Summary of Federal Tax Law Changes for 2008 - 2017

Many of the tax breaks in recent tax-relief bills were designed to be phased in over a number of years, or are indexed to inflation. To help you determine how these tax laws affect your long-term plans, this article explains the changes scheduled to come into effect through 2017.

Pick a year from the list below to learn what tax changes affect that year's returns. We include changes for 2008 because they affect tax returns you'll be working on in the spring of 2009.

• 2008
• 2009
• 2010
• 2011
• 2013
• 2017

Starting in 2008

Tax Credit of Up to $7,500 for First-time Homebuyers

If you purchased a primary residence in 2008 after April 8, and are a “first-time” homebuyer, you can qualify for a new tax credit equal to 10 percent of up to $75,000 of the purchase price. To be eligible, you must not have owned a residence in the U.S. in the previous three years. The credit phases out between $150,000 and $170,000 of Adjusted Gross Income for joint filers, and $75,000 to $95,000 for single filers. It is refundable to the extent it exceeds your regular tax liability, which means that if it more than offsets your tax liability, you’ll get a refund check. But it does not offset the Alternative Minimum Tax.

Beware: This credit is more like an interest-free loan from Uncle Sam, because it will be repaid over 15 years. The repayment period starts two years after the year the credit is claimed. Thus, if you claim a $7,500 tax credit for a purchase in 2008, you will have to pay an extra $500 of income tax in 2010, and in later years.

If you sell the residence before the credit is fully repaid, the balance is due in the year of the sale. (If your profit on the sale is less than the credit amount outstanding, though, the amount due is limited to the amount of your profit.)

Higher Income Limits for Deductible IRAs and for Roth IRAs

If you are covered by a retirement plan at work, you can take a full IRA deduction if your modified Adjusted Gross Income is less than $85,000 (married filing jointly) or $53,000 (single or head of household). A partial deduction is allowed until your Adjusted Gross Income reaches $105,000 if you are married filing jointly, or $73,000 if you are single or a head of household. Also, the opportunity to contribute to a Roth IRA is now phased out as your modified Adjusted Gross Income rises between $159,000 and $169,000 if you are married filing jointly, or $101,000 to $116,000 if you are single or a head of household.

Indexed Tax Brackets

Thanks to inflation in the past year, the 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent tax brackets all kick in at approximately 2 percent higher levels of income than in 2007.

Larger Personal Exemptions

For 2008, each personal exemption you can claim is worth $3,500—up by $100 from 2007.

Higher Standard Deductions

For 2008, the standard deduction for married filing jointly rises to $10,900, up by $200 from 2007. For single filers, the amount increases to $5,450 in 2008, up by $100 over 2007. And heads of household can claim $8,000 in 2008, a jump of $150 from 2007.

Additional Standard Deduction Amount for Property Taxes Paid

Non-itemizers who pay real estate taxes can claim even larger standard deductions. Joint filers can add in up to $1,000 of property taxes paid to the amounts shown above. Singles can add in up to $500 of real estate tax payments.

Reduction in Itemized Deductions and Personal Exemptions for High-Income Taxpayers

Currently, itemized deductions and personal exemptions are phased out as your income rises. In 2008, the reduction of itemized deductions occurs once your Adjusted Gross Income exceeds $159,950, regardless of your filing status. Your itemized deductions are reduced by 1 percent of the amount by which your AGI exceeds $159,950, but you can never lose more than 80 percent of your itemized deductions.

Also, your medical expenses, investment interest deduction, deductible gambling losses and any casualty and theft losses are not subject to the cut. Personal exemptions are reduced by 2 percent for each $2,500 of Adjusted Gross Income over $239,950 for marrieds filing jointly, $199,950 for heads of households and $159,950 for singles, but the reduction cannot exceed $1,167 per exemption.

Increased Section 179 Expense Deduction

Thanks to a new law, the maximum amount of equipment placed in service in 2008 that businesses can expense increases to $250,000, a $125,000 increase from 2007. The annual investment limit increases to $800,000 in 2008, up from $500,000 the year before. Thus, you won't lose the benefit of expensing until you place more than $800,000 of assets in service in 2008.

