2008 Individual Tax Law Changes
During 2008, Congress changed several tax laws affecting individual and business tax returns. Below we have highlighted the main tax law changes that could impact your individual 2008 tax return:
New National and Refundable Tax Credit for First-Time Homebuyers
This new tax credit is similar to an interest free loan to help first-time homebuyers accumulate enough funds for a downpayment. A first-time homebuyer is defined as a taxpayer who hasn’t owned a main home within the last three years prior to the new home purchase. The “credit” is limited to 10% of the home’s purchase price up to a maximum credit of $7,500. Taxpayers claim the credit on the tax return in the year of the home purchase. The credit is repaid in 15 equal installments on the taxpayer’s return beginning two years after the home purchase. But please note, the credit applies only to homes purchased between April 9, 2008 and July 1, 2009.
There are restrictions as to which taxpayers qualify. In addition to meeting Congress’ definition of a first-time homebuyer, taxpayers cannot purchase the home from a close relative and they must meet modified adjusted gross income restrictions.
For more information on whether you might qualify this new credit, please contact us directly at christine@cemtaxplanning.com.
Additional Standard Deduction for State and Local Real Property Taxes Paid in 2008
This new deduction helps taxpayers who pay real estate taxes on a property used as a home (not as a rental property), but do not itemized their deductions on Schedule A. Taxpayers can claim an additional standard deduction up to the lesser of the real estate taxes paid or $500 for single filers and $1,000 for marreid filing jointly filers. The real estate taxes paid must meet the same requirements as those qualifying for the itemized deduction on Schedule A and they can include qualifying foreign real estate taxes. But remember, if you own your home but you have it rented while you are stationed overseas, the real estate taxes you pay on your home are included on your Schedule E, not your Schedule A and thus will probably not qualify for this deduction.
For more information on whether you might qualify this new deduction, please contact us directly at christine@cemtaxplanning.com.
Peace Corp Now Included on 10-Year Suspension Rule for Section 121 Gain Exclusion
Beginning in 2008, Peace Corp employees and volunteers are now included on the 10-year suspension rule for Section 121 gain exclusion that was previously only enjoyed by US Military, Foreign Service and the Intelligence Community.
In a nutshell, the Section 121 gain exclusion allows taxpayers to exclude capital gains up to $250,000 as a single filer and $500,000 as a married filing jointly couple from capital gain taxes. To qualify for the exclusion, the taxpayer must live in the property as a main home for at least 2 of the last 5 years or meet the IRS-defined unforeseen circumstances rules for a partial exclusion.
The 10-year suspension rule allows for qualifying taxpayers to suspend the 5-year requirement while they are not living in the home due to an official US government assignment elsewhere with a qualifying government agency.
But remember: Section 121 gain exclusion applies only to capital gains (the difference between your basis in the property and the sales price). If you own a property and you have it rented while living elsewhere or overseas, you are required to depreciate the property on your Schedule E. When you sell the property, the depreciation that you took or could have taken is called Section 1250 unrecaptured gain and this amount MUST be recorded on your tax return in the year of sale up to the amount of gain on the property. Even if you never properly depreciated your property, you still must record the amount of depreciation you could have taken as Section 1250 unrecaptured gain on your tax return in the year of sale. Section 1250 unrecaptured gain can never be excluded…only your capital gain can potentially be excluded under the Section 121 rules.
For more information on whether you might qualify this suspension rule, please contact us directly at christine@cemtaxplanning.com.
New Limitations on the Section 121 Gain Exclusion Rules
In order to pay for the new tax cuts Congress approved in 2008, Congress also approved some new tax increases. The main increase that affects your individual return is the new limitation rule on Section 121 gain exclusion. Prior to the rule change, taxpayers could exclude capital gain up to the Section 121 limits as long as the property was used as the taxpayer’s principal residence for at least 2 of the last 5 years. If the property was rented as well during the 5 year period, the rental period did not count against the taxpayer for capital gain exclusion as long as the taxpayer had met the 2 year rule.
Congress changed the Section 121 gain exclusion rules in 2008. Now, the capital gain attributed to the period the taxpayer had rented the property prior to sale can no longer be excluded for periods beginning on and after January 1, 2009. However, similar to the 10-year suspension rules discussed previously, taxpayers who rented their property while on official orders from a qualifying government agency (US Military, Foreign Service, and Intelligence Community) are excluded from this tax law change.
For more information on how this change to the Section 121 gain exclusion rules could impact you, please contact us directly at christine@cemtaxplanning.com.
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