexible Spending Arrangements (FSAs)

Qualified reservist distribution from a health FSA. A special rule allows amounts in a health FSA to be distributed to reservists ordered or called to active duty. This rule applies to distributions after June 17, 2008, if the plan has been amended to allow these distributions. A qualified reservist distribution is allowed if:

The individual was, by reason of being a member of a reserve component, ordered or called to active duty for a period in excess of 179 days or for an indefinite period, and

The distribution is made during the period beginning on the date of such order or call and ending on the last date that reimbursements could be made for the plan year which includes the date of such order or call.
For more information, see Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.

(Last Reviewed or Updated: February 17, 2009)

Home/Residence-Related Tax Changes

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...

First-Time Homebuyer Credit
If you are a first-time homebuyer you may be able to claim a one-time tax credit.

New Rule for Employees and Volunteers of the Peace Corps
If you or your spouse is an employee, enrolled volunteer, or volunteer leader of the Peace Corps, you may be able to exclude from income a gain from selling your main home.

(Last Reviewed or Updated: June 02, 2009)

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.

(Last Reviewed or Updated: March 07, 2009)

First-Time Homebuyer Credit

If you are a first-time homebuyer, you may be able to claim a one-time tax credit equal to the lesser of:

$7,500 ($8,000 if you purchased your home in 2009), but only half of that amount if married filing separately, or
10% of the purchase price of your home.
You may be able to claim the credit if:

You purchased your main home in the United States after April 8, 2008, and before December 1, 2009, and
You (and your spouse if married) did not own any other main home during the 3-year period ending on the date of purchase.
If you constructed your main home, you are treated as having purchased it on the date you first occupied it.

Who cannot claim the credit. You cannot claim the credit if any of the following apply.

Your modified adjusted gross income is $95,000 or more ($170,000 or more if married filing jointly).
You are, or were, eligible to claim the District of Columbia first-time homebuyer credit for any taxable year. See Form 8859. This rule does not apply for a home purchased in 2009.
Your home financing comes from tax-exempt mortgage revenue bonds. This rule does not apply for a home purchased in 2009.
You are a nonresident alien
Your home is located outside the United States
You sell the home, or it ceases to be your main home, before the end of 2008
You acquired your home by gift or inheritance
You acquired your home from a related person. A related person includes:
Your spouse, ancestors (parents, grandparents, etc.), or lineal descendants (children, grandchildren, etc.)
A corporation in which you directly or indirectly own more than 50% in value of the outstanding stock of the corporation
A partnership in which you directly or indirectly own more than 50% of the capital interest or profits interests
Repayment of credit
Homes purchased in 2008. You generally must repay the credit over a 15-year period in 15 equal installments. The repayment period begins in 2010 and you must include the first installment as additional tax on your 2010 tax return.
If your home ceases to be your main home before the 15-year period is up, you must include all remaining annual installments as additional tax on the return for the tax year that happens. This includes situations where you sell the home, you convert it to business or rental property, or the home is destroyed, condemned, or disposed of under threat of condemnation.

Homes purchased in 2009. You must repay the credit only if the home ceases to be your main home within the 36-month period beginning on the purchase date. This includes situations where you sell the home, you convert it to business or rental property, or the home is destroyed, condemned, or disposed of under threat of condemnation. You repay the credit by including it as additional tax on the return for the year the home ceases to be your main home. If the home continues to be your main home for at least 36 months beginning on the purchase date, you do not have to repay any of the credit.

More Information. For exceptions to the repayment rule, more information about the credit, and how to claim the credit, see Form 5405, First-Time Homebuyer Credit.

(Last Reviewed or Updated: April 29, 2009)

New Rule for Employees and Volunteers of the Peace Corps

If you or your spouse is an employee, enrolled volunteer, or volunteer leader of the Peace Corps, you may be able to exclude from income a gain from selling your main home, even if you did not live in it for 2 years during the 5-year period ending on the date of sale. Generally, you can elect to have the 5-year test period for ownership and use suspended for up to 10 years during any period you or your spouse serve outside the United States (on qualified official extended duty if an employee). This provision applies to a sale of a main home in tax years beginning after 2007. Similar benefits already apply to members of the uniformed services or Foreign Service or employees of the intelligence community. For more information, see Publication 523, Selling Your Home.

(Last Reviewed or Updated: June 02, 2009)

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

2008
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).
See section C of Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, and its instructions for more information.

2009
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 2009 to $280 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 ($280 per day for any period in 2009).

(Last Reviewed or Updated: May 01, 2009)

Itemized Deductions

2008
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). See the instructions for Schedule A (Form 1040), line 29, for more information on figuring the amount you can deduct.

2009
If your AGI is above a certain amount, you may lose part of your itemized deductions. In 2009, this amount is increased to $166,800 ($83,400 if married filing separately).

(Last Reviewed or Updated: April 29, 2009)

Like-Kind Exchanges

Beginning with exchanges completed after May 22, 2008, the exchange of stock in a mutual ditch, reservoir, or irrigation company may qualify for the nonrecognition of gain or loss under section 1031.

The nonrecognition of gain or loss on the exchange may apply if, at the time of the exchange:

The company is a section 501(c)(12)(A) organization (determined without regard to the percentage of income collected from members for the purpose of meeting losses and expenses), and
The shares of stock in the company have been recognized by the highest court in the state in which the company was organized or by an applicable statute of that state as constituting or representing real property or an interest in real property.

(Last Reviewed or Updated: April 29, 2009)

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%. The 15% maximum tax rate on qualified dividends and net capital gain has not changed.

(Last Reviewed or Updated: March 07, 2009)

New Rules for Children of Divorced or Separated Parents

Revocation of release of claim to an exemption. For tax years beginning after July 2, 2008 (the 2009 calendar year for most taxpayers), new rules apply to allow the custodial parent to revoke a release of claim to exemption that was previously released to the noncustodial parent on Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, or similar form. The revocation is effective no earlier than the tax year beginning in the calendar year following the calendar year in which the custodial parent provides, or makes reasonable efforts to provide, the noncustodial parent with written notice of the revocation. Therefore, if the custodial parent provides notice of revocation to the noncustodial parent in 2009, the earliest tax year the revocation can be effective is the tax year beginning in 2010. You can use Part III of Form 8332 for this purpose. You must attach a copy of the revocation to your return for each tax year you claim the child as a dependent as a result of the revocation.

Post-1984 decree or agreement. If the divorce decree or separation agreement went into effect after 1984 and before 2009, the noncustodial parent can still attach certain pages from the decree or agreement instead of Form 8332. For any decree or agreement executed after 2008, Form 8332 or similar form must be used.

(Last Reviewed or Updated: May 14, 2009)

Penalty for Failure to File Income Tax Return Increased

If you do not file your return by the due date (including extensions) you may have to pay a failure-to-file penalty. For income tax returns required to be filed after 2008, the failure-to-file penalty for returns filed more than 60 days after the due date (including extensions) is increased. In this situation, the minimum penalty is the smaller of $135 or 100% of the unpaid tax.