Tax-free Parking for Employees

Starting in 2008, employees are not taxed on up to $220 a month of employer-paid parking, up $5 per month from 2007. The cap on tax-free transit passes their employers can give rises to $115 a month, up $5 a month from 2007.

Exemptions for the Alternative Minimum Tax

Congress increased the AMT exemptions for 2008 to prevent millions of additional taxpayers from having to pay the minimum tax. For 2008, the exemptions are $46,200 for single taxpayers and heads of households, $69,950 for married couples filing joint returns, and $34,975 for married couples filing separately. Unless Congress acts in 2009, the exemption levels will drop to $45,000 for married filing jointly, $33,750 for singles and heads of household, and $22,500 for married couples filing separately.

Income Earned Abroad

The maximum foreign earned income exclusion is increased to $87,600 this year (up from $85,700).

Tougher Kiddie Tax

Beginning in 2008, Congress gave the kiddie tax more bite. In 2007, a child's unearned income over $1,700, such as gains and dividends, was taxed at the parents' marginal rate until the year the child is 18. The threshold increases to $1,800 in 2008, but the age is raised to 19. For full-time students whose earned income is less than half their support, it increased to 24. This change prevents families from shifting appreciated assets to their kids to take advantage of the zero percent rate on capital gains, which is discussed below.

Reduction in Capital Gains Tax Rates

Prior to 2008, long-term capital gains from the sale of assets held longer than one year were taxed at a maximum rate of 5 percent, to the extent the seller was in the 10 percent or 15 percent tax brackets. In 2008, the 5 percent maximum rate drops to zero percent through 2010. The 15 percent maximum tax rate on long-term capital gains for taxpayers in higher brackets stays the same.

Reduction in Dividend Tax Rates

Similarly, in 2008 the special 5 percent maximum rate on dividends of taxpayers in the 10 percent and 15 percent tax brackets drops to zero percent through 2010.

State and Local Sales Tax Deduction

The opportunity for itemizers to choose to deduct their state sales tax payments instead of deducting state and local income taxes was reinstated for 2008. This break is now set to expire after 2009.

Educators' Deduction

This deduction for up to $250 of classroom supplies purchased by educators was revived for 2008. It is now scheduled to lapse after 2009.

Nontaxable Combat Pay Allowed for Earned Income Tax Credit (EITC)

The election to include nontaxable combat pay in the calculation of earned income for the Earned Income Tax Credit was extended to apply again for 2008 and 2009.

Tuition and Fees Deduction

The deduction for up to $4,000 of college tuition and fees was reinstated by Congress for 2008 and 2009.

Direct Donations of IRAs to Charity

For 2008 and 2009, IRA owners age 70 ½ and older can donate up to $100,000 of their IRAs to charity without having to report the withdrawal as income and deduct the donation as a charitable contribution. Thus, their deductions will not be limited by the Adjusted Gross Income cap on charitable contributions or the itemized deduction phaseout. Keeping IRA distributions out of adjustable gross income in the first place can also have other benefits. Amounts donated in this way count as all or part the IRA owner’s required minimum distribution.

Refundable Child Tax Credit

The $12,050 income threshold needed to qualify to claim the child tax credit if it exceeds your regular income tax bill is lowered to $8,500 for 2008.

Tax Relief for Victims of the Floods in the Midwest

Victims of the spring 2008 floods in 10 Midwestern states (Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska and Wisconsin) are eligible for a slew of tax breaks:

• Itemizers can deduct all their uninsured losses, without regard to the $100 floor or 10 percent of Adjusted Gross Income offset.
• Victims can withdraw up to $100,000 from an IRA or company plan without penalty, and pay tax on the payouts over three years. Any amounts that are recontributed during that time will be treated as rollovers, and any tax paid can be refunded by filing Form 1040-X.
• Victims can borrow the lesser of $100,000 or their vested benefit from company plans.
• Anyone housing flood victims for 60 days or more gets a $500 exemption for each one, up to a maximum of $2,000.
• The standard mileage rate for flood-related charitable driving in 2008 is 36 cents per mile for driving done before July 1, and 41 cents per mile for driving done after June 30.
• The $1,800 and $2,000 maximums for the Hope and Lifetime Learning credits, respectively, are doubled for 2008 and 2009 for students in colleges in the disaster area.

