Individuals
Many new tax breaks for real estate were slipped into recently enacted legislation providing relief from the current mortgage crisis. Lawmakers approved tax cuts worth $12.4 billion over 10 years, as well as tax increases to offset them.
Nonitemizers can deduct property taxes in 2008 in addition to taking the standard deduction. The extra write-off's capped at $1,000 for marrieds and $500 for singles. This break lapses after 2008.
First-time home buyers get a tax credit of up to $7,500 for buying a main home after April 8, 2008 and before July 1, 2009. To be eligible, purchasers must not have owned a principal residence in the U.S. in the previous three years. The credit phases out between $150,000 and $170,000 of AGI for married couples and $75,000 to $95,000 for single filers. It is refundable to the extent that it exceeds regular tax liability, "but it doesn't offset the AMT. Home buyers in 2009 can elect to take the credit on their 2008 income tax returns."
But the tax credit is recaptured over 15 years, without any interest. starting two years after the year the credit is claimed. Thus a first-time home buyer who claims a $7,500 tax credit for a purchase in 2008 must pay an extra $500 of income tax in 2010 and later years. If the homeowner sells the residence before the credit is fully repaid, the seller is taxed that year on the lesser of the gain from the sale (if sold to an unrelated party) or the unrecaptured balance of the credit.
Congress curbed a break for folks turning a second home into a main home:
Some of the gain will be ineligible for the home-sale exelusion if the house is converted to personal use after 2008 and is later sold. The portion of the profit that's taxed is based on the ratio of the time after 2008 when the home was used as a second residence or rented out to the total time that the seller owned the house.
And credit card issuers will have to file 1099s on payments to merchants. starting with payments for 2011. That gives issuers time to gear up their computers.
IRAs
Good news if you plan to convert a 40 l(k) account directly to a Roth IRA:
New rules from the IRS offer a sweet deal for any after-tax contributions. The total amount of your after-tax contributions can be converted free of tax. This is a much more liberal rule than when converting a regular IRA to a Roth. In that situation, the portion of the rollover that is deemed to be tax free is based on the ratio of your nondeductible payins to the total in your IRA accounts. If you have $60,000 in your IRA with $6,000 total nondeductible contributions and you convert $6,000 to a Roth IRA, just $600 of it would escape income tax. The remaining $5,400 would be taxed. But in the same situation with a 401(k), the full $6,000 would avoid tax. The same goes for 403(b) plans and 457 plans.
Fringe Benefits
Claiming cell phones as a tax free fringe benefit will get easier soon. Congress is prodding IRS to loosen rules requiring taxation of personal use of employer-provided cell phones and requiring detailed records to be maintained on business usage. Workers now have to document the business purpose, time and place of calls they make. Lawmakers say cell phone usage should be on a par with employee use of company desk phones or e-mail, which needn't be tracked. If the Service doesn't act soon, taxwriters will take the initiative to change the law.
Benefit Plans
Note this break if you use a flexible spending plan for dependent care costs:
You can claim the dependent care credit to the extent that your expenses are more than the amount that you fund through your flexible spending account. Although only $5,000 of dependent care expenses can be run through a flex plan, the credit is available for as much as $6,000 of eligible expenses for taxpayers with two or more children under the age of 13. In that case, $1,000 of expenses would be eligible for the dependent care credit on Form 2441. For most filers, the credit on that amount would generate an additional $200 in; tax savings. Of course, no credit can be claimed for any dependent care costs that are paid out of the flexible spending account. That would be prohibited double-dipping.
The Service is easing the rules on some reimbursements by flex plans.
Prepaid orthodontist charges can be reimbursed up front, the IRS says in proposed regulations, even if the treatment lasts into the following tax year.
Newly employed workers are permitted to make retroactive elections for their flex accounts, as long as they do so within 30 days of their hiring date.
Workers who quit can tap unused funds to pay dependent care expenses that are incurred after they leave their jobs. This helps them avoid any forfeitures.
And individuals in flex plans who don't have health insurance can buy it with their set-asides, effectively using pretax dollars to obtain medical coverage.
The IRS will clamp down on 529 plans this year and issue regulations that will target abuses.
Under the microscope:
Putting as much as $120,000 (the maximum 529 payin that's free of gift tax) into accounts for different people, then quickly changing the beneficiary on all of the accounts to one individual. And another ploy... stuffing a lot of money into a 529 plan and later using the funds to pay for retirement. That allows contributors to circumvent the payin ceilings and distribution requirements that apply to qualified retirement plans.