(Last Reviewed or Updated: March 07, 2009)

Personal Exemptions

2008 Changes
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 1/3 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.

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.

Exemption for individual displaced by Midwestern disaster. You may be able to claim a $500 exemption if you provided housing to a person displaced by a Midwestern disaster. For more information, see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas.

2009
The amount you can deduct for each exemption has increased to $3,650 for 2009. 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 2009, the phaseout begins at:

$125,100 for married persons filing separately,
$166,800 for single individuals,
$208,500 for heads of households, and
$250,200 for married persons filing jointly or qualifying widow(er)s.
For 2009, each exemption cannot be reduced to less than $2,433.

(Last Reviewed or Updated: April 29, 2009)

Recovery Rebate Credit

This credit is figured like last year's economic stimulus payment, except that your 2008 tax information is used to figure this credit. Your 2007 tax information was used to figure your economic stimulus payment. The maximum credit is $600 ($1,200 if married filing jointly) plus $300 for each qualifying child.

You may be able to take this credit only if:

You did not get an economic stimulus payment, or
Your economic stimulus payment was less than $600 ($1,200 if married filing jointly for 2007), plus $300 for each qualifying child you had for 2008.
For more information, see the instructions for Form 1040, line 70; Form 1040A, line 42; or Form 1040EZ, line 9.

(Last Reviewed or Updated: March 07, 2009)

Residential Energy Credits

2008
Nonbusiness energy property credit expired.You cannot claim the nonbusiness energy property credit for property placed in service in 2008.

Residential energy efficient property credit expanded. You can now include costs for qualified small wind energy property and geothermal heat pump property in figuring the residential energy efficient property credit.

2009
Nonbusiness energy property credit. This credit, which expired after 2007, has been reinstated. You may be able to claim a nonbusiness energy property credit of 30% of the cost of certain energy-efficient property or improvements you placed in service in 2009. This property can include high-efficiency heat pumps, air conditioners, and water heaters. It also may include energy-efficient windows, doors, insulation materials, and certain roofs. The credit has been expanded to include certain asphalt roofs and stoves that burn biomass fuel.

Limitation. The total amount of credit you can claim in 2009 and 2010 is limited to $1,500.

Residential energy efficient property credit. Beginning in 2009, there is no limitation on the credit amount for qualified solar electric property costs, qualified solar water heating property costs, qualified small wind energy property costs, and qualified geothermal heat pump property costs. The limitation on the credit amount for qualified fuel cell property costs remains the same.

(Last Reviewed or Updated: April 29, 2009)

Social Security and Medicare Taxes

2008
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.

(Last Reviewed or Updated: March 07, 2009)

Special Limitation Period for Retroactively Excluding Military Retirement Pay

If you retire from the armed services based on years of service and are later given a retroactive service-connected disability rating by the VA, your retirement pay for the retroactive period is excluded from income up to the amount of VA disability benefits you would have been entitled to receive. You can claim a refund of any tax paid on the excludable amount (subject to the statute of limitations) by filing an amended return on Form 1040X for each previous year during the retroactive period.

Generally, under the statute of limitations a claim for credit or refund must be filed within 3 years from the time a return was filed or 2 years from the time the tax was paid, whichever period expires later. However, if you receive a retroactive service-connected disability rating determination, the statute of limitations is extended for 1 year beginning on the date of the determination. The extension applies to claims for credit or refund filed after June 17, 2008, and does not apply to any tax year that began more than 5 years before the date of the determination

Example. You retired in 2003 and receive a pension based on your years of service. On August 6, 2008, you receive a determination of service-connected disability retroactive to 2003. Generally, you could claim a refund for the taxes paid on your pension for 2005, 2006, and 2007. However, under the special limitation period, you can also file a claim for 2004 as long as you file the claim by August 5, 2009. You cannot file a claim for 2003 because that tax year began on January 1, 2003, which is more than 5 years before date of the determination.

Transition Rules. If you received a retroactive service-connected disability rating determination after December 31, 2000, and before June 18, 2008, you have until June 17, 2009, to file your claims. You cannot make any claims for tax years that began before 2001.

(Last Reviewed or Updated: April 29, 2009)

Special Rules for Individuals Impacted by Hurricanes Katrina, Rita, and Wilma

If you claimed a casualty or theft loss deduction and in a later year you received more reimbursement than you expected, you generally do not recompute the tax for the year in which you claimed the deduction. Instead, you must include the reimbursement in your income for the year in which it was received, but only to the extent the original deduction reduced your tax for the earlier year. However, an exception applies if you claimed a casualty or theft loss deduction for damage to or destruction of your main home caused by Hurricane Katrina, Rita, or Wilma, and in a later year you received a hurricane relief grant. Under this exception, you can choose to file an amended income tax return (Form 1040X) for the tax year in which you claimed the deduction (and for any tax year to which such deduction was included in a net operating loss carryback or carryforward) and reduce (but not below zero) the amount of the deduction by the amount of the grant. If you choose to file an amended return reducing the prior deduction, any underpayment of tax resulting from the reduced deduction will not be subject to any penalty or interest as long as the additional tax is paid not later than 1 year after the filing of the amended return. If you make this choice, you must file Form 1040X by the later of:

The due date for filing your tax return for the tax year in which you receive the grant (including extensions), or
July 30, 2009.
For special filing procedures you must follow and more information, see Pub. 547, Casualties, Disasters, and Thefts.

(Last Reviewed or Updated: May 05, 2009)

Standard Deduction Increased

2008 Changes
The standard deduction for people who do not itemize their deductions on Schedule A (Form 1040) is, in most cases, higher for 2008 than it was for 2007. In addition to the annual increase due to inflation adjustments, your 2008 standard deduction is increased by:

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), and
Any net disaster loss from a federally declared disaster.
You can figure your 2008 standard deduction by using the 2008 Standard Deduction Worksheet in Publication 501, Exemptions, Standard Deduction, and Filing Information.

2009 Changes
The standard deduction for people who do not itemize their deductions on Schedule A (Form 1040) is, in most cases, higher for 2009 than it was for 2008. In addition to the annual increase due to inflation adjustments and the increase allowed for the deduction for certain real estate taxes and a net disaster loss, your 2009 standard deduction is increased by any state or local sales tax imposed on the purchase of a qualified motor vehicle in 2009 after February 16. For details, see Deduction for Sales and Excise Taxes Imposed on Purchase of New Motor Vehicles later. To figure your 2009 standard deduction now, see Worksheet 2-3 in Publication 505, Tax Withholding and Estimated Tax.

(Last Reviewed or Updated: June 07, 2009)

Standard Mileage Rate

2009
For 2009, the standard mileage rate for the cost of operating your car for business use is 55 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 2009, the standard mileage rate for the cost of operating your car for medical reasons or as part of a deductible move is 24 cents per mile.

See Transportation under What Medical Expenses Are Includable in Publication 502 or Travel by car under Deductible Moving Expenses in Publication 521, Moving Expenses..

Charitable-related mileage. For 2009, the standard mileage rate for the cost of operating your car for charitable purposes remains 14 cents per mile.

