2008 Tax Law Updates
Feb 28, 2009 04:00PM ● Published by Super Admin
Mortgage Debt Forgiveness
Taxpayers with loans forgiven or foreclosed between January 1, 2007 and January 1, 2013 will be allowed to exclude from taxable income up to $2 million of mortgage debt forgiven on their principal residence. This exclusion does not apply to rental or vacation homes, only in principal residences. It is important to note that the exclusion only applies to the amount of debt related to acquiring or improving your home. If you refinanced and used the proceeds to pay off a car loan, credit card or pulled cash out to use for non-home improvement items, the forgiveness of that portion of the debt will be taxable. The rules are complex and California did not conform to all of the federal rules, so if you are in this situation it is important to seek professional assistance.
A Tax Credit with a Twist
First-time homebuyers will be allowed a refundable tax credit that is the lesser of 10 percent of the purchase price of a principal residence or $7,500 ($3,750 for married individuals filing separately). The credit applies to first-time homebuyers who purchase a principal residence after April 8, 2008, but before July 1, 2009. A special rule allows those who purchase a principal residence after December 31, 2008 but before July 1, 2009, to treat the purchase as being made in 2008. (Effectively allowing taxpayers to claim the credit on their 2008 returns rather than on their 2009 returns). The credit is then paid back over 15 years. So, in effect this is not a true credit, but more of an interest free loan from the government. Limitations do apply for taxpayers with income over $75,000 ($150,000 for joint filers).
Property Tax Deduction for Standard Deduction Taxpayers
Taxpayers who claim the standard deduction instead of itemizing deductions will be allowed to claim an additional deduction for state and local property taxes paid. The deduction, which applies only to tax years beginning in 2008, is the lesser of the property taxes actually paid, or $500 ($1,000 for joint return filers).
Reduced Home Sale Exclusion
After 2008, some home sellers who don’t use their properties as their principal residences for the entire time they own them may pay more of a tax bill than they would under current rules. The tax break affected is the home sale exclusion, which generally allows up to $250,000 ($500,000 married filing joint) of home sale profit to be tax-free if a home was owned and used by the seller as the principal residence for at least two of the five years before the sale. For sales after 2008, the gain potentially eligible for the home sale exclusion will be reduced proportionately for the period of time a home wasn’t used as a principal residence, such as a vacation/rental home that is turned into a principal residence by its owners. There are, however, a number of exceptions, so be sure to check with your tax professional.
Deduction for Mortgage Insurance Premiums
The deduction for mortgage insurance premiums has been extended and will continue to be allowed for amounts paid or accrued between 2007 and 2011.
Extended Tax Breaks
More than 30 tax breaks that either expired at the end of 2007, or are soon to expire, have been extended. For example, the deduction for state and local general sales tax, the deduction for higher education expenses, and the deduction for educator expenses have all been revived to apply to the 2008 tax year, and are extended to apply in 2009 as well.
Raised Depreciation Limits
A qualifying business can expense up to $250,000 (increased from $128,000) of qualifying property purchased by the taxpayer in tax years beginning in 2008.
A business can now claim additional depreciation equal to 50 percent of qualifying property purchased, beginning in 2008.
The previous is just an overview of the most widely applicable law changes for 2008. There are many more that may apply depending on your specific situation, so please consult a qualified tax professional for advice regarding your specific tax situation.
<hr>Darla A. Colson, CPA, MST and Terra VanZant, CPA, are with Gilbert Associates, Inc., in Folsom. They can be reached at 916-646-6464.