Deepa Rajan

Tax-Saving Ideas for Your '08 Return

Opportunities to consider

By Rick Sauder

February 27, 2009

To provide some relief for taxpayers hit by the economic downturn, Congress created several new tax-saving opportunities and continued a handful of popular deductions that would have expired. Here's a look at some of the items tax experts recommend that you give some extra attention.

1. Contribute to your IRA.
A Traditional IRA is one of the few ways you can reduce taxable income in a previous year after it has ended, says Jeff Schnepper, a tax attorney and author from Cherry Hill, N.J.

"Once the year is over, there's not much you can do to increase your deductions, but an IRA is one of the exceptions," he notes. "You can contribute right up until the filing deadline (April 15), and the amount you can contribute is $1,000 more for 2008 than in 2007."

For 2008, the contribution limit increased to $5,000 for people age 49 or younger and to $6,000 if you're 50 or older (as of the end of 2008). If eligible, you can subtract the amount you contribute before April 15 from your 2008 income and you won't owe taxes on the money (or the investment earnings it generates) until you retire after age 59½.

One catch: income limits. Full deductibility of a 2008 contribution to a Traditional IRA phases out between $85,000 and $105,000 of modified adjusted gross income for joint filers and between $53,000 and $63,000 for single filers. There's no income limit on non-deductible contributions, however.

There are other retirement plan contribution opportunities available to people in certain situations. One is a Simplified Employer Pension (SEP) IRA. You can open and contribute to a SEP up until the April 15 filing deadline if you had self-employment income in 2008, Schnepper says.

He also notes that you can contribute to a Keogh plan, another option for self-employed individuals, up until the tax-filing deadline, or even beyond if you receive a filing extension, although the plan has to have been set up prior to the start of 2009.

Learn more about IRAs.

2. New standard deductions.
For the first time, Congress has turned two itemized deductions into standard deduction add-ons, says Mark Luscombe, JD, CPA, and principal tax analyst for CCH, a tax information provider.

One of the new standard deductions is for state and local property taxes. In 2008 and 2009, property owners can boost their standard deduction by up to $500 if they're single filers and up to $1,000 if they're married filing jointly. The new tax break could be especially helpful for people who have paid off or nearly paid off their home mortgage and therefore have little or no mortgage interest, which is one of the biggest itemized deductions.

The other extra standard deduction is for losses in national disaster areas declared by the president. Previously, taxpayers who suffered a casualty loss in a natural disaster had to itemize deductions and also were subject to certain limitations. (This is still true for casualty losses from non-national disasters.) For 2008 and 2009, qualified casualty losses in declared disasters -- such as Midwestern flooding, certain Kansas storms and California wildfires -- can be added to the standard deduction, minus relief income, insurance payments and a deductible of $100 (for 2008) or $500 (for 2009).

"It's very unusual for Congress to turn itemized deductions into standard deductions, and it could make a difference for some people whether they choose to itemize or simply take the standard deduction," Luscombe says.

He recommends that taxpayers figure their deductions both ways and determine which method results in the biggest tax break.

3. Recovery rebate credit.
You've probably long forgotten the "stimulus checks" sent out by federal government last spring, but Luscombe advises brushing up. The payments of up to $600 per taxpayer and $300 per child were actually an advance 2008 tax credit based on 2007 income.

If your 2007 adjusted gross income exceeded $75,000 as a single filer or $150,000 as a joint filer, the credit began to phase out. But many people had less income in 2008 because of the flagging economy, and they may now be eligible for a recovery rebate credit for the full amount or the amount by which their original payment was reduced. If you think you might fall in this category, visit the recovery recovery rebate page on the IRS Web site.

Also, keep in mind that if you added a child to the family in 2008, you may be able to claim an additional recovery credit of up to $300, and college-age children who began supporting themselves in 2008 may be able to claim the $600 credit for themselves.

4. First-time homebuyer tax credit.
It sounds great -- a tax credit of up to $7,500 for "first-time" homebuyers -- and in fact it might be. But people who qualify for the credit need to be aware of the strings attached..

The good news is that it's available if you bought a home on or after April 9, 2008, and have not owned a primary residence in the U.S. in the previous three years (vacation homes not included). You can have up to $150,000 of adjusted gross income if you're a joint filer and $75,000 if you're a single filer before it begins to phase out. It's also refundable, which means that if the tax you owe is less than the credit, the government will send you a check for the difference.

Plus, don't assume the credit is meant only for young homebuyers. "This would be perfect for someone who is retiring and wants to buy a house after renting for several years," says Jeff Schnepper.

On the downside, the credit is actually an interest-free loan that has to be paid back in $500-a-year installments for 15 years, if you received the maximum. Another consideration, Schnepper notes, is that should the home cease to be your primary residence, you would have to pay back the full outstanding balance in the year that occurs.

The economic stimulus package recently signed by the president eliminates the repayment provision for homes purchased in 2009 and increases the maximum credit to $8,000. If you were thinking about claiming a credit on your 2008 return for a home purchased after January 1 and before July 1, 2009 (as the original law allows you to do), you could now do so without having to repay the money, but you wouldn't be able to claim the higher maximum. The new provision also requires that you own your home for at least three years.

5. Investment losses -- and gains.
"Don't forget to claim your investment losses," Jeff Schnepper says. His advice applies for every tax year, but especially for 2008. If you sold investment assets in 2008 for less than you bought them for, you can reduce your tax bill. The limit on capital losses is $3,000 ($1,500 for single filers), but you can carry over the excess to future years.

While losses were the rule rather than the exception last year, don't be surprised if you receive a notice that you had capital gains or dividend income from your mutual fund shares. Fund managers buy and sell stocks and bonds throughout the year, and if those assets have been held for a long period, chances are they have appreciated in value, thus generating a capital gain when they're sold.

Securities held in a mutual fund also may have generated dividend payments, and those, too, are taxable.

6. Reinstated tax breaks.
Some tax breaks (subject to limitations) that were set to expire in 2008 were reinstated, including:

• You can once again choose to deduct the state sales tax you paid during the year instead of deducting state and local income taxes. This is a great break for taxpayers in states will little or no income tax. If you forgot to save your sales receipts, you can use the IRS's tables to find it.
• Teachers can again deduct up to $250 for unreimbursed expenses incurred in connection with classroom supplies they purchased.
• If you had college tuition and fee costs in 2008, you can once again deduct up to $4,000.

While all of these opportunities and considerations may sound daunting (and there are more not covered here), there's plenty of help, too. You can start with the Fidelity Tax Center, where you can also save 25% on TurboTax tax preparation software for federal returns. The IRS also offers volumes of specific information on their Web site.

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