2008
For 2008, the standard mileage rate for the cost of operating your car for business use is:

50.5 cents per mile for the period January 1 through June 30, 2008, and
58.5 per mile for the period July 1 through December 31, 2008.
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 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 for the period January 1 through June 30, 2008, and
27 cents per mile for the period July 1 through December 31, 2008.
See Transportation under What Medical Expenses Are Includable in Publication 502 or Travel by car under Deductible Moving Expenses in Publication 521, Moving Expenses..

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

(Last Reviewed or Updated: March 07, 2009)

Unemployment Compensation

For any tax year beginning in 2009, you can exclude from gross income $2,400 of unemployment compensation you received during the year.

(Last Reviewed or Updated: May 05, 2009)

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 on page 4 in Publication 926, Household Employer's Tax Guide.

(Last Reviewed or Updated: March 07, 2009)

Tax Changes for Business

Tax Changes for Businesses

5-Year Carryback of 2008 Net Operating Losses (NOLs) for Eligible Small Businesses (ESBs)
For 2008, you can choose a 3, 4, or 5-year carryback period for the part of your 2008 NOL that is an ESB loss.

Business Start-up and Organizational Costs
A separate election statement is no longer required to elect to deduct up to $5,000 of business start-up and organizational costs paid or incurred after September 8, 2008.

Carbon Dioxide Sequestration Credit
Carbon dioxide captured after October 3, 2008, from an industrial source may be eligible for a credit.

COBRA Premium Assistance Credit
The American Recovery and Reinvestment Act of 2009 (ARRA) allows a credit against employment taxes for providing COBRA premium assistance to assistance eligible individuals.

Credit for Employer Differential Wage Payments
Eligible small business employers may be able to claim a credit for differential wage payments.

Depreciation and Section 179 Expense
Section 179 deduction limits have increased, depreciation limits on certain electric vehicles have changed and the special depreciation allowance has changed for certain New York Liberty Zone property.

Domestic Production Activities Deduction
For tax years beginning in 2007, 2008, or 2009, the percentage used to figure the domestic production activities deduction increases to 6%.

Employer-Owned Life Insurance Contracts
Policyholders owning one or more employer-owned life insurance contracts may have to file a report.

Fringe Benefit Parking Exclusion and Commuter Transportation Benefit
Monthly exclusion amounts have increased.

Health Savings Accounts (HSAs)
Information on 2009 changes for Health Savings Accounts (HSAs).

Maximum Automobile Value for Using the Cents-Per-Mile Valuation Rule
An employer providing a passenger automobile for the first time for personal use by an employeeay use special rules for determining the value of the personal use.

New Form 8926
For tax years beginning after 2007, corporations will use Form 8926, Disqualified Corporate Interest Expense Disallowed Under Section 163(j) and Related Information, to figure the amount of any corporate interest expense deduction disallowed by section 163(j).

Nonqualified Deferred Compensation Plans
There are new regulations on reporting requirements for amounts deferred under a nonqualified deferred compensation plan.

S Corporations
There are several changes affecting S-corporations.

Self-Employment Tax
The maximum amount of net earnings subject to the social security part of the self-employment tax has increased.

Social Security and Medicare Taxes
The maximum amount of wages subject to the social security tax and Medicare tax has increased for 2008.

Standard Mileage Rate
The standard mileage rate for business use of your vehicle, medical and move- related use and charitable use has increased for 2008.

Work Opportunity Credit
The work opportunity credit has been extended to cover individuals who begin work for you before September 1, 2011. The qualified veterans group and high-risk youth groups have been expanded.

(Last Reviewed or Updated: April 29, 2009)

5-Year Carryback of 2008 Net Operating Losses (NOLs) for Eligible Small Businesses (ESBs)

For 2008, you can choose a 3, 4, or 5-year carryback period for the part of your 2008 NOL that is an ESB loss. An ESB is a small business as defined in Internal Revenue Code section 172(b)(1)(F)(iii), except that an ESB's 3-year average annual gross receipts can be up to $15 million (instead of $5 million). An ESB loss is the smaller of:

The amount that would be the 2008 NOL if only income, gains, losses, and deductions attributable to ESBs were taken into account, or
The 2008 NOL.
For more information, see the Instructions for Form 1139 (corporations) or the Instructions for Form 1045 (individuals, estates, and trusts).

(Last Reviewed or Updated: April 29, 2009)

Business Start-up and Organizational Costs

A separate election statement is no longer required to elect to deduct up to $5,000 of business start-up and organizational costs paid or incurred after September 8, 2008. This amount is reduced (but not below zero) by the amount by which your costs exceed $50,000. Any costs not deducted must be amortized ratably over a 180-month period.

You can also apply the same treatment to business start-up costs and organizational costs paid or incurred after October 22, 2004, and before September 9, 2008, provided the period of limitations on assessment of tax has not expired for the year of the election. For more information, see chapter 8 of Publication 535, Business Expenses.

(Last Reviewed or Updated: April 29, 2009)

Carbon Dioxide Sequestration Credit

Carbon dioxide captured after October 3, 2008, from an industrial source may be eligible for a credit. A credit of $20 per metric ton is allowed for qualified carbon dioxide that is captured at a qualified facility and disposed of in secure geological storage or $10 per metric ton to qualified carbon dioxide that is captured at a qualified facility and used as a tertiary injectant in a qualified enhanced oil or natural gas recovery project. Only carbon dioxide captured and disposed of or used within the United States or a U.S. possession is taken into account when figuring the credit. For more information, see Form 8933, Carbon Dioxide Sequestration Credit.

(Last Reviewed or Updated: April 29, 2009)

COBRA Premium Assistance Credit

The American Recovery and Reinvestment Act of 2009 (ARRA) allows a credit against employment taxes for providing COBRA premium assistance to assistance eligible individuals. For periods of COBRA continuation coverage beginning after February 16, 2009, a group health plan must treat an assistance eligible individual as having paid the required COBRA continuation coverage premium if the individual elects COBRA coverage and pays 35% of the amount of the premium.

The 65% of the premium not paid by the assistance eligible individuals is reimbursed to the employer or other entity maintaining the group health plan. The reimbursement is made through a credit against employment tax liabilities. The credit is taken on line 12a of Form 941, line 11a of Form 944, or line 13a of Form 943 once the 35% of the premium is paid by or on behalf of the assistance eligible individual. The credit is treated as a deposit made on the first day of the return period (quarter or year).

Anyone claiming the credit for COBRA assistance payments must maintain the appropriate information to support their claim.

For more information, see Publication 15 (Circular E), Employer's Tax Guide.

(Last Reviewed or Updated: April 29, 2009)

Credit for Employer Differential Wage Payments

Eligible small business employers may be able to claim a credit for differential wage payments made to qualified employees after 2008 and before 2010. The credit is 20% of the first $20,000 of qualified differential wage payments made to each qualified employee. For more information, see Form 8932, Credit for Employer Differential Wage Payments.

