Recovery rebate credit. If you did not receive the full economic stimulus payment, you may be able to claim the recovery rebate credit.   Many taxpayers received stimulus rebate payments based on their 2007 tax return data. Those who received less than the applicable maximum rebate amount (generally, $600 for singles; $1,200 for joint return filers; and an additional $300 for each qualifying child) may be entitled to a rebate credit on their 2008 returns. This credit is figured in the same manner as last year's economic stimulus payment.

Some taxpayers did not receive the full payment for 2007 because of phaseout rules. An economic stimulus payment (both the basic and the child's amount) was reduced by 5% of a taxpayer's adjusted gross income (AGI) above $75,000 ($150,000 for joint returns). Thus, taxpayers who had a drop in income from 2007 to 2008—perhaps due to layoffs, business reverses, or the poor performance of investments, may qualify for the recovery rebate credit on line 70. Return preparers must ascertain how much of a stimulus payment, if any, a taxpayer received last year in order to calculate this year's recovery rebate credit.

Withdrawal of economic stimulus payment from certain accounts. If your economic stimulus payment was directly deposited to a tax-favored account and you withdraw the payment by the due date (including extensions) of your 2008 tax return, the amount withdrawn will not be taxed and no additional tax or penalty will apply.

First-time homebuyer credit. If you bought your main home after April 8, 2008, and are a first-time homebuyer, you may be able to claim this credit.  An up-to-$7,500 tax credit is available to first-time homebuyers. The credit is 10% of the purchase price of the home (subject to a $7,500 credit ceiling) for principal residences purchased from 4/9/08 through 6/30/09 and is reported on line 69. The credit is refundable, so those who owe less tax than the credit amount can get a refund check. Furthermore, taxpayers who make eligible home purchases in 2009 may claim the credit on their 2008 tax returns. The credit phases out with modified adjusted gross income in the $75,000 to $95,000 range ($150,000 to $170,000 for joint return filers).

The credit does come with a major caveat, however. It must be repaid over 15 years beginning with the second tax year after the tax year in which the home was purchased. Thus, taxpayers who claim the maximum $7,500 credit amount for a 2008 home purchase will need to start paying $500 per year back to the government beginning in 2010. This “recapture” period is accelerated if the home is sold or ceases to be used as the taxpayer's principal residence.

Consequently, the credit is really akin to an interest-free loan from the government. Taxpayers should bear this in mind before they choose to claim the credit and spend the funds. (Those claiming the credit should also adjust their income tax withholding accordingly once the recapture period begins.)

Home-sale exclusion. Taxpayers fortunate enough to sell their homes at a gain are eligible for the home-sale exclusion. The maximum exclusion amount is generally $250,000, but it can be $500,000 for joint return filers. Starting in 2008, the code extends the $500,000 exclusion limit to gain from the sale of a principal residence by a widow(er) if the sale occurs up to two years after the spouse's date of death and the couple would have qualified for the $500,000 exclusion limit at the time of death.

Reduced homesale exclusion for some sellers. After 2008, some homesellers who don't use their properties as principal residences for their entire ownership period may wind up paying more of a tax bill than they would under current rules (or pay tax when none would be owed currently).  The tax break affected is the homesale exclusion, which generally allows up to $250,000 of homesale profit to be tax-free if a home was owned and used by the seller as a principal residence (i.e., main home) for at least 2 of the 5 years before the sale. In general, the tax-free break can only be used once every 2 years. The tax-free profit amount is up to $500,000 for married taxpayers filing jointly for the year of sale if several conditions are met. A reduced maximum exclusion may apply to taxpayers who must sell their principal residence because of health or employment changes (or certain unforeseen circumstances) and as a result (1) fail the 2-out-of-5-year ownership and use rule, or (2) previously used the homesale exclusion within two years.

For sales after 2008, gain potentially eligible for the homesale exclusion will be reduced proportionately for the period of time a home wasn't used as a principal residence. The prime example is a vacation home that is turned into a principal residence by its owners, but the new rule also can hit individuals who use a property as a main home for a while, rent it out for a period of time, and then move back in. There are, however, a number of exceptions. For starters, pre-2009 periods of non-principal-residence use don't count, and neither do periods of temporary absence totaling no more than 2 years due to health or employment changes (or certain unforeseen circumstances), or up to 10 years of absence for qualifying members of the military or certain government employees. Finally, non-principal-residence use doesn't count if it occurs (1) in the five years preceding the sale, but (2) after you permanently stop using the home as a main home.

As you can see, the new rule is quite complex and down the road will cause big headaches for some homesellers unless they're careful and get an expert's advice.

