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Top 5 New Tax Laws for the Best Refund in 2009 - Plus a Few Money Saving Tax Tips

written by: Patricia Tokar, CPA•edited by: Laurie Patsalides•updated: 3/5/2009

Before you send in your 2008 tax return, take one last look to be sure that you took advantage of all the new tax laws. Here are the top 5 new laws that should save you some tax money, plus a list of some of the areas you should review before you file your 2008 income tax return.

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    1. The Recovery Rebate Credit

    The Economic Stimulus Payment allowed for a payment in 2008 of up to $600.00 per taxpayer plus $300.00 per dependent child under the age of 17. Did you receive the maximum allowable? If not, you may qualify for the Recovery Rebate Credit.

    The Economic Stimulus Payment check you received last summer was automatically issued, based on the assumption that your 2008 tax return would be similar to your 2007 tax return. If there were any changes from 2007 to 2008, such as a new dependent or a difference in your income, then you should use the worksheet in the instructions of Form 1040 to see if you qualify for the Recovery Rebate Credit. If so, claim the additional credit on Line 70 of the Form 1040.

    And no, the Economic Stimulus Payment you received in 2008 is not taxable.

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    2. First Time Homebuyer’s Tax “Credit"

    This “credit" is new for 2008 and is set to expire in 2009. The First-Time Homebuyer’s Credit is not actually a credit - it is an interest-free loan. The loan will be repaid over a 15 year period by repaying 1/15 th of it each year on the homebuyer’s tax return. If the home is sold before 15 years, the balance owing on the loan is due in the year of the sale.

    The “credit" is equal to 10% of the purchase price of the home up to a maximum “credit" of $7500.00 ($3750.00 if married filing separately).

    To qualify as a first-time homebuyer, neither you nor your spouse can have any ownership in a home for the three year period prior to the purchase of the qualifying home. A qualifying home must be purchased after April 8, 2008 and before July 1, 2009.

    Note that you can elect to take the credit on the 2008 return for a home purchased in 2009 (before July 1, 2009). This will allow you to receive the “credit" immediately instead of waiting until next year. Use the checkbox on Form 5405 to make this selection.

    Use Form 5405 to claim the First Time Homebuyer’s Credit.

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    3. Standard Deduction for Real Property Taxes

    If you don’t have enough deductions to itemize, you may take an additional standard deduction for the non-business real property taxes you paid in 2008 that would have otherwise been deductible on your Schedule A. The deduction is the amount of the tax paid up to $500.00 (single) or $1000.00 (joint).

    Even if you can itemize, you should compare your itemized total to the amount of the standard deduction including the property tax deduction to see if you would now get a bigger deduction by just taking the adjusted standard deduction.

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    4. Increased IRA Contributions

    The Roth and Traditional IRA 2008 annual contribution limits are now $5000.00. If you are 50 or older, the limit is $6000.00. If you did not contribute the maximum to your IRA in 2008, you can still make a 2008 contribution up to April 15, 2009.

    If you calculate your tax return and would like to reduce your balance owing (or increase your refund), then consider making an additional 2008 contribution to your Traditional IRA. This assumes that you qualify to make a deductible contribution.

    Note that contributions to a Roth IRA are not tax-deductible.

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    5. 5% Tax Rate on Qualified Dividends and Net Capital Gains is Reduced to Zero

    The five-percent tax rate on qualified dividends and net capital gains is reduced to zero for 2008.

    This may apply to you if your taxable income is below:

    • $65,100, if married filing jointly

    • $32,550, if single (or married filing separately)

    • $43,650, if head of household.

    On the Form 1099-DIV, Box 1b will report the amount of your dividends that, with some exceptions, are qualified for the lower tax rate.

    Use the Qualified Dividends and Capital Gains worksheet or Schedule D to calculate the tax on your qualified dividends. The Schedule D tax calculation is rather tedious and you may prefer to use a computerized tax program or a professional preparer for this schedule.

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    A Few More Money Saving Tax Tips for 2008

    A Few More Tax Tips for 2008

    Besides the Top 5 new tax laws above, there are many extensions of provisions and increases of benefits for 2008. Here is a brief list:

    • The maximum earned income credit has increased. Additionally, the amount of income you can earn and still claim the credit has increased.

    • The mortgage insurance premiums you paid on a residence may be deductible if the mortgage insurance contract was new in 2007 or 2008.

    • The optional itemized deduction for state and local sales tax is still in effect.

    • Teachers may still deduct up to $250.00 of qualified teaching supplies.

    • Contributions of computers, software, and books to schools and libraries may qualify for a larger charitable deduction

    • If your home was sold in foreclosure and the bank sent you a form showing your forgiven debt, you may be able to exclude all or part of this from income.

    • Nonrefundable personal tax credits may be used to offset Alternative Minimum Tax.

    • The business standard auto mileage rate for 2008 was increased mid-year to 58.5 cents per mile for mileage after July 1, 2008 (prior to July 1, the mileage rate is 50.5 cents).

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    • IRS Form 1040

    • Instructions to Form 1040

    - refer to page 63 of the instructions for the Rebate Recovery Credit worksheet

    - refer to page 38 of the instructions for the Qualified Dividends and Capital Gains Tax worksheet

    • IRS Form 5405 - First Time Homebuyer’s Credit

    • IRS Schedule D - Capital Gains and Losses

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    Legal Section

    This article is not intended to be specific tax advice. It is intended as a general guideline only. Any specific advice should be sought from your tax professional.

    CIRCULAR 230 DISCLOSURE: Pursuant to Treasury Department guidelines, any federal tax information contained in this article, or any attachment, does not constitute a formal tax opinion. Accordingly, any federal tax advice contained in this communication, or any attachment, is not intended or written to be used, and cannot be used, by you or any other recipient for the purpose of avoiding penalties