(Last Reviewed or Updated: April 29, 2009)

Depreciation and Section 179 Expense

2008
Increased Section 179 limits. The maximum section 179 deduction you can elect for qualified section 179 property you placed in service in tax years that begin in 2008 has increased to $250,000 ($285,000 for qualified enterprise zone property and qualified renewal community property). This limit is reduced by the amount by which the cost of section 179 property placed in service in the tax year exceeds $800,000. For qualified section 179 Gulf Opportunity (GO) Zone property placed in service in certain counties and parishes of the GO Zone, the maximum deduction is higher than the deduction for most section 179 property.

Special depreciation allowance for certain property. You may be able to take an additional first year special depreciation allowance for certain qualified property (defined below). The allowance is an additional deduction of 50% of the property’s depreciable basis (after any section 179 deduction and before figuring your regular depreciation deduction).

Property that qualifies for this special depreciation allowance include the following.

Tangible property depreciated under the modified accelerated cost recovery system (MACRS) with a recovery period of 20 years or less
Water utitiliy property
Off-the-shelf computer software
Qualified leasehold improvement property
Qualified property must also meet all of the following tests.

You must have acquired qualified property by purchase after December 31, 2007, and before January 1, 2009. If a binding contract to acquire the property existed before January 1, 2008, the property does not qualify.
Qualified property must be placed in service after December 31, 2007, and before January 1, 2009 (before January 1, 2010, for certain transportation property and certain property with a long production period).
The original use of the property must begin with you after December 31, 2007.
Property that does not qualify for special depreciation allowance include the following.

Property placed in service and disposed of in the same tax year.
Property converted from business use to personal use in the same tax year it is acquired. Property converted from personal use to business use in the same or later tax year may be
Depreciation limits on business qualified GO Zone property.
Property required to be depreciated under the alternative depreciation system (ADS).
Property included in a class of property for which you elected not to claim the special depreciation allowance.
Depreciation limits on business vehicles. The total depreciation deduction (including the section 179 deduction) you can take for a passenger automobile (that is not a truck or a van) you use in your business and first placed in service in 2008 is $2,960 ($10,960 for automobiles for which the special depreciation allowances applies). The maximum deduction you can take for a truck or a van you use in your business and first placed in service in 2008 is $3,160 ($11,160 for trucks or vans for which the special depreciation allowance applies).

Caution. These limits are reduced if the business use of the vehicle is less than 100%

2009
Section 179 limits. The maximum section 179 expense deduction you can elect for qualified section 179 property you placed in service in tax years that begin in 2009 remains at $250,000 ($285,000 for qualified enterprise zone property and qualified renewal community property). This limit is reduced by the amount by which the cost of section 179 property placed in service in the tax year exceeds $800,000

Depreciation limits on business vehicles. The total depreciation deduction (including the section 179 expense deduction) you can take for a passenger automobile (that is not a truck or a van) you use in your business and first placed in service in 2009 is $2,960 ($10,960 for automobiles for which the special depreciation allowance applies). The maximum deduction you can take for a truck or van you use in your business and first placed in service in 2009 is $3,060 ($11,060 for trucks or vans for which the special depreciation allowance applies).

Caution. These limits are reduced if the business use of the vehicle is less than 100%.

(Last Reviewed or Updated: May 01, 2009)

Domestic Production Activities Deduction

For tax years beginning in 2007, 2008, or 2009, the percentage used to figure the domestic production activities deduction increases to 6%.

For more information on this deduction, see Form 8903, Domestic Production Activities Deduction, and its instructions.

(Last Reviewed or Updated: March 07, 2009)

Employer-Owned Life Insurance Contracts

Generally, a policyholder owning one or more employer-owned life insurance contracts issued after August 16, 2006, is required to file a report for each tax year the contract(s) is owned. However, you are not required to file a report for any tax year ending before November 14, 2007. For more information, see Form 8925, Report of Employer-Owned Life Insurance Contracts.

(Last Reviewed or Updated: March 07, 2009)

Fringe Benefit Parking Exclusion and Commuter Transportation Benefit

2008

You can generally exclude a limited amount of the value of qualified parking and commuter highway vehicle transportation and transit passes you provide to an employee from the employee's wages. For 2008, the monthly exclusion for qualified parking increases to $220 and the monthly exclusion for commuter highway vehicle transportation and transit passes increases to $115. See Qualified Transportation Benefits on page 17 of Publication 15-B.

(Last Reviewed or Updated: March 07, 2009)

Health Savings Accounts (HSAs)

Eligibility. For 2009, a qualifying high deductible health plan (HDHP) must have a deductible of at least $1, 150 for self-only coverage or $2,300 for family coverage and must limit annual out-of-pocket expenses of the beneficiary to $5,800 for self-only coverage and $11,600 for family coverage.

Employer contributions. Up to specified dollar limits, you can generally exclude your contributions (must be in cash) to the Health Savings Account (HSA) of a qualified individual (determined monthly) from federal income tax withholding, social security tax, Medicare tax, and FUTA tax. For 2009, you can contribute up to the following amounts to a qualified individual's HSA.

$3,000 for self-only coverage or $5,950 for family coverage.
$4,000 for self-only coverage or $6,950 for family coverage for qualified individuals who are age 55 or older at any time during the year.

Employers are allowed to make larger HSA contributions for a nonhighly compensated employee than for a highly compensated employee.

For more information, see Health Savings Accounts on page 13 of Publication 15-B, Employer's Tax Guide to Fringe Benefits.

(Last Reviewed or Updated: April 29, 2009)

Maximum Automobile Value for Using the Cents-Per-Mile Valuation Rule

For 2008, an employer providing a passenger automobile for the personal use of an employee may determine the value of the personal use by using the vehicle cents-per-mile value rule if the vehicle's fair market value on the date it is first made available to the employee does not exceed $15,000 for a passenger automobile other than a truck or van, or $15,900 for a truck or van. For more information, see Cents-Per-Mile Rule on page 20 of Publication 15-B, Employer's Tax Guide to Fringe Benefits.

(Last Reviewed or Updated: March 07, 2009)

New Form 8926

For tax years beginning after 2007, corporations will use Form 8926, Disqualified Corporate Interest Expense Disallowed Under Section 163(j) and Related Information, to figure the amount of any corporate interest expense deduction disallowed by section 163(j). A corporation's interest expense may be disallowed if it paid or accrued disqualified interest during the tax year.

Disqualified interest is:

Interest paid or accrued (directly or indirectly) to a related person not subject to U.S. income tax on the interest.
Interest paid or accrued on indebtedness held by an unrelated person if there is a disqualified guarantee of the indebtedness and the interest is not subject to a U.S. gross basis income tax (a tax figured on the gross amount of an item of income without reduction for any allowed deduction), and
Interest paid or accrued (directly or indirectly) to a taxable real estate investment trust (as defined in section 856(l)) by a subsidiary of the trust.
Also, any disqualified interest disallowed as a deduction by section 163(j) in a tax year is carried forward and treated as disqualified interest paid or accrued in the next tax year.

However, if at least one of the following statements is true, disqualified interest paid or accrued in the current tax year will not be disallowed by section 163(j).

