Posted By Wade Michels

New IRS Tax Law Bonanza!

Find the new tax laws that impact the cash you made in 2008.
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Ah tax season, the most wonderful time of the year. A time to reflect on all your good fortunes and the cash you made in 2008. And the IRS is rooting for you too - after all, your good fortune is their good fortune.

Inflation or the lack thereof impacts the tax code. If inflation is rapidly rising, new laws will negatively impact your tax liabilities. If it decreases then it’s a pretty good bet you will have some more money in your pocket. And since we haven’t experienced much inflation lately, the government has come up with some nice tax adjustments designed to help working stiffs like you and me. What? How much? Read on.

Real Estate Stuff
The PMI deduction allows for homeowners who pay private mortgage insurance to deduct that amount on their income tax. Unless you were able to put 20% down on your home, PMI is a necessary evil. Regulators passed this legislation so that it will apply to all new mortgages through 2010. To get the maximum benefit your adjusted gross income needs to be less than $100K per year. If you make more than $109K, you will receive no benefit at all.

The government is well aware of the massive amount of foreclosures crippling Americans and destroying the real estate market. In the past, those that have been foreclosed on were required to pay taxes on the amount of forgiven debt, essentially treating it like income. Yowza! But the Mortgage Debt Forgiveness Act allows these folks to apply for a “cancellation of debt income”, which is not taxed. Obviously, there are caps and restrictions but generally, this is a nice break for those struggling to get back on their feet.

The Housing and the Economic Recovery Act of 2008 could be a first time homebuyer’s best friend. If you’ve bought a home between April 9 2008 and June 30 2009 and have not owned one for 3 years prior, you qualify. This provides a tax credit of 10% of your homes purchase price up to $7500 to be spent on a new rug, TV, a massive amount of liquor, anything your heart desires.

But it’s not really a true credit, as those who qualify will have to pay it back without interest over a 15 year period. If you move out before the 15 years are up, the repayment gets accelerated. Also if you’re married and your spouse has owned a home within the last 3 years, you will not qualify. If you make more than $95K or $170K married (filing jointly), you’re also out of luck.

IRA’s, Investments, You
If your adjusted gross income is less than $85K (Married filing jointly) or $53K as a single, you can now take a full IRA deduction via your sponsored work retirement plan. You can also earn a partial deduction if you’ve made less than $105K (married filing jointly) or $63K if you’re single.

Speaking of work sponsored retirement plans; the contribution limit for a 401(k) is now $16,500 up from $15,500. If you’re older than 50, the limit rises to $22,000. Think about this for minute. All the dollars you put into a 401(k) reduces your AGI or taxable income. So the more you contribute, the lower your tax liability, and the more you get to keep. While it’s true you will have to pay taxes on this cash when you take it out, by then, you could be in a lower tax bracket.

Long term capital gains taxes are generally lower than your current tax rate. But effective 2008, some investors won’t owe any tax at all when they sell a long term holding. For qualified dividends, the 5% tax rate for those taxpayers in the 10 – 15% tax bracket is forgiven.

Flex Spending
As you know, healthcare is an ongoing problem that won’t improve any time soon. So if you are allowed to contribute to a health savings account (HSA) also known as a flexible spending account, you should maximize your contributions. The limits have recently been raised to $3K for a single and $5950 for a family. If you’re over 55, you can add another $1,000 to it. As long as you spend all of the money on qualified medical expenses, a contribution to one of these bad boys, will save you from your tax rate. Put $3K in and at a 25% tax bracket you will save $750 bucks. Not too shabby.

Fin
Obviously this isn’t an all-encompassing list - one of those would take four Sundays to compile and wouldn't be too much fun to read. But if you’re familiar with these recent changes then perhaps you will have a few more dollars to spend on whatever tickles your fancy. Hey, if Uncle Sam is willing to throw taxpayers a bone, it makes sense to take him up on his offer.

Want more light reading? The IRS has spent more than a few Sundays compiling this information.

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