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Updates & Notices
An overview of tax changes included in recent tax legislation.
These tax breaks are subject to limitations and exceptions. If you believe you may be able to take advantage of
any of these changes, please call so that we may discuss your personal tax situation.
The “American Housing Rescue and Foreclosure Prevention Act of 2008”—the Housing Act—was signed
into law by the President on July 30, 2008. This sweeping measure was designed to shore up the ailing housing
market as well as tighten lending practices and reform financial institutions associated with that market. It also
contains a number of tax changes, including tax breaks for homebuyers and homeowners, relaxed requirements
for tax-exempt bonds, eased AMT rules, tax changes for businesses and specialized changes affecting low-income
housing and special investment vehicles called Real Estate Investment Trusts (REITs).
Tax credit for first-time homebuyers. The new law gives first-time homebuyers a credit equal to 10% of the
home's purchase price up to $7,500. This refundable credit reduces a person's tax liability on a dollar-for-dollar
basis and, if the credit is more than the tax you owe, the difference is paid to you as a tax refund. However, unlike
other Federal tax credits, the new credit must be paid back to the Government over a period of 15 years. If you
stop using the home as your principal residence, you will need to repay the outstanding balance of the credit. So,
as a practical matter, the new credit for first-time homebuyers is the equivalent of an interest-free loan from the
Government.
A number of terms and conditions must be met for the credit to apply. The two key rules are that:
- You (and if married, your spouse) didn't own a principal residence during the 3-year period before you make
the credit-eligible home purchase; and
- You must buy a new principal residence after April 8, 2008, and before July 1, 2009.
The credit for new homebuyers is available in full only if adjusted gross income (AGI) doesn't exceed $150,000 if
you file a joint return ($75,000 for all other filers).
Property tax deduction for non-itemizers. For 2008 only, those who pay state and local property taxes may
increase their standard deduction. The increase is limited to the lesser of: 10% of tax paid or $1,000 for joint
filers, or $500 for all other filers.
Specialized AMT relief provisions. The new law includes the following specialized relief measure for individuals
and businesses. The tax code provides an income tax credit for putting up low-income housing, and another
income tax credit for rehabilitating older buildings. Under the new Act, the low-income housing credit claimed
for buildings put in service after 2007, and the rehabilitation credit for post-2007 expenses, can both be used to
offset the AMT.
Reduced home sale exclusion for some sellers. After 2008, some home sellers 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. The tax break affected is the home sale exclusion, which generally allows up to $250,000
($500,000 for married taxpayers filing jointly) of home sale 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.
For sales after 2008, the home sale 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 their main home for a while, rent it out for
a period of time, and then move back in. The new provisions are very complicated and include a number of
exceptions. If you would like more details about these new rules, please do not hesitate to call.
Additional tax provisions affecting individuals and businesses. Congress also recently passed the Economic
Stimulus Act of 2008. The following items relate to this Act.
Boosted section 179 expensing. Under pre-Act law, taxpayers could expense (i.e., deduct currently, rather than
taking depreciation deductions over a period of years) up to $128,000 for 2008. This annual expensing limit was
reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during
2008 exceeded $510,000.
For tax years beginning after 2007 and before 2011, the expensing limit is increased to $250,000, and the overall
investment limit is increased from $510,000 to $800,000.
Bonus depreciation makes a comeback. The Act provides for a bonus first-year depreciation deduction of 50% of
the adjusted basis of qualified property placed in service after Dec. 31, 2007, and, generally, before Jan. 1, 2009.
Qualifying property includes: property with an estimated useful "tax" life of 20 years or less; non-custom-made
computer software; and certain leasehold improvements. Used equipment does not qualify.
The otherwise applicable “luxury auto” cap on first-year depreciation is increased by $8,000 for vehicles that
qualify.
Zero tax on long-term capital gain and dividend income. Beginning in 2008 and continuing through 2010, a zero
tax rate applies to most long-term capital gain and dividend income that would otherwise be taxed at the regular
15% or 10% rates. This low rate has an impact not only on lower-bracket individuals but also, surprisingly, on
some whose top dollars are taxed well in excess of 15%. The amount of income taxed at 0% depends on the
interplay between an individual's filing status, his taxable income, and how much of that taxable income consists
of long-term capital gain and qualifying dividend income.
As you can see these provisions are very complicated. If you would like more details about these new rules,
please do not hesitate to call our office at (203) 239-6888.
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