The corporation's debt to equity ratio at the end of the tax year does not exceed 1.5 to 1.
The corporation does not have any excess interest expense for the tax year.
For more information, see the Instructions for Form 8926.

(Last Reviewed or Updated: April 29, 2009)

Nonqualified Deferred Compensation Plans

Generally, all amounts deferred under a nonqualified deferred compensation plan for the tax year and all preceding tax years are included in your employees' wages in the current year, unless the plan meets certain requirements.

These requirements were stated in Notice 2005–1. However, portions of that notice were obsoleted and replaced by final regulations that were effective for tax years beginning after 2007. For more information, see page 3 of Internal Revenue Bulletin 2007-19 for Treasury Decision 9321.

(Last Reviewed or Updated: February 17, 2009)

S Corporations

The following changes affect S corporations.
The capital gain of an S corporation is not treated as passive investment income. This applies to tax years beginning after May 25, 2007. For details, see Internal Revenue Code section 1362(d)(3).
Generally, restricted bank director stock is not taken into account as outstanding stock of an S corporation. This applies to tax years beginning after 2006. For details, see Internal Revenue Code section 1361(f).
A special rule applies to banks required to change from the reserve method of accounting on becoming an S corporation. This applies to tax years beginning after 2006. For details, see Internal Revenue Code section 1361(g).
If a qualified subchapter S subsidiary no longer qualifies because of a sale of its stock, new rules apply as to how such a sale is treated. This applies to tax years beginning after 2006. For details, see Internal Revenue Code section 1361(b)(3)(C).
Certain S corporations may be able to eliminate all earnings and profits attributable to tax years beginning before 1983. See Public Law 110-28, section 8235.
An electing small business trust may be able to deduct interest expense on indebtedness it incurred to acquire stock in an S corporation. This applies to tax years beginning after 2006. For details, see Internal Revenue Code section 641(c)(2).
For tax years ending on or after December 31, 2007, certain corporations with reasonable cause for not timely filing Form 2553, Election by a Small Business Corporation, can request to have the form treated as timely filed by filing it as an attachment to Form 1120S, U.S. Income Tax Return for an S Corporation. For more information, see Form 2553 and its instructions.

(Last Reviewed or Updated: March 07, 2009)

Self-Employment Tax

2008

The maximum amount of net earnings subject to the social security part of the self-employment tax for tax years beginning in 2008 has increased to $102,000. All net earnings of at least $400 are subject to the Medicare part of the tax.

Conservation Reserve Program (CRP) payments. CRP payments you receive after 2007 are excluded from net earnings from self-employment when figuring your self employment tax if you are receiving social security benefits for retirement or disability. Qualifying individuals will deduct CRP payments on line 1b of the 2008 Schedule SE (Form 1040).

Optional methods to figure net earnings. Form tax years beginning after 2007, the dollar thresholds for using the optional methods to figure net earnings from self-employment have increased. You may use the farm optional method to figure your net earnings from farm self-employment if your gross farm income was $6,300 or less or your net farm profits were less than $4,548. The nonfarm optional method may be used to figure your net earnings from nonfarm self-employment if your net nonfarm profits were less than $4,548 and also less than 72.189% of your gross nonfarm income.

In 2008, the maximum social security coverage under the optional methods has increased to four credits, the equivalent of $4,200 of net earnings from self-employment. In future years, the thresholds will be indexed to maintain that level of coverage.

(Last Reviewed or Updated: March 07, 2009)

Work Opportunity Credit

The work opportunity credit has been extended to cover members of targeted groups who begin work for you before September 1, 2011. For tax years beginning after December 31, 2006, there is no longer an alternative minimum tax limitation with respect to this credit. For more information about this credit, see Form 5884, Work Opportunity Credit.

Members of targeted groups. For employees who begin work for you after December 31, 2006:

Long-term family assistance recipients are members of a targeted group (if hired before January 1, 2007, see Form 8861, Welfare-to-Work Credit).
Ex-felons are no longer required to be a member of a low-income family.
Food stamp recipients must be at least age 18 when hired, but not age 40 or older.
For individuals who begin work for you after May 25, 2007:

The qualified veterans group is expanded to include veterans entitled to compensation for a service-connected disability and who, during the one-year period ending on the hiring date, were (a) discharged or released from active duty in the U.S. Armed Forces or (b) unemployed for a period or periods totaling at least 6 months. The first-year wages taken into account for these disabled veterans is $12,000.
The high-risk youth group has been renamed "designated community residents" and expanded to include individuals who are at least age 18 but not yet age 40. In addition, residents of rural renewal counties have been added to this group.
For more information, see Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, and its Instructions.

For individuals who begin work for you after May 25, 2007, the qualified veterans group is expanded to include veterans entitled to compensation for a service-connected disability and who, during the one-year period ending on the hiring date, were (a) discharged or released from active duty in the U.S. Armed Forces or (b) unemployed for a period or periods totaling at least 6 months. The first-year wages taken into account for these disabled veterans is $12,000.

For individuals who begin work for you after May 25, 2007, the high-risk youth group has been renamed "designated community residents" and expanded to include individuals who are at least age 18 but not yet age 40. In addition, residents of rural renewal counties have been added to this group. See the Instructions for Form 8850 for more information.

For tax years beginning after 2006, the work opportunity credit is allowed against both the regular tax and the alternative minimum tax.

(Last Reviewed or Updated: March 07, 2009)

Tax Changes for Disaster Areas

Kansas Disaster Areas
The Food, Conservation, and Energy Act of 2008 provides disaster relief for Kansas disaster areas.

Mid-Western Disaster Areas
The Heartland Disaster Tax Relief Act of 2008 provides relief for taxpayers in Midwestern disaster areas.

Special Rules for Individuals Impacted by Hurricanes Katrina, Rita, and Wilma
Did you claim a casualty or theft loss deduction?

(Last Reviewed or Updated: May 05, 2009)

Kansas Disaster Areas

Tax relief for the Kansas disaster area. Publication 4492-A explains the temporary tax relief provided by the Food, Conservation, and Energy Act of 2008 for taxpayers in Kiowa County, Kansas, and the surrounding areas who were affected by the storms and tornadoes that began on May 4, 2007.

Special tax relief provisions apply for:

Casualty and theft losses,
Net operating losses,
Replacement period for nonrecognition of gain,
IRAs and other retirement plans,
Special depreciation allowance,
Section 179 expense deduction,
Demolition and clean-up costs, and
Employee retention credit.
For more information, see Publication 4492-A.

(Last Reviewed or Updated: April 29, 2009)

Mid-Western Disaster Areas

Tax relief for the Midwestern disaster areas. Publication 4492-B explains the major provisions of the Heartland Disaster Tax Relief Act of 2008 that were provided for taxpayers in Midwestern disaster areas. Midwestern disaster areas are those areas for which a major disaster was declared by the President during the period beginning on May 20, 2008, and ending on July 31, 2008, in the state of Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, or Wisconsin, as a result of severe storms, tornadoes, or flooding that occurred on the applicable disaster date.

