Tax Developments Worth Noting
by Steven Mendelsohn

Interest in taxes is heightened now by the numerous and far-reaching tax changes included in the economic stimulus package. This article summarizes some of those changes, but only those that have immediate applicability to your 2008 tax filing or 2009 planning.  Remember, most of the tax changes in the new law take effect only in 2009, so have no impact on the return you are filing this spring.  The article also discusses a number of changes made during 2008 that could affect how much you pay for 2008.

Inflation Adjustments-- Many numbers are adjusted for inflation so they change each year.  For example, the maximum 2008 earned income tax credit (EITC) for a family with two or more qualifying children goes up to $4,824, $2,917 for one child, and $438 for people with no qualifying children.  The income phaseouts (that is, the adjusted gross income (AGI) level above which eligibility for the credit goes away) have also risen, with the figures now being $41,646 for people with two or more children, $36,995 for one and $15,880 for a couple with no children. The comparable figures for single people not filing joint returns are a little less.

Things like the standard deduction also go up by $150 to $200, as does the personal exemption, the amount of income you can have without falling afoul of the alternative minimum tax and a number of other items.

Earned Income Credit-- For tax years 2009 and 2010 the stimulus package provides a break for families with three or more qualifying children and for married people who claim the EITC.

Check the IRS web site for details.  If you are an employed person utilizing the advance EITC you may be able to reduce your withholding even further.  The advance EITC allows eligible individuals to have their withholding reduced throughout the year so that they get the benefit of the EITC each payday rather than having to wait till they file their annual tax returns.  The new law does not change the $1,750 maximum for advance EITC though, so if you have already reduced your withholding by that much you will probably have to wait until you file your 2009 return before benefiting from the new provision.

Make Work Pay-- One provision of the new law will definitely have an immediate impact on your take-home pay.  The Make Work Pay credit, available for 2009 and 2010, will give taxpayers a credit equal to 6.2% of earned income or $400, whichever is less.  The IRS will publish revised withholding tables for employers to use in adjusting workers' withholding so that the benefits, estimated at about $8 a week, can start being received immediately.  This credit phases out once "modified AGI" exceeds $75,000 for an individual, $150,000 for married couples.  The amount of the credit may also be slightly reduced for Social Security and veterans benefits payment recipients who get the special one-time $250 payment discussed below.

People receiving payments under any federal benefit program that is needs-based or means-tested will want to know that this credit is not countable as income under any such program, and it can't be counted as income under any state program that operates with federal funds either.  But what the law gives the law also takes away, for after two months following the receipt of the credit it will be countable as "resources".

There is nothing in the law that requires the Social Security Administration, for instance, to count the credit in determining resources, and one would hope that they, the Department of Housing and Urban Development and other agencies administering important programs possess the legal authority not to count this small amount toward resources and that they will exercise that discretion in favor of excluding them.

Economic Recovery Payment-- Under the new law all recipients of Social Security payments (including old-age pension, SSDI and SSI), recipients of Railroad Retirement benefits, and recipients of Veterans disability pensions and of certain other compensation will receive a $250 payment.  With a few exceptions, anyone receiving these payments in any month from November 2008 through January 2009 will get this economic recovery payment.

The payment is tax-exempt.  For purposes of means-tested public programs, it is also excluded from income, but nine months after receipt it becomes countable as resources for those programs that look at resources.  Why Congress chose to give people a nine month spend-down period for these payments but only two months for the Making Work Pay credit is unknown.  Interestingly too, if you are entitled to this $250 payment but do not receive it by December 31, 2010, you will not be able to get it afterwards, so if you don't receive it by the end of 2009 start making inquiries.

Recovery Rebate Credit-- This talk about one-time payments that show up out of the blue in our mailboxes or direct deposit accounts reminds us of last year's economic stimulus payment (ESP) of $300-600 ($1,200 for married couples) that most people got.  The trouble is, some people who were eligible for it didn't get it.  There are many reasons why, the most common being their failure to file a 2007 tax return, but all hope is not lost.  If you were entitled to the credit but didn't get it, you may be able to claim the recovery rebate credit on your 2008 return. This credit is calculated exactly as the ESP was, except that you use your 2008 financial information rather than your 2007 data in making the computation.  You get your complete 2008 information by filling out your tax return.  Then at the end you apply the recovery rebate credit to that.  Full information on how is available on the IRS web site.

Reference to the availability of information on the IRS web site should serve as an occasion to remind people that numerous sources of information and assistance are available for people who cannot get the information they need from a web site or who need help in completing their returns.  In addition to IRS phone and in-person assistance, low-income taxpayers should look to the volunteer income tax assistance program (VITA) or the tax counseling for the elderly program (TCE).  In this regard, VITA programs operating in about 80 cities around the country specialize in return preparation with people with disabilities. These can be located through the Real Economic Impact Tour (www.reitour.org).

Homeownership-- No one would suggest that the wave of foreclosures spreading across the country has any silver lining, but the continuing decline in house prices has made it possible for some people to afford homes who could not have done so before.  First-time homebuyers (that is, people who have not owned a home in the past three years) should know that if they purchase a home in 2009 they will be eligible for an $8,000 tax credit.  Late in 2008 Congress had passed legislation providing a $7,500 credit for such purchases, but that credit had to be paid back over 15 years.  The new stimulus bill eliminates the repayment requirement and raises the credit to $8,000. Unfortunately, the credit does not appear to be refundable.  This means that if your total tax for 2009 (including what you had withheld from your wages or paid in quarterly estimated taxes, and anything you pay with your return) totals less than $8,000, you will not get the benefit of the entire credit but will only be able to take that much of it as reduces your tax to zero.

A technical point here:  To avoid confusion remember that the word "refundable" has two very different uses.  It can refer to whether you are entitled to a refund, but it has another meaning. "Refundable credits" are those whose full value you can get, even if applying it reduces your tax to below zero.

State and Local Taxes-- For those people who own a home and claim the standard deduction, such itemized deductions as the one for real estate taxes have been lost to them.  But for 2008 you can claim a $500 deduction for such taxes you paid, and you still don't have to itemize in order to get it.  Renters don't get any benefit, even though they're paying the owner's real estate taxes.

You still have to itemize in order to claim the deduction for state sales taxes though.  For 2008 and 2009 people who itemize can choose to deduct either their state income or sales taxes, depending on which are larger.  But unless you itemize, neither of those choices will be available to you.

A brief article such as this can only scratch the surface.  The tax law is growing ever-more complex, but at the same time better and better resources are becoming available, not merely for coping with the law but for using it to your advantage. Sometimes it may seem that only small sums are involved, but in this economy, every penny counts.