Starting in 2009

Tax Credit of Up to $8,000 for First-Time Homebuyers

If you purchased a primary residence in 2009 before December 1, 2009 and are a “first-time” homebuyer, you can qualify for a tax credit equal to 10 percent of up to $80,000 of the purchase price. To be eligible, you must not have owned a residence in the United States in the previous three years. The credit phases out between $150,000 and $170,000 of Adjusted Gross Income for joint filers, and $75,000 to $95,000 for single filers.

The credit is refundable to the extent it exceeds your regular tax liability, which means that if it more than offsets your tax liability, you’ll get a refund check. But it does not offset the Alternative Minimum Tax.

You can even elect to claim the credit for a 2009 home purchase on your 2008 tax return. (If you filed for 2008 before buying, but before the December 1, 2009 deadline, you can claim your credit by filing an amended return using Form 1040X. Doing so will guarantee you a refund check.) Unlike the credit for 2008 purchases, the credit for 2009 purchases doesn’t have to be paid back over 15 years. But you will have to repay the credit if you sell the house within three years of the date you bought it.

Payroll Tax Credit

For 2009 and 2010, Congress gave workers a credit of 6.2 percent of their earned income, capped at $400 for single filers and $800 for joint filers. For single filers, the credit starts phasing out at $75,000 of Adjusted Gross Income and dries up at $95,000. The phaseout zone for couples is $150,000-$190,000. Employees will get the credit in advance via lower income tax withholding in each paycheck, not as a rebate check. Self-employeds can reduce their quarterly estimated payments to get an advance benefit from the credit. The exact amount of the payroll tax credit for the year will be calculated on the filers’ tax returns. Recipients of Social Security benefits, Railroad Retirement benefits, Supplemental Security Income or veteran disability pensions will get a one-time $250 check instead for 2009. Federal retirees who don’t receive any Social Security will also get a $250 check.

Sales Tax Deduction for New Vehicles

Buyers of new vehicles can deduct the sales tax paid on the purchase, even if they don’t claim sales taxes as itemized deductions. They can add the tax they pay to their standard deduction. This break applies to new cars, motor homes, light trucks and motorcycles purchased after February 16, 2009 and before January 1, 2010. Sales tax paid on the first $49,500 of cost qualifies. The benefit begins phasing out for married couples with AGI over $250,000 and singles with Adjusted Gross Income over $125,000. It is completely gone for single filers with Adjusted Gross Income of $135,000 or more, or joint filers with AGI of at least $260,000. 

Itemizers who elect to deduct state sales taxes in lieu of state income taxes get no benefit from this change, since the auto sales tax is already included in the sales tax deduction. Itemizers who deduct state income taxes will get a separate deduction for auto sales taxes; non-itemizers will add the sales tax amount to their standard deduction amount.

Indexed Tax Brackets

 

Thanks to higher inflation in the past year, the 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent tax brackets all kick in at approximately 5 percent higher levels of income than in 2008.

Larger Personal Exemptions

For 2009, each personal exemption you can claim is worth $3,650, up by $150 from 2008.

Higher Standard Deductions

For 2009, the standard deduction for marrieds filing a joint return rises to $11,400, up by $450 from 2008. Joint filers can also add in up to $1,000 of property taxes paid.

For single filers, the amount increases to $5,700 in 2009, up by $250 over 2008. Singles can also deduct up to $500 of real estate tax payments.

Heads of household can claim $8,350 in 2009, a jump of $350 from 2008.

Non-itemizers who pay real estate taxes can claim even larger standard deductions. Non-itemizers can also add any casualty losses that occurred in presidentially-declared disaster areas.