Some of the special tax relief provisions are:

Casualty and theft losses,
Charitable giving incentives,
Net operating losses,
Replacement period for nonrecognition of gain,
IRAs and other retirement plans,
Education credits,
Exclusion of certain cancellations of indebtedness,
Demolition and clean-up costs, and
Employee retention credit.

(Last Reviewed or Updated: April 29, 2009)

Tax Law Changes for Gifts and Estates and Trusts

2007 Federal Tax Rates for Estates and Trusts
Details of the federal estate and trust tax rates.

Annual Exclusion for Gifts
2008 and 2009 changes to annual exclusion amounts for gifts.

Increased Estate Tax Applicable Exclusion Amount
Estate tax applicable exclusion amounts have increased.

Limit on Contributions to Funeral Trusts
Special rules for contracts entered into during calendar year 2007 for qualified funeral trusts.

Reduction of Maximum Estate and Gift Tax Rate
Maximum tax rate change for estate and gift tax.

Valuation of Qualified Real Property in Decedent's Gross Estate
Certain rules apply for the special use valuation method.

(Last Reviewed or Updated: June 02, 2009)

2007 Federal Tax Rates for Estates and Trusts

The 2007 federal estate and trust tax rates are as follows.

2007 Federal Estate and Trust Tax Rates

If taxable income is: The tax is:

Not over $2,150 15% of the taxable income

Over $2,150 but not over $5,000 $322.50 plus 25% of the excess over $2,150

Over $5,000 but not over $7,650 $1,035.00 plus 28% of the excess over $5,000

Over $7,650 but not over $10,450 $1,777.00 plus 33% of the excess over $7,650

Over $10,450 $2,701.00 plus 35% of the excess over $10,450

(Last Reviewed or Updated: November 12, 2008)

Annual Exclusion for Gifts

2008 Changes
The annual exclusion for gifts made to spouses who are not U.S. citizens will increase to $128,000.

2009 Changes
The annual exclusion for gifts of present interests made to a donee during the calendar year has increased to $13,000.

The annual exclusion for gifts made to spouses who are not U.S. citizens will increase to $133,000.

(Last Reviewed or Updated: June 02, 2009)

Increased Estate Tax Applicable Exclusion Amount

2008 Changes
An estate tax return for a U.S. citizen or resident needs to be filed only if the gross estate exceeds $2 million for decedents dying during 2008.

2009 Changes
An estate tax return for a U.S. citizen or resident needs to be filed only if the gross estate exceeds $3.5 million for decedents dying during 2009.

(Last Reviewed or Updated: June 02, 2009)

Limit on Contributions to Funeral Trusts

For a contract entered into during calendar year 2007 for a qualified funeral trust, as defined in section 685 of the Internal Revenue Code, the trust may not accept aggregate contributions by or for the benefit of an individual in excess of $8,800.

(Last Reviewed or Updated: November 12, 2008)

Reduction of Maximum Estate and Gift Tax Rate

For estates of decedents dying, and gifts made, after 2006, the maximum rate for the estate tax and the gift tax for 2007, 2008, and 2009 is 45%.

(Last Reviewed or Updated: November 12, 2008)

Valuation of Qualified Real Property in Decedent's Gross Estate

For the estate of a decedent dying in calendar year 2007, if the executor elects to use the special use valuation method under Section 2032A of the Internal Revenue Code for qualified real property, the aggregate decrease in the value of qualified real property resulting from electing to use this election that is taken into account for purposes of the estate tax may not exceed $940,000.

(Last Reviewed or Updated: November 12, 2008)

Foreign Issues

Exemption for Certain Distributions From Mutual Funds Extended
Exemption from 30% tax on certain dividends has been extended.

Foreign Earned Income and Housing Exclusions
The maximum foreign earned income exclusion and base housing amount have increased.

New Rules for Former U.S. Citizens and Former Long-Term Residents
If you expatriated after June 16, 2008, new expatriation rules may apply to you.

New Treaties and Protocol
The United States has exchanged instruments of ratification for new income tax treaties with Bulgaria and Iceland and a new protocol to the income tax treaty with Canada.

U.S. Real Property Interests
For dispositions of U.S. real property interests after July 30, 2008, transferors can give a nonforeign certification to a qualified substitute.

Withholding on Foreign Partners
A foreign partner can provide to a partnership a certification to reduce or eliminate the partnership's withholding tax obligation on certain income.

(Last Reviewed or Updated: June 07, 2009)

Exemption for Certain Distributions From Mutual Funds Extended

The exemption from 30% tax on certain interest-related dividends and short-term capital gain dividends received from a mutual fund or other regulated investment company has been extended 2 years. It now applies to dividends for tax years of the company beginning before 2010. See Dividend Income in chapter 3 of Publication 519, U.S. Tax Guide for Aliens.

(Last Reviewed or Updated: June 02, 2009)

Foreign Earned Income and Housing Exclusions

2008
Exclusion amount. For 2008, the maximum foreign earned income exclusion has increased to $87,600.

Housing expenses-base amount. The base housing amount has increased to $38.30 per day, or $14,016 for an entire calendar year.

2009

Exclusion amount. For 2009, the maximum foreign earned income exclusion has increased to $91,400.

Housing expense--base amount. For 2009, the base housing amount has increased to $40.07 per day, or $14,624 for the entire calendar year.

(Last Reviewed or Updated: March 07, 2009)

New Rules for Former U.S. Citizens and Former Long-Term Residents

If you expatriated after June 16, 2008, new expatriation rules apply to you if any of the following statements apply.

Your average annual net income tax for the 5 years ending before the date of expatriation or termination of residency is more than $139,000 (if you expatriated or terminated residency before January 1, 2009).
Your net worth is $2 million or more on the date of your expatriation or termination of residency.
You fail to certify on Form 8854 that you have complied with all U.S. federal tax obligations for the 5 years preceding the date of your expatriation or termination of residency.
Note. If you expatriated before June 17, 2008, the expatriation rules in effect at that time continue to apply. See chapter 4 in Publication 519, U.S. Tax Guide for Aliens, for more information.

(Last Reviewed or Updated: June 02, 2009)

New Treaties and Protocol

The United States has exchanged instruments of ratification for new income tax treaties with Bulgaria and Iceland and a new protocol to the income tax treaty with Canada. The effective dates are as follows:

Bulgaria. The provisions for withholding tax at source are effective for amounts paid or credited after 2008. For other taxes, the treaty is effective for tax periods beginning after 2008.

Canada. The provisions for withholding tax at source are generally effective for amounts paid or credited after January 31, 2009. For other taxes, the protocol is generally effective for tax periods beginning after 2008.

Iceland. The provisions for withholding tax at source are effective for amounts derived after 2008. For other taxes, the new treaty is effective for tax years beginning after 2008. An individual who was otherwise entitled to benefits under Article 21 (Teachers) of the former treaty can continue to apply those provisions. A person entitled to benefits under the former treaty can elect to have that treaty apply in its entirety for a twelve-month period following the date the new treaty would otherwise apply.