Additional standard deduction for real estate taxes. If you do not itemize your deductions, you can claim an additional standard deduction for real estate taxes you paid.  Taxpayers who claim the standard deduction can claim an additional standard deduction amount of up to $500 ($1,000 for joint return filers) for real estate taxes. If this additional standard deduction amount is being claimed, the box at line 39c should be checked.

The larger standard deduction amount will cause some taxpayers to refrain from itemizing their deductions in 2008. While their tax returns will appear simpler without the itemized deductions, the taxpayers will still need to compile their actual expenses in order to determine whether itemizing or claiming the standard deduction is more beneficial. On the other hand, taxpayers who claim the standard deduction for 2008 and then receive a state or local income tax refund for the year will not need to report the refund as taxable income on their 2009 returns.

Additional standard deduction for net disaster loss. If you do not itemize your deductions, you can claim an additional standard deduction for any net disaster loss from a federally declared disaster.

Standard mileage rates:

For 2008, the standard mileage rate for the cost of operating your car for:

• business use is 50.5 cents per mile (58.5 cents per mile after June 30, 2008). 
• medical reasons is 19 cents per mile (27 cents per mile after June 30, 2008). 
• determining moving expenses is 19 cents per mile (27 cents per mile after June 30, 2008).

Alternative minimum tax (AMT) exemption amount increased. The AMT exemption amount is increased to $46,200 ($69,950 if married filing jointly or a qualifying widow(er); $34,975 if married filing separately).

Retirement savings plans:

IRA deduction increased. You and your spouse, if filing jointly, each may be able to deduct an IRA contribution of up to $5,000 ($6,000 if age 50 or older at the end of 2008).

Traditional IRA income limits. You may be able to take an IRA deduction if you were covered by a retirement plan and your modified adjusted gross income is less than $63,000 ($105,000, if you are married filing jointly or a qualifying widow(er)).

Roth IRA income limit. You may be able to make a Roth IRA contribution if your modified adjusted gross income is less than $116,000 ($169,000, if you are married filing jointly or a qualifying widow(er)).

Rollovers to Roth IRAs. You can roll over distributions from a qualified retirement plan into a Roth IRA. The rollover is not tax-free.

Retirement savings contributions credit. The adjusted gross income limit for claiming this credit is increased to $26,500 ($39,750 if head of household; $53,000 if married filing jointly).

Child's investment income.  Known as the “Kiddie tax”, older “children” are now subject to the “kiddie tax.” This rule, which taxes unearned income above a threshold amount ($1,800 for 2008) at the parents' tax rate, if that is higher than the child's rate would otherwise be, applies to those as old as age 23 (if full-time students). In 2007, the kiddie tax did not apply to children over age 17.

With the higher age limit, more taxpayers subject to the kiddie tax are likely to have some earned income from summer jobs or other employment. If excess income tax was withheld on their wage income, they are likely to be anxious to file their 2008 return to get a refund of the overwithheld amount. Yet, these young taxpayers cannot complete their returns until after their parents' returns are done because the parents' taxable income must be reported on the child's Form 8615, which is used to calculate the kiddie tax.

While recent legislation has extended the kiddie tax's reach to cover older children, some exceptions to the kiddie tax's coverage do apply:

• Children who are at least age 18 and have earned income in excess of one-half of their support are not subject to the kiddie tax. Significantly, only earned income is counted for this purpose. Thus, a child who is a beneficiary of a large trust fund that provides sufficient unearned income for the child to fully support himself or herself is nonetheless subject to the kiddie tax.
• If neither of the child's parents is alive at the close of the tax year, the kiddie tax does not apply to the child.
• If the child files a joint return for the tax year, the kiddie tax does not apply.

As in the past, parents may elect to report the child's income on the parents' return by using Form 8814, Parent's Election to Report Child's Interest and Dividends (and checking the appropriate box by line 44 of Form 1040). In general, this election is available only if these requirements are satisfied:

• The child's income consisted of only interest and dividends, including capital gain dividends.
• The child's 2008 gross income was less than $9,000.
• The child had no federal income tax withheld from his or her income, and no estimated tax payments were made by or for the child.

While reporting the child's income on the parent's return may be simpler, it could result in a higher aggregate tax for the family of up to $90 per child subject to the kiddie tax. If the election is made, the first $900 of the child's income in excess of the $900 standard deduction for someone who can be claimed as a dependent is taxed at the lowest ordinary income tax rate of 10%. If the source of that income is qualified dividends or capital gain distributions, however, the tax rate could be 0% if the child filed a separate return.

You must use Form 8615, Tax on Certain Children Who Have Investment Income of More Than $1,800, to figure the tax on a child that:

(1)  Was under age 18 at the end of 2008,
(2)  Was age 18 at the end of 2008 and did not have earned income
       that was more than half of the child's support, or
(3)  Was over age 18 and under age 24 at the end of 2008 and was a
       full-time student and did not have earned income that was more
       than half of the child's support.