Reduction in Itemized Deductions and Personal Exemptions for High-Income Taxpayers

As noted earlier, itemized deductions and personal exemptions are phased out as your income rises. In 2009, the reductions are a bit less painful. The cutback in itemized deductions occurs once your Adjusted Gross Income exceeds $166,800, regardless of your filing status. Your itemized deductions are reduced by 1 percent of the amount by which your AGI exceeds $166,800, but you can never lose more than 80 percent of your itemized deductions. Also, your medical expenses, investment interest deduction, deductible gambling losses and any casualty and theft losses are not subject to the cut. Personal exemptions are reduced by 2 percent for each $2,500 of Adjusted Gross Income over $250,200 for married filing jointly, $208,500 for heads of households and $166,800 for singles, but the reduction cannot exceed $1,217 per exemption.

Section 179 Expense Deduction

The maximum amount of equipment placed in service in 2009 that businesses can expense stays at $250,000. And the annual investment limit remains $800,000. Thus, you won't begin to lose the benefit of expensing until you place more than $800,000 of assets in service in 2009.

Tax-Free Parking for Employees

Starting in 2009, firms can pay for $230 a month of parking tax-free for employees, up $10 per month from 2008. The cap on tax-free transit passes is now $230 a month as well, the same as for parking. The limit had been $115 a month in 2008.

Tax Credit for College Tuition

For 2009 and 2010, the Hope credit is replaced by a new credit of up to $2,500 per student a year for four years of college, not just the first two years. It now also covers the cost of books, and begins to phase out at $80,000 of Adjusted Gross Income for single filers and $160,000 for joint filers. If the credit is more than your income tax liability, 40 percent of it is refundable. Also, the full credit is allowed against the Alternative Minimum Tax.

Child Tax Credit

If the credit exceeds the filer’s tax liability, all or part of the credit will be refunded if the filer earns more than $3,000 in 2009 and 2010, down from $12,550 in earnings previously.

Earned Income Tax Credit (EITC)

For families with three or more children, the maximum Earned Income Tax Credit for 2009 and 2010 rises by $628.50. And the phaseout of the credit for joint filers starts at higher income levels in 2009 and 2010, allowing more of them to claim the credit.

Higher Income Limits for Deductible IRAs and for Roth IRAs

If you are covered by a retirement plan at work, you can take a full IRA deduction in 2009 if your modified Adjusted Gross Income is less than $89,000 (married filing jointly) or $55,000 (single or head of household). A partial deduction is allowed until your Adjusted Gross Income reaches $109,000 if you are married filing jointly, or $75,000 if you are single or a head of household. Also, the opportunity to contribute to a Roth IRA is now phased out as your modified Adjusted Gross Income rises between $166,000 and $176,000 if you are married filing jointly, or $105,000 to $120,000 if you are single or a head of household.

Increased Contribution Limit for 401(k) Plans

The maximum employee contribution rises to $16,500 from $15,500 in 2009 for these and similar workplace retirement plans, including 403(b)s and the federal Thrift Savings Plan. Workers age 50 and older in 2009 can put in an additional $5,500 this year, also a $500 increase from 2007. Thus, their maximum contribution is $22,000.

State Tax Exemption

In 2009, the federal estate tax exemption rises to $3,500,000 from its 2008 level of $2,000,000.

Higher Annual Gift Tax Exemption

For 2009, you can give up any individual up to $13,000 without owing any gift tax—a $1,000 increase over 2008.

Exemptions for the Alternative Minimum Tax (AMT)

For 2009, the exemption levels rise to $70,950 for married filing jointly, $46,700 for singles and heads of household, and $35,475 for married couples filing separately. Otherwise, more than 20 million filers would have been added to the AMT rolls. Congress is likely to act again to prevent this from happening for the 2010 tax year. Also, interest on private-activity bonds issued in 2009 and 2010 is exempt from the Alternative Minimum Tax.

Credit for Residential Energy-Efficient Property

The credit for 30 percent of the cost of installing solar water heating equipment, solar electric equipment, geothermal heat pumps or small wind turbines in your primary residence or a second home is no longer limited to $2,000 after 2008. But the credit for fuel cell property still cannot exceed $500 per half-kilowatt capacity.