(Last Reviewed or Updated: June 07, 2009)

U.S. Real Property Interests

For dispositions of U.S. real property interests after July 30, 2008, transferors can give a nonforeign certification to a qualified substitute. Qualified substitutes are explained in Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, under U.S. Real Property Interest.

Generally, the treatment of a regulated investment company (RIC) as a qualified investment entity (QIE) was scheduled to expire at the end of 2007. The provision has been extended through 2009. The special rules that apply to distributions from a QIE attributable to the gain from the sale or exchange of a U.S. real property interest will continue to apply to any distribution from a RIC. See Qualified investment entities under U.S. Real Property Interest in Publication 515.

(Last Reviewed or Updated: June 07, 2009)

Withholding on Foreign Partners

A foreign partner can provide to a partnership a certification to reduce or eliminate the partnership's withholding tax obligation under section 1446 on the partner's allocable share of effectively connected taxable income from the partnership. Any certificate (including any updated certificates and status reports) submitted, or required to be submitted, after July 28, 2008, must comply with Regulations section 1.1446-6.

The foreign partner must use Form 8804-C, Certificate of Partner-Level Items to Reduce Section 1446 Withholding. The partner gives the form to the partnership. For more information, including when the partnership has to file the form with the IRS, see the Instructions for Form 8804-C.

(Last Reviewed or Updated: June 02, 2009)

IRAs and Other Retirement Plans

403(b) Plans
The limit on elective deferrals and annual additions have increased.

Military Death Gratuities and Servicemembers' Group Life Insurance (SGLI) Payments
If you received a military death gratuity or SGLI payment, you may contribute all or part of the amount received to your Roth IRA or to a Coverdell education savings account (ESA).

Modified AGI Limit for Retirement Savings Credit Contributions Increased
You may be able to claim the retirement savings contributions credit.

Modified AGI Limit for Roth IRA Contributions Increased
Your Roth IRA contribution limit is reduced (phased out) in some situations.

Modified AGI Limit for Traditional IRA Contributions Increased
Modified AGI Limit for Traditional IRA Contributions Increased

Nonqualified Deferred Compensation Plans
There are new regulations on reporting requirements for amounts deferred under a nonqualified deferred compensation plan.

Qualified Plans
Limits on contributions and benefits, compensation limits, and elective deferrals (401(k) plans).

Qualified Reservist Distributions
Eligibility to receive qualified reservist distributions has been extended to individuals ordered or called to active duty after 2007.

Rollover of Airline Payments
If you are a qualified airline employee, you may contribute, to a Roth IRA, any portion of an airline payment you receive from a commercial airline carrier involved in certain bankruptcy proceedings.

Rollover of Exxon Valdez Settlement Income
If you are a qualified taxpayer and you received qualified settlement income in connection with the Exxon Valdez litigation, you can contribute all or part of the amount received to an eligible retirement plan.

Rollovers From Other Retirement Plans to Roth IRAs
The rollover rules have changed. Read on for more details...

Roth Contribution Limit
Your contribution limit for 2008

SIMPLE Plan
Increase in Limit on Salary Reduction Contributions Under a SIMPLE Plan

Simplified Employee Pensions (SEPs)
Limits have increased for 2008.

Tax-Free Withdrawal of Economic Stimulus Payments
You may choose to withdraw an economic stimulus payment that was directly deposited to your traditional or Roth IRA in 2008.

Traditional IRA Contribution and Deduction Limit
The contribution limit to your traditional IRA for 2008

(Last Reviewed or Updated: April 29, 2009)

403(b) Plans

The following changes apply to 403(b) plans. For more information, see Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans) For Employees of Public Schools and Certain Tax-Exempt Organizations.

2008
The limit on annual additions has increased to $46,000.

(Last Reviewed or Updated: February 17, 2009)

Military Death Gratuities and Servicemembers' Group Life Insurance (SGLI) Payments

If you received a military death gratuity or SGLI payment, you may contribute all or part of the amount received to your Roth IRA or to a Coverdell education savings account (ESA). The contribution is treated as a rollover, except that this type of rollover does not count when figuring the annual limit on the number of rollovers allowed.

The amount you can contribute to a Roth IRA or Coverdell ESA under this provision cannot exceed the total amount of such payments that you received because of the death of a person reduced by any part of the amount so received that you have already contributed to a Roth IRA or Coverdell ESA.

Generally, the rollover must be completed before the end of the 1-year period beginning on the date that you received the payment. However, if you received the military death gratuity because of a death due to an injury occurring after October 6, 2001, and before June 17, 2008, you have until June 17, 2009, to make the contribution to your Roth IRA or Coverdell ESA.

The amount contributed is treated as part of your basis (cost) in the Roth IRA or Coverdell ESA.

(Last Reviewed or Updated: May 14, 2009)

Modified AGI Limit for Retirement Savings Credit Contributions Increased

2008
For 2008, you may be able to claim the retirement savings contributions credit if your modified adjusted gross income (AGI) is not more than:

$53,000 if your filing status is married filing jointly,
$39,750 if your filing status is head of household, or
$26,500 if your filing status is single, married filing separately, or qualifying widow(er).
2009

For 2009, you may be able to claim the retirement savings contributions credit if your modified AGI is not more than:

$55,500 if your filing status is married filing jointly,
$41,625 if your filing status is head of household, or
$27,750 if your filing status is single, married filing separately, or qualifying widow(er).

(Last Reviewed or Updated: February 17, 2009)

Modified AGI Limit for Roth IRA Contributions Increased

2008 Tax Changes

For 2008, your Roth IRA contribution limit is reduced (phased out) in the following situations.

Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $159,000. You cannot make a Roth IRA contribution if your modified AGI is $169,000 or more.
Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2008 and your modified AGI is at least $101,000. You cannot make a Roth IRA contribution if your modified AGI is $116,000 or more.
Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more.
2009
For 2009, your Roth IRA contribution limit is reduced (phased out) in the following situations.

Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $166,000. You cannot make a Roth IRA contribution if your modified AGI is $176,000 or more.
Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2009 and your modified AGI is at least $105,000. You cannot make a Roth IRA contribution if your modified AGI is $120,000 or more.
Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more.

(Last Reviewed or Updated: February 17, 2009)

Modified AGI Limit for Traditional IRA Contributions Increased

2008
For 2008, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified adjusted gross income (AGI) is:

More than $85,000 but less than $105,000 for a married couple filing a joint return or a qualifying widow(er),
More than $53,000 but less than $63,000 for a single individual or head of household, or
Less than $10,000 for a married individual filing a separate return.
If you either live with your spouse or file a joint return, and your spouse is covered by a retirement plan at work, but you are not, your deduction is phased out if your AGI is more than $159,000 but less than $169,000. If your AGI is $169,000 or more, you cannot take a deduction for contributions to a traditional IRA.

