Taxes: What's New for 2008?

Even when there are no big changes to the tax laws, annual inflation and previously scheduled adjustments trigger a number of small tax rule changes, including:

• How much you can contribute to retirement accounts.
• Eligibility limits based on adjusted gross income (AGI)¹.
• Income levels that determine which marginal income tax bracket you fall into.

Income tax brackets

Here are the new federal tables for single filers and married filing jointly. Check out the IRS Web site for additional information on tax brackets, personal exemption and standard deduction amounts, and more.

2008 federal income tax brackets
Rate	Single	Married, filing jointly
10%	$8,025 or less	$16,050 or less
15%	More than $8,025 but not more than $32,550	More than $16,050 but not more than $65,100
25%	More than $32,550 but not more than $78,850	More than $65,100 but not more than $131,450
28%	More than $78,850 but not more than $164,550	More than $131,450 but not more than $200,300
33%	More than $164,550 but not more than $357,700	More than $200,300 but not more than $357,700
35%	More than $357,700	More than $357,700

Other changes

• Charitable deductions—2007 was the last year that IRA owners age 70½ or older can make tax-free charitable contributions of up to $100,000 directly from their IRAs. This option is no longer available.
• AMT—At the 11th hour, Congress passed yet another temporary patch for the alternative minimum tax. For 2007, the AMT exemption increases to $66,250 for married taxpayers filing jointly, and $44,350 for single filers. (Hopefully, we won't have to wait until the end of December again to find out about 2008.)
• Kiddie tax—The limit on the so-called kiddie tax increases to $900 in 2008, from $850 in 2007. The cutoff age, which was raised from 14 to 18 in 2006, is further increased to 19 beginning in 2008. This means children under age 19 will pay no income tax on the first $900 of unearned income, such as capital gains or interest from a savings account, and will be taxed at their own rate (most likely 10%) on the next $900 (0% for long-term capital gains). In addition, starting in 2008, full-time college students under the age of 24 will also be taxed at their parents' rate on unearned income in excess of $1,800, unless the students' earned income is greater than one-half of their support. Children 19 and older (or 24 and older, for dependent full-time college students) continue to pay tax at their own rate. If they're in the 15% ordinary bracket or below, that means 0% on long-term capital gains and qualified dividends for tax years 2008 through 2010.

Retirement

Here are the maximum amounts you can contribute to various retirement accounts for 2008, plus the catch-up contribution available to people 50 and older.

2008 federal limits for retirement accounts
Account	Contribution limit	Catch-up contribution
401(k), 403(b) and 457	$15,500	$5,000
SIMPLE IRA	$10,500	$2,500
QRP/Keogh and SEP-IRA	20% of net self-employment income (or 25% of compensation), up to $46,000	None
Individual 401(k)	20% of net self-employment income (or 25% of compensation) plus $15,500, up to $46,000	$5,000
Traditional IRA and Roth IRA	$5,000	$1,000

Money you put in a traditional IRA is generally tax deductible—unless you're an active participant in a qualified employer plan such as a 401(k) or 403(b). In that case, for 2008, your traditional IRA contribution is fully deductible if your AGI is $53,000 or below (partially deductible between $53,000 and $63,000 for singles). The phase-out range for deductibility is $85,000–$105,000 for married filing jointly ($159,000–$169,000 for the nonparticipant spouse of an active participant, when filing jointly).

The AGI phase-out range for Roth IRA eligibility increases in 2008 to $101,000–$116,000 for singles and $159,000–$169,000 for married filing jointly.

Education

• The maximum Coverdell Education Savings Account contribution of $2,000 per year remains unchanged, as do the AGI phase-out ranges of $95,000–$110,000 for singles and $190,000-$220,000 for married filing jointly.
• For 529 plans,³ there's still no limit to how much you can contribute each year—each state's plan has its own lifetime limit, typically over $200,000. You can still treat a 529 contribution as being made over five years for gift tax purposes. So, a married couple could contribute as much as $120,000 per child up front without using any of their lifetime gift tax credit (see below).
• The AGI phase-out limits for the Hope and Lifetime Learning tax credits go to $48,000–$58,000 for singles and $96,000–$116,000 for married filing jointly. Additionally, the maximum Hope credit increases to $1,800 (100% of the first $1,200 and 50% of the next $1,200). The Lifetime Learning credit remains at 20% of the first $10,000 of qualifying education expenses.
• The AGI phase-out for eligibility to deduct up to $2,500 of student loan interest remains at $55,000–$