The accounting firm of Wegner LLP is pleased to provide this update of tax changes for 2008. This article hits only the high spots. Your particular situation may require the counsel of a tax professional.

By John Gillis, CPA

Federal Form 1040 Pages 1 and 2

Income Items

Line 7. Wages, salaries, tips, etc. Military benefits, which will not count as taxable wages, include any bonus payment made by a state or political subdivision to a member or former member of the U.S. uniformed services, or to his dependent, because of the member's service in a combat zone. Payments made by Veterans Affairs under a work therapy program are also tax exempt.

Line 21. Other income. For 2008, 2009 and 2010 members of qualified volunteer emergency response organizations (e.g., state or local organizations whose members provide volunteer firefighting or emergency medical services) will not have to report as income qualified state or local tax benefits (such as reduction or rebate of state or local income or property tax) and qualified reimbursement payments (up to $360 a year).

Adjustments to Gross Income, Standard Deduction and Personal Exemptions

Line 25. Health Savings Account deduction. An individual is allowed a maximum HSA contribution of $2,900 for single coverage ($5,800 for family coverage).

Line 26. Moving expenses. The deduction for moving expenses is 19¢ per mile for Jan. 1 to June 30, 2008 and 27¢ per mile from July 1 to Dec. 31, 2008.

Line 32. IRA deduction. The IRA contribution limit is $5,000 ($6,000 if over 50 at the end of 2008). For 2008, the adjusted gross income (AGI) phase out ranges for making deductible contributions to regular IRAs by taxpayers that are active participants in an employer-sponsored retirement plan are higher (e.g., $85,000 to $105,000 for joint return filers).

Lines 39c and 40. Standard deduction. For 2008, the standard deduction is $5,450 for single filers and for married persons filing separately, $10,900 for joint filers and qualifying widows/widowers, and $8,000 for heads of household. Also, for qualifying taxpayers, it is increased by the disaster loss deduction and up to $1,000 for real property taxes and a box must be checked on line 39c if either increase is claimed.

Line 42. Personal exemptions. The exemption for 2008 is $3,500. The exemption starts to phase out if AGI exceeds: $159,950 for single filers, $119,975 for married persons filing separately, $239,950 for joint filers and qualifying widows/widowers, and $199,950 for heads of household. For 2008, a taxpayer loses only 1/3 of the amount he would otherwise lose under the regular phase out computation.

Tax Calculations and Credits

Line 44. Tax. A zero tax rate applies to some long-term capital gain and dividend income that would otherwise be taxed at the regular 15% rate and/or the regular 10% rate. (See the discussion below pertaining to Schedule D.) The kiddie tax, which requires children to pay tax on unearned income at their parent’s highest marginal rate, now applies to all children up to age 18, and children over age 18 but under age 24 who are full-time students—if their earned income doesn't exceed one-half of the amount of their support.

Line 45. Alternative minimum tax (AMT). For 2008, the AMT exemption amounts are increased to $69,950 for married individuals filing jointly and surviving spouses, $46,200 for unmarried individuals, and $34,975 for married individuals filing separately.

Line 50. Education credits. For 2008, the Hope and Lifetime credits phase out ratably for taxpayers with modified AGI of $48,000 to $58,000 ($96,000 to $116,000 for joint filers). For 2008, the Hope credit is 100% of up to $1,200 of qualified higher education tuition and related expenses plus 50% of the next $1,200 of such expenses. Use Form 8863 to take these credits.

Line 53. Credits from certain forms. This line is used to report the residential energy efficient property credit from Form 5695. For 2008, there are two new components to this credit: qualified small wind energy property expenditures and qualified geothermal heat pump property expenditures. This line is also used to report the adoption credit from Form 8839. The maximum adoption credit for 2008 is $11,650, and begins to phase out when modified AGI exceeds $174,730.

Line 54. Other credits. Qualifying expenditures paid or incurred after May 22, 2008, may qualify for a new agricultural chemical security credit, subject to conditions and limitations. There is a new credit for small business employers that pay differential wages after June 17, 2008, to active duty members of the uniformed services.

Line 57. Self-employment tax. Maximum amount of self-employment income subject to FICA tax is $102,000 with no ceiling on Medicare wage base.