2009
For 2009, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified AGI is:

More than $89,000 but less than $109,000 for a married couple filing a joint return or a qualifying widow(er),
More than $55,000 but less than $65,000 for a single individual or head of household, or
Less than $10,000 for a married individual filing a separate return.
If you either live with your spouse or file a joint return, and your spouse is covered by a retirement plan at work, but you are not, your deduction is phased out if your modified AGI is more than $166,000 but less than $176,000. If your modified AGI is $176,000 or more, you cannot take a deduction for contributions to a traditional IRA.

(Last Reviewed or Updated: February 17, 2009)

Qualified Plans

The following changes apply to qualified plans. For more information, see Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans).

2008
Limits on contributions and benefits. For 2008, the maximum annual benefit for a participant under a defined benefit plan has increased to the smaller of:

$185,000, or
100% of the participant's average compensation for his or her highest 3 consecutive calendar years.
Limits on contributions and benefits. For 2008, a defined contribution plan's maximum annual contributions and other additions (excluding earnings) to the account of a participant has increased to the smaller of:

$46,000, or
100% of the compensation actually paid to the participant.
Compensation limit. For 2008, the maximum compensation used for figuring contributions and benefits has increased to $230,000.

(Last Reviewed or Updated: February 17, 2009)

Qualified Reservist Distributions

Eligibility to receive qualified reservist distributions has been extended to individuals ordered or called to active duty after 2007. The additional 10% tax on early distributions does not apply to these distributions. In addition, a qualified reservist distribution can be contributed to an IRA within the 2-year period following the active duty period. The dollar limits otherwise applicable to IRA contributions do not apply to any such contribution. For more information on qualified reservist distributions and qualified reservist repayments, see Publication 590, Individual Retirement Arrangements (IRAs).

--02-FEB-2009

(Last Reviewed or Updated: February 02, 2009)

Rollover of Airline Payments

If you are a qualified airline employee, you may contribute, to a Roth IRA, any portion of an airline payment you receive from a commercial airline carrier involved in certain bankruptcy proceedings. The contribution must be made within 180 days from the date you received the payment, or before June 23, 2009, whichever is later. The contribution will be treated as a qualified rollover contribution and the modified AGI limits that generally apply to Roth IRA rollovers do not apply to airline payments.

For more information and for definitions of qualified airline employees and airline payments, see Rollover of Airline Payments in chapter 2 of Publication 590. Also, see Form 8935, Airline Payment Report. This form will be sent to you within 90 days following an airline payment, or by March 23, 2009, whichever is later. The form will indicate the amount of the airline payment that is eligible to be rolled over to a Roth IRA.

(Last Reviewed or Updated: April 29, 2009)

Rollover of Exxon Valdez Settlement Income

If you are a qualified taxpayer and you received qualified settlement income in connection with the Exxon Valdez litigation, you can contribute all or part of the amount received to an eligible retirement plan. This includes a traditional IRA, a Roth IRA, and a qualified retirement plan. The amount contributed cannot exceed $100,000 (reduced by the amount of qualified settlement income contributed to an eligible retirement plan in prior tax years) or the amount of qualified settlement income received during the tax year. Contributions for the year can be made until the due date for filing your return, not including extensions

For more information on contributing qualified settlement income to a traditional or Roth IRA, see chapters 1 and 2 of Publication 590, Individual Retirement Arrangements (IRAs). For qualified retirement plans, see Publication 575, Pension and Annuity Income.

(Last Reviewed or Updated: April 29, 2009)

Rollovers From Other Retirement Plans to Roth IRAs

Prior to 2008, you could only rollover (convert) amounts from either a traditional, SEP, or SIMPLE IRA into a Roth IRA. After 2007, you can rollover amounts from the following plans into a Roth IRA.

A qualified pension, profit-sharing or stock bonus plan (including a 401(k) plan),
An annuity plan,
A tax-sheltered annuity plan (section 403(b) plan),
A deferred compensation plan of a state or local government (section 457 plan), or
An IRA.
Any amount rolled over is subject to the same rules for converting a traditional IRA into a Roth IRA. See Converting From Any Traditional IRA Into a Roth IRA in chapter 1 of Publication 590. Also, the rollover contribution must meet the rollover requirements that apply to the specific type of retirement plan.

--08-APR-2008

(Last Reviewed or Updated: November 14, 2008)

Roth Contribution Limit

If contributions on your behalf are made only to Roth IRAs, your contribution limit for 2008 will generally be the lesser of:

$5,000, or
Your taxable compensation for the year.

If you were age 50 or older before 2009 and contributions on your behalf were made only to Roth IRAs, your contribution limit for 2008 will generally be the lesser of:

$6,000, or
Your taxable compensation for the year.
However, if your modified adjusted gross income (AGI) is above a certain amount, your contribution limit may be reduced.

--25-JAN-2008

(Last Reviewed or Updated: January 26, 2008)

SIMPLE Plan

The following change applies to SIMPLE plans. For more information, see Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans).

Salary reduction contributions. For 2007, the limit on salary reduction contributions (excluding catch-up contributions) to a SIMPLE plan is $10,500. This limit remains the same for 2008.

Salary reduction contributions that your employer could make on your behalf under a SIMPLE plan increased to $10,500.

--25-JAN-2008

(Last Reviewed or Updated: January 26, 2008)

Simplified Employee Pensions (SEPs)

The following changes apply to SEPs. For more information, see Publication 560.

Deduction limit increased. The maximum deduction for contributions to a SEP remains unchanged at 25% of the compensation paid or accrued during the year to your eligible employees participating in the plan. However, for 2008, the maximum combined deduction for a participant's elective deferrals and other SEP contributions has increased to $46,000.

Contribution limit increased. For 2008, the annual limit on the amount of employer contributions to a SEP has increased to the smaller of:

$46,000, or
25% of an eligible employee's compensation.
Compensation limit. For 2008, the maximum amount of an employee's compensation you can consider when figuring SEP contributions (including elective deferrals) and the deduction for contributions has increased to $230,000.

--21-JAN-2009

(Last Reviewed or Updated: January 21, 2009)

Tax-Free Withdrawal of Economic Stimulus Payments

You may choose to withdraw an economic stimulus payment that was directly deposited to your traditional or Roth IRA in 2008. If you choose to withdraw any or all of the payment, that portion of the payment is treated as neither contributed nor distributed from your IRA. The amount withdrawn is not included in your income and is not subject to additional tax or penalty. The withdrawal must be made by the due date for filing your 2008 tax return, including extensions. For most people, that would be April 15, 2009

For more information on reporting these withdrawals, see the instructions for your tax return. Also see chapters 1 and 2 of Publication 590, Individual Retirement Arrangements (IRAs).

(Last Reviewed or Updated: April 29, 2009)

Traditional IRA Contribution and Deduction Limit

The contribution limit to your traditional IRA for 2008 will be increased to the smaller of the following amounts:

$5,000, or
Your taxable compensation for the year.
If you were age 50 or older before 2009, the most that can be contributed to your traditional IRA for 2008 will be the smaller of the following amounts:

$6,000, or
Your taxable compensation for the year.
--25-JAN-2008

(Last Reviewed or Updated: January 26, 2008)

Source: IRS Recent Tax Changes