Credit for Energy-Saving Home Improvements

The old 10 percent tax credit of the cost of energy-saving home improvements is increased to 30 percent for 2009 and 2010, up to a maximum of $1,500 in the two-year period. It applies to qualified skylights, windows, outside doors, biomass fuel stoves and high-efficiency furnaces, water heaters and central air conditioners. In addition, the dollar limits on the particular type of improvement, such as a $200 cap on the credit for windows, are repealed.

Converting a Second Home to a Primary Home

If you convert a second home into a principal residence after 2008, you may not be able to exclude all of your gain. A portion of the gain on a subsequent sale of the home will be ineligible for the home-sale exclusion of up to $500,000, even if the seller meets the two-year ownership-and-use tests. The portion of the profit that’s subject to tax is based on the ratio of the time after 2008 when the house was a second home or a rental unit, to the total time you owned it. So if you have owned a vacation home for 18 years and make it your main residence in 2011 for two years before selling it, only 10 percent of the gain (two years of nonqualified second home use divided by 20 years of total ownership) is taxed. The rest qualifies for the home-sale exclusion of up to $500,000.

Refundable Child Tax Credit

The $8,500 income threshold needed to qualify to claim the child tax credit if it exceeds your regular income tax bill decreases to $3,000 for 2009.

Partial Exclusion for Unemployment Benefits

For 2009, the first $2,400 of unemployment benefits you receive is tax-free.

College Savings Plans

Beginning in 2009, 529 College Savings Plans can be tapped tax-free to pay for a computer or Internet access.

Estimated Tax Relief for Owners of Small Businesses

If an individual’s Adjusted Gross Income for 2008 was less than $500,000 and more than half of the gross income was from a business with fewer than 500 workers, the estimated income taxes for 2009 estimated tax payments can be based on the lesser of 90 percent of tax liability for 2008 or 2009. The usual estimated tax benchmarks of 100 percent or 110 percent of tax liability do not apply.

Starting in 2010

Estate Tax Repealed

The federal estate tax is scheduled to be eliminated for estates of individuals who die in 2010. We expect Congress to act in 2009 to keep the tax alive.

Roth IRA Conversions

Starting in 2010, individuals with more than $100,000 of modified Adjusted Gross Income are free to switch a traditional IRA to a Roth IRA. For conversions in 2010, taxpayers can spread the tax due over two years. Half the tax will be due in 2011, and the remaining half will be payable in 2012. Removing the limit on conversions effectively eliminates the income limit on contributions to Roth IRAs. A taxpayer with income too high to use a Roth will be able to contribute to a traditional IRA (which does not have income limits for contributions) and immediately convert to a Roth.

Domestic Production Activities Deduction

In 2010, this deduction increases to nine percent of qualifying business net income. This deduction applies to businesses engaged in construction, engineering or architectural services, film production, or the lease, rental or sale of equipment you manufactured. However, the rate remains 6 percent for oil and gas companies.

State and Local Sales Tax Deduction

The opportunity for itemizers to choose to deduct their state sales tax payments instead of deducting their state and local income taxes ends after 2009, unless Congress acts to extend it.

Educators' Deduction

This deduction for up to $250 of classroom supplies purchased by educators lapses after 2009, unless Congress acts to extend it.

Nontaxable Combat Pay Allowed for Earned Income Tax Credit (EITC)

The election to include nontaxable combat pay in the calculation of earned income for the Earned Income Tax Credit is not available after 2009, unless Congress acts to extend it.

Tuition and Fees Deduction

The deduction for up to $4,000 of college tuition and fees expires after 2009, unless Congress acts to extend it.

Direct Donations of IRAs to Charity

Beginning in 2010, the opportunity for IRA owners age 70½ to directly donate part of their IRA balance to charity will disappear, unless Congress acts to extend it.

Additional Standard Deduction for Property Taxes

Starting in 2010, non-itemizers will no longer be allowed to increase their standard deduction by up to $1,000 of property taxes paid, unless Congress acts to extend this break.

