2008 Tax Filing Season: New and Noteworthy

The tax filing season is often a period of high anxiety, and this year brings an additional challenge: a series of legislative acts last year ushered in multiple changes. The good news, though, is that most of those changes work in your favor. So whether you're completing your own IRS Form 1040 or relying on a professional tax preparer, here are a few new wrinkles to keep in mind.

2008 Stimulus Payment Redux

Remember the economic stimulus payments issued by the federal government last year? Individuals who filed 2007 federal income tax returns, and had $3,000 or more of income (including amounts received from Social Security and certain veterans' benefits), generally qualified for a stimulus payment of up to $600 per individual ($1,200 in the case of married couples filing jointly), with an additional $300 for each qualifying child under the age of 17.

That stimulus payment you may have received in 2008 was actually an advance payment of a credit against your 2008 taxes, based on your 2007 information. When you complete your 2008 return, you determine the amount of credit you're entitled to (calculated in the same manner as the economic stimulus payment was in 2008, except that your actual 2008 tax figures are used) and subtract the amount that you received as a stimulus payment last year. If the credit is more than you received as a stimulus payment, the difference is claimed as a "recovery rebate credit" on your 2008 income tax return. If the credit is less than the stimulus payment you received last year, you don't have to pay back the difference.

If you didn't qualify for an economic stimulus payment last year, or received less than the full amount, you get a second bite at the apple. For example, maybe your 2007 adjusted gross income was too high to qualify for a stimulus payment, but your 2008 adjusted gross income is below the threshold. If you had a child born in 2008, you could also end up with additional recovery rebate credit dollars.

Economic Stimulus Payments and IRAs

If you had a 2008 economic stimulus payment directly deposited into a tax-advantaged account like an IRA, and subsequently withdrew the funds, you may have received a Form 1099-R showing the amount you withdrew as a distribution. As long as you did not withdraw more than the amount of your economic stimulus payment from the IRA (and you make the withdrawal by the due date of your return, including extensions), you do not have to pay tax or penalties on this amount. (You actually have until the due date of your return, including extensions, to withdraw the stimulus payment amount from your IRA without tax consequences.) Follow the IRS instructions for lines 15a and 15b (Form 1040), Exception 5, or lines 11a and 11b (Form 1040A), Exception 5.

First-time Homebuyer Credit

If you bought a home on or after April 9, 2008, or if you purchase a home before July 1, 2009, and you qualify as a first-time homebuyer, you may be eligible for a refundable tax credit equal to 10 percent of the purchase price, up to $7,500 ($3,750 if married filing separately). For homes purchased in 2009, you can claim the credit on either your 2008 or 2009 federal income tax return.

The home has to be your principal residence, and, to qualify as a first-time homebuyer, you must not have had an ownership interest in a principal residence in the United States for the three-year period immediately preceding the purchase. You can't claim the credit if your modified adjusted gross income (MAGI) is $95,000 or more ($170,000 or more if married filing jointly), and you're only entitled to a partial credit if your MAGI exceeds $75,000 ($150,000 if married filing jointly).

This credit, however, is essentially an interest-free loan. Two years after you claim the credit, you have to start paying it back, generally over 15 years in equal installments. Special rules apply if you sell the home during the repayment period, or if the home ceases to be your principal residence.

Standard Deduction for Real Estate Taxes

Even if you don't itemize deductions on your 2008 return, you may be able to deduct at least some of the real estate taxes you paid. That's because, for the first time, individuals who do not itemize deductions will be able to claim an additional standard deduction for real estate taxes paid to state and local governments, up to $500 ($1,000 if married filing jointly).

With the number of recent tax changes, it could pay to take a little extra time to review IRS instructions this year. And, as always, if you have questions, talk to a tax professional.