The election to report a child's investment income on a parent's return and the special rule for when a child must file Form 6251, Alternative Minimum Tax—Individuals, also now apply to the children listed above.

Capital gain tax rate reduced. The 5% capital gain tax rate is reduced to zero.  A 0% capital gain rate applies to the extent a taxpayer's taxable income would be taxed at a rate below 25% absent the preferential capital gain rate. For 2008, the 25% tax rate applies beginning with income in excess of $32,550 for most single taxpayers, $43,650 for heads of households, and $65,100 for joint return filers. Thus, not all capital gains reported on line 13 produce a tax liability.

On the other hand, these “tax-free” capital gains could indirectly increase the tax due. These gains are included in adjusted gross income, and this additional income could subject a taxpayer to deduction or credit phaseouts, or increase the taxable portion of his or her Social Security benefits.

Earned income credit (EIC). The maximum amount of income you can earn and still get EIC increased. The amount depends on your filing status and number of children. The maximum amount of investment income you can have and still be eligible for the credit increased to $2,950.

Standard deduction. The standard deduction for taxpayers who do not itemize deductions on Schedule A (Form 1040) has increased. The amount depends on your filing status.

Exemption amount. You are allowed a $3,500 deduction for each exemption to which you are entitled. However, your exemption amount could be phased out if you have high income.

Limit on itemized deductions. Some of your itemized deductions may be limited if your adjusted gross income is more than $159,950 ($79,975 if you are married filing separately).

The adoption credit and the maximum exclusion from income of benefits under an employer's adoption assistance program are increased to $11,650.

Hope or lifetime learning credit income limits increased. The amount of income you can have and still receive a Hope or lifetime learning credit has increased.

Social security and Medicare taxes. The maximum wages subject to social security tax (6.2%) increased to $102,000. All wages are subject to Medicare tax (1.45%).

Extended tax provisions. The following tax provisions that were scheduled to expire at the end of 2007 have been extended.

• The deduction for educator expenses in figuring adjusted gross income. 
• The deduction for qualified tuition and fees.
• The exclusion from income of qualified charitable distributions. 
• The District of Columbia first-time homebuyer credit.
• The itemized deduction for state and local general sales taxes.

Credit for nonbusiness energy property. The credit for nonbusiness energy property has expired and does not apply for 2008 but does apply again for 2009.

Exclusion from Income for Certain Cancellation of Debt on Principal Residence.   For most homeowners, these are now tax-free. Eligible homeowners can exclude debt forgiven on their principal residence if the balance of the loan was less than $2 million. The limit is $1 million for a married person filing a separate return.

The Mortgage Forgiveness Debt Relief Act of 2007 allows individuals to exclude from gross income a discharge of qualified principal residence indebtedness (defined below). This exclusion applies to discharges made after 2006 and before 2010. Additionally, the basis of the principal residence must be reduced (but not below zero) by the amount excluded from gross income. To claim the exclusion, you must file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), with your tax return.

Qualified principal residence indebtedness.  This is a mortgage you took out to buy, build, or substantially improve your principal residence. It also must be secured by your principal residence. If the amount of your original mortgage is more than the cost of your principal residence plus the cost of any substantial improvements, only the debt that is not more than the cost of your principal residence plus improvements is qualified principal residence indebtedness. Any debt that is secured by your principal residence you use to refinance qualified principal residence indebtedness is treated as qualified principal residence indebtedness, but only up to the amount of the old mortgage principal just before the refinancing. Any additional debt you used to substantially improve your principal residence is also treated as qualified principal residence indebtedness.

Principal residence.  Your principal residence is the home where you ordinarily live most of the time. You can have only one principal residence at any one time.

Amount eligible for the exclusion.  The maximum amount you can treat as qualified principal residence indebtedness in $2 million ($1 million if married filing separately). You cannot exclude from gross income discharge of qualified principal residence indebtedness if the discharge was for services performed for the lender or on account of any other factor not directly related to a decline in the value of your residence or to your financial condition.

Ordering rule.  If only a part of a loan is qualified principal residence indebtedness, the exclusion applies only to the extent the amount discharged exceeds the amount of the loan (immediately before the discharge) that is not qualified principal residence indebtedness. For example, assume your principal residence is secured by a debt of $1 million, of which $800,000 is qualified principal residence indebtedness. If your residence is sold for $700,000 and $300,000 of debt is discharged, only $100,000 of the debt discharged may be excluded (the $300,000 that was discharged minus the $200,000 of nonqualified debt).