Two major pieces of legislation were signed into law in fall 2008. The first was designed to stem the continuing slump in housing sales. The second was meant to stabilize floundering financial markets. Included in both packages, however, were tax breaks that may be a big help to your personal finances in these turbulent times. Note, though, that many of the provisions are temporary. You'll want to act fast where appropriate.
Housing tax breaks
Thinking about buying your first house? If you haven't owned a home within the past three years, you can claim a tax credit of 10% of the purchase price of a principal residence, up to $7,500. But note these important points:
Unlike other federal income tax credits, this one is really a temporary interest-free loan. You must repay it over the succeeding 15 years in equal installments, beginning with the second year following the year of purchase. If you sell the property before then, the remaining balance will be due in the year of the sale (unless the property is sold at a loss). If you die during that period, the balance of the loan is forgiven.
The credit applies to homes purchased on or after April 9, 2008, and before June 1, 2009. If you buy your house in 2009, you can choose whether to claim the credit for 2008 or 2009.
The amount of the credit phases out for married taxpayers with adjusted gross income (AGI) of more than $150,000 and disappears at AGI more than $170,000 (half these amounts for single taxpayers).
Don't itemize on your federal income tax return? You still may be able to take a deduction for property taxes. Available initially only for the 2008 tax year but extended through 2009, the deduction adds a maximum of $1,000—or the actual property tax, if less—to the standard deduction for married couples filing jointly and to $500 for single taxpayers. This provision is most likely to benefit you if you have paid off your mortgage and no longer have deductible interest.
You can make charitable donations directly from an IRA.
Did a lender forgive all or a portion of your mortgage debt? Normally the amount of such forgiveness is subject to income tax. Now, so long as you took the mortgage to buy, build, or substantially improve your home, you can exclude up to $2 million of cancelled debt from gross income. This forgiveness was to expire at the end of 2009. It has been extended through 2012.
2008 standard deduction limits
With the additional sum for property taxes (above), the 2008 standard deduction of $10,900 for married couples filing jointly becomes a maximum of $11,900 and the 2008 standard deduction of $5,450 for single taxpayers becomes a maximum of $5,950.
Is someone in your family attending college? The new law extends a higher education tuition deduction through the end of 2009. According to tax publishers CCH Incorporated, Riverwoods, Ill., the maximum deductible amount is $4,000 for married taxpayers with AGI not exceeding $130,000 ($65,000 for single taxpayers). It becomes a maximum of $2,000 for married taxpayers whose income is between those limits and $160,000 (joint) or $80,000 (single).
Sizable amounts of forgiven mortgage debt will not be taxed.
Are you a teacher? The deduction of up to $250 for out-of-pocket classroom expenses has been extended through the end of 2009. You may claim this deduction whether or not you file an itemized return if you have spent your own money on books, supplies, equipment, software, or other classroom materials.
Did you make a big purchase in 2008? Plan one for 2009? If the amount you paid in state and local sales tax adds up to more in either year than your state income tax, you can choose to deduct sales tax instead of income tax on your federal income tax return for these two tax years. According to a tax briefing from tax publisher CCH Incorporated, you can calculate the deduction either by saving receipts or using the calculator provided by the IRS (Internal Revenue Service). If you use the tables, you can add any sales taxes paid on big-ticket items such as cars, boats, and home building materials.
Have you been snared by the dreaded Alternative Minimum Tax (AMT)? Originally intended to prevent high-income taxpayers from bypassing income tax obligations by eliminating so-called tax "preferences," the AMT—because it was never indexed for inflation—has snared more and more middle-income taxpayers. People with large families or significant out-of-pocket medical expenses, for example, have wound up losing exemptions and deductions they were otherwise entitled to—and paying a lot more tax. A temporary fix for the 2008 tax year exempts income of $69,950 for married couples filing jointly and $56,200 for single taxpayers from the AMT. Without this measure, the exempt amounts were $45,000 and $33,750 respectively.
Many of the provisions are temporary. Act fast where appropriate.
Interested in tapping your IRA to make charitable contributions? This popular provision expired at the end of 2007 but has been extended through 2009. For these two tax years, you can make charitable donations directly from an IRA instead of withdrawing the cash, paying income tax on the distribution, and then donating the money. There is no deduction for donations made this way but the retirement distribution is not taxable as income. Just be sure to follow the rules, as outlined in Ed Slott's IRA Advisor:
You must be age 70½ or older;
Distribution must be from an IRA, not from an employer plan such as a 401(k);
The check must be made out to the charity but you can have it sent to you so that you can deliver it yourself;
If you do have it delivered directly from your IRA custodian, be sure that your name and address are associated with the donation (you still are required to have written substantiation of the gift from the charity); and
You cannot receive any benefit from the contribution; it must otherwise be entirely deductible.
Grace W. Weinstein is a New Jersey-based financial writer whose columns appear in The Financial Times. She is the author of 13 books, including "J.K. Lasser's Guide to Winning With Your 401(k)."