Alternative Minimum Tax (AMT)

The AMT exemption amounts are increased to $46,200 ($69,950 MFJ) up from 2007 amounts of $44,350 ($66,250 MFJ).

Nonrefundable personal credits will not be limited by AMT. When credits aren't limited by AMT, it means the credit can reduce the individual's tax liability below the tentative AMT.

These are the affected credits that are allowed against AMT through 2008:

• Child and Dependent Care credits
• Credit for the elderly or the disabled
• Mortgage Interest Credit for interest paid or accrued on certain home mortgages of low-income persons
• Hope and Lifetime Learning credits
• Residential Energy Credit
• D.C. First-time Homebuyer Credit

Other AMT-related items in the bill include a reduction of federal tax liability related to certain incentive stock options and an increase in the AMT refundable credit percentage. Contact Us or visit the IRS Web site for more detailed information.

Extenders

Sales Tax Deduction — The choice to deduct state and local sales tax instead of state and local income tax on Schedule A was extended through Dec. 31, 2009.

Tuition and Fees Deduction — The above-the-line deduction for up to $4,000 of qualified higher education expenses ($2,000 for higher-income taxpayers) was extended through Dec. 31, 2009.

Educator Expenses — Above-the-line $250 deduction for out-of-pocket classroom expenses for teachers K–12 was extended through Dec. 31, 2009.

Qualified Charitable Distributions — Taxpayers age 70 1/2 or older may contribute up to $100,000 tax-free from an IRA to a qualified charity. The transfer is taken into account for meeting the required minimum distribution for the year. Extended through Dec. 31, 2009.

Non-business Energy Property Credit — Reinstated for 2009. It's a credit of up to $500 for energy-efficient home improvements to a main residence. The credit is limited to 10% of the cost of building envelope improvements (insulation, exterior windows and doors, etc.) and various dollar amounts for qualifying heating and hot water equipment. In addition, qualifying home heating property (maximum $300 credit) is expanded to include energy-efficient biomass fuel stoves (such as corn stoves).

Credit for Energy Efficient Appliances — The credit is extended and the definition of qualified appliances is expanded. The credit amount for appliances manufactured after 2007 is modified. Extended for appliances manufactured through Dec. 31, 2010.

Child Tax Credit

The Child Tax Credit is refundable to the extent of the greater of either:

• 15% of earned income above the annual threshold
• In the case of an individual with 3 or more qualifying children, the excess of Social Security taxes paid over the Earned Income Credit on the return.

Under the new law, the threshold is reduced to $8,500 for tax year 2008 only. Reminder: Excludable combat pay is considered earned income for purposes of the refundable Child Tax Credit.

Other New or Modified Tax Provisions Affecting 2009 and Later Tax Years

The following provisions come into effect after 2008.

• Property tax deduction of up to $500 ($1,000) for non-itemizers is extended through 2009.
• The energy credit for solar and fuel cell heating equipment is extended through 2016. The credit is expanded to include residential small wind energy equipment and geothermal heat pumps as qualifying property. (Note: the expansion for wind and heat pump equipment applies to 2008.) Also, the cap is raised from $2,000 to $4,000 for solar heating property (the cap remains at $2,000 for other property).
• The $500 lifetime credit for home energy improvements is extended for tax year 2009 only. (The credit is not available for 2008.)
• The exclusion from taxable income of qualified principal residence indebtedness is extended for qualifying discharges of debt through 2012.
• A new credit for plug-in electric vehicles is available 2009–2014. The credit is a base amount of $2,500 plus an additional $417 per kilowatt hour in excess of 4 kilowatts per hour.
• Starting in 2009, employers may provide a limited fringe benefit for bicycle purchase, repairs, parts and storage costs to employees who commute by bicycle. The maximum annual benefit is $240.
• For 2009, certain farm machinery and equipment may be depreciated over 5 years.
• Starting with stock acquired in 2011, brokers will be required to report investors' adjusted basis and gain or loss on the sale of investments.

A new tax credit for first-time homebuyers is included in the recently enacted Housing and Economic Recovery Act of 2008  This tax credit will be available for a limited time only.