Limits on Deducting Farm Losses

Beginning in 2010, the amount of farm losses you can enter to offset nonfarm income is capped at the greater of $300,000 or your net farm income over the past five years. But this limit will apply only if you get federal farm payments or Commodity Credit Corporation (CCC) loans. You can take suspended losses in later years. The caps will also apply to partners and S firm owners.

Exemptions for the Alternative Minimum Tax

For 2010, the exemption levels drop to $45,000 for married filing jointly, $33,750 for singles and heads of household, and $22,500 for married couples filing separately. Congress is likely to act in 2009 to prevent this from happening. Otherwise, more than 20 million filers will be added to the AMT rolls.

Partial Exclusion for Unemployment Benefits

For 2010, the first $2,400 of unemployment benefits you receive is no longer tax-free.

Sales Tax Deduction for New Vehicles

Beginning in 2010, buyers of new vehicles no longer get a tax benefit for sales tax paid on new vehicles, unless they itemize and elect to deduct sales taxes instead of state income taxes.

Credit for Energy-Saving Home Improvements

The 30 percent tax credit of the cost of energy-saving home improvements reverts to 10 percent after 2010, and is capped at $500.

Starting in 2011

Higher Tax Rates

Beginning in 2011, tax rates in effect prior to 2001 spring back into effect. The top income tax rate returns to 39.6 percent, and the special low 10 percent bracket is eliminated. Whether this will actually happen will be at the heart of a spirited battle in Congress.

Estate Tax Revived

For individuals dying after 2010, the federal estate tax returns with a $1,000,000 exemption and a 50 percent maximum rate. This assumes that Congress allows the estate tax to disappear in 2010, which is unlikely.

Increase in Capital Gains and Dividend Tax Rates

The tax rate reductions for long-term capital gains and dividends is scheduled to expire this year.

• In 2011, the maximum long-term capital gains tax rate goes back up to 20 percent from 15 percent. A lower 10 percent tax rate is used by individuals who are in the 15 percent tax bracket. Their long-term capital gains had been tax-free since 2008.

• In 2011, dividend income (other than capital gain distributions from mutual funds) is taxed as ordinary income at your highest marginal tax rate.

Child Tax Credit

The credit of $1,000 per eligible child reverts to $500 after 2010. After 2010, none of the child tax credit will be refundable to taxpayers unless their earned income is more than $12,550. This is one of the many Bush tax cuts currently scheduled to expire after 2010.

Payroll Tax Credit

Starting in 2011, the partial credit for payroll taxes paid is no longer available.

Decreased Section 179 Expense Deduction

Taxpayers who purchase qualifying business property may elect to deduct the cost of the property (new or used) in the year that it is placed in service. This is referred to as a Section 179 deduction. In 2009 and 2010, the maximum amount of property that may be taken as a Section 179 deduction is $125,000, as indexed for inflation. In 2011 and future years, the maximum deduction drops to $25,000.

College Savings Plans

Beginning in 2011, 529 Plans can no longer be tapped tax-free to pay for a computer or Internet access.

Tax Credit for College Tuition

The Hope credit is again limited to the first two years of college and is capped at $1,800. None of the credit is refundable if it is more than your regular income tax liability.

Earned Income Tax Credit (EITC)

Temporary increases in the Earned Income Tax Credit for filers with three or more children and the higher income levels for the phaseout of the credit are repealed.

Starting in 2013

Tax Relief for Taxpayers Who Lose Their Homes Due to Foreclosure Expires

Beginning in 2013, debt forgiven in connection with the foreclosure of a principal residence will once again be considered taxable income (unless you are in bankruptcy or insolvent).

Mortgage Insurance Premiums

The special itemized deduction for mortgage insurance premiums paid on mortgages taken out after 2006 expires after 2012.

Starting in 2017

Credit for Residential Energy-Efficient Property

The credit for 30 percent of the cost of installing solar water heating equipment, photovoltaic or fuel cell equipment, geothermal heat pumps or wind turbines in your primary residence or a second home does not apply after 2016.

Updated for tax year 2009