Line 65. Excess Social Security and RRTA tax withheld. Maximum Social Security (OASDI) tax for 2008 is $6,324 (computed on the first $102,000 of wages) for purposes of credit for excess tax withheld.

Line 66. Additional child credit. For 2008, the earned income formula for the determination of the refundable child credit has been modified to apply to 15% of earned income in excess of $8,500.

Line 69. First-time homebuyer credit. Eligible first-time homebuyers buying principal residences in the U.S. after Apr. 8, 2008, and before July 1, 2009, may claim a refundable tax credit (on Form 5405) equal to the lesser of 10% of the purchase price or $7,500 ($3,750 for married individuals filing separately). Purchases after Dec. 31, 2008, and before July 1, 2009, may be treated as made on Dec. 31, 2008.

Schedule A Itemized Deductions

Line 1. Medical and dental expenses. The standard mileage rate for medically-related use of an auto is 19¢ per mile for Jan. 1 to June 30, 2008 and 27¢ per mile from July 1 to Dec. 31, 2008.

Line 16. Gifts by cash or check.  Direct contributions, by a person who has reached 70 &1/2, to charity from an IRA are not reportable on Schedule A. IRA distributions made to a charity are also not reported as income.

Line 20. Casualty or theft losses. The 10% of AGI floor doesn't apply to an individual's casualty or theft losses arising in a federal disaster.

Line 21. Unreimbursed employee expenses. The standard mileage rate is 50.5¢ per mile for Jan. 1 to June 30, 2008, and 58.5¢ per mile from July 1 to Dec. 31, 2008.

Line 29. Total itemized deductions. The allowable amount of itemized deductions will be reduced if adjusted gross income in 2008 is more than $159,950 ($79,975 for married filing separately). For 2008, a taxpayer will lose only 1/3 of the amount he would otherwise lose under the regular reduction computation.

Schedule B Interest And Dividend Income

Line 1. Interest. Accrued interest on Series E or EE U.S. savings bonds issued in 1978 is taxable.

Line 3. Excludable interest on Series EE or Series I U.S. savings bonds. The exclusion for education related savings bond interest phases out at higher income levels. For 2008, the phase out begins at modified adjusted gross income above $67,100 ($100,650 on a joint return).

Schedule C Profit Or Loss From Business

Line 9. Car and truck expenses. The standard mileage rate is 50.5¢ per mile for Jan. 1 to June 30, 2008, and 58.5¢ per mile from July 1 to Dec. 31, 2008.

Line 13. Depreciation and section 179 expense. The amount that may be expensed under Code Sec. 179 in 2008 is $250,000, with investment-based phase out beginning at $800,000. Taxpayers may also claim a 50% bonus depreciation deduction for qualified property.

Schedule D Capital Gain Income

Capital gain rates. A zero tax rate applies to some long-term capital gain and dividend income that would otherwise be taxed at the regular 15% rate and/or the regular 10% rate provided a number of conditions are met including the level of the taxpayer’s income. Taxpayers with significant capital gain and dividend income should seriously consider: a) getting their returns prepared by a professional; or b) buying tax preparation software.  

Home sale exclusion. A surviving spouse may qualify for the up-to-$500,000 home sale exclusion if the sale occurs not later than two years after the spouse's death, if the requirements for the $500,000 exclusion were met immediately before the spouse's death and the survivor has not remarried as of the date of the sale. An individual may elect to suspend for a maximum of 10 years the home sale exclusion's five-year test period for ownership and use during certain absences due to volunteer service in the Peace Corps.

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Wisconsin Form 1

Line 4. Income additions. Wisconsin now requires that rent or interest expense paid to a related party must be added back to income but then may be deducted again if certain criteria are met. This new provision is aimed at business owners.

Line 9. Social Security. Social Security benefits are no longer taxable by Wisconsin.

Line 11. Income subtractions. The subtraction for medical care insurance is expanded to include a person whose employer pays a portion of the cost of the insurance. Such persons may subtract 10% of amount they paid for the insurance. The subtraction for college tuition and mandatory fees paid is increased from $4,843 per student to $5,114.

Lines 26 and 32. Tax credits. There are new credits for ethanol and biodiesel fuel pumps, film production and manufacturing investment.