Eligible taxpayers will claim the credit on new IRS Form 5405. This form, along with further instructions on claiming the first-time homebuyer credit, will be included in 2008 tax forms and instructions and be available later this year on the IRS Web site.

Qualifying for the Credit

Only the purchase of a main home located in the U.S. qualifies and only for a limited time. Vacation homes and rental property aren't eligible. You must buy the home after April 8, 2008, and before July 1, 2009. For a home you build, the purchase date is the first date you occupy the home.

Taxpayers who owned a main home at any time during the 3 years prior to the date of purchase aren't eligible for the credit. This means that first-time homebuyers and those who have not owned a home in the 3 years prior to a purchase can qualify for the credit.

If you make an eligible purchase in 2008, you can claim the first-time homebuyer credit on your 2008 tax return. For an eligible purchase in 2009, you can choose to claim the credit on either your 2008 (or amended 2008 return) or 2009 return.

Credit Amount

The credit is 10% of the purchase price of the home, with a maximum available credit of $7,500 for either a single taxpayer or a married couple filing jointly. The limit is $3,750 for a married person filing a separate return. In most cases, the full credit will be available for homes costing $75,000 or more. Important note: Whatever the size of the credit a taxpayer receives, the credit must be repaid over a 15-year period.

Income Limits

The credit is reduced or eliminated for higher-income taxpayers.

The credit is phased out based on your modified adjusted gross income (MAGI). MAGI is your adjusted gross income plus various amounts excluded from income (i.e. foreign income). For a married couple filing a joint return, the phase-out range is $150,000 to $170,000. For other taxpayers, the phase-out range is $75,000 to $95,000.

This means the full credit is available for married couples filing a joint return whose MAGI is $150,000 or less and for other taxpayers whose MAGI is $75,000 or less.

Those That Don't Qualify

If any of the following describe you, you can't take the credit:

• Your income exceeds the phase-out range. This means joint filers with MAGI of $170,000 and above and other taxpayers with MAGI of $95,000 and above.
• You buy your home from a close relative. This includes your spouse, parent, grandparent, child or grandchild.
• You stop using your home as your main home.
• You sell your home before the end of the year.
• You are a nonresident alien.
• You are, or were, eligible to claim the District of Columbia first-time homebuyer credit for any taxable year.
• Your home financing comes from tax-exempt mortgage revenue bonds.
• You owned another main home at any time during the 3 years prior to the date of purchase. For example, if you bought a home on July 1, 2008, you cannot take the credit for that home if you owned, or had an ownership interest in, another main home at any time from July 2, 2005, through July 1, 2008.

Repaying the Credit

The first-time homebuyer credit is similar to a 15-year interest-free loan. Normally, it's repaid in 15 equal annual installments beginning with the second tax year after the year the credit is claimed. The repayment amount is included as an additional tax on the taxpayer's income tax return for that year.

For example, if you properly claim a $7,500 first-time homebuyer credit on your 2008 return, you will begin paying it back on your 2010 tax return. Normally, $500 will be due each year from 2010 to 2024.

You may need to adjust your withholding or make quarterly estimated tax payments to ensure you don't owe come tax time.

However, some exceptions apply to the repayment rule:

• If you die, any remaining annual installments are not due. If you filed a joint return and then you die, your surviving spouse would be required to repay his or her half of the remaining repayment amount.
• If you stop using the home as your main home, all remaining annual installments become due on the return for the year that happens. This includes situations where the main home becomes a vacation home or is converted to business or rental property. There are special rules for involuntary conversions. Consult a tax professional to determine the tax consequences of an involuntary conversion.
• If you sell your home, all remaining annual installments become due on the return for the year of sale. The repayment is limited to the amount of gain on the sale, if the home is sold to an unrelated taxpayer. If there is no gain or if there is a loss on the sale, the remaining annual installments may be reduced or even eliminated. Consult a tax professional to determine the tax consequences of a sale.
• If you transfer your home to your spouse, or, as part of a divorce settlement, to your former spouse, that person is responsible for making all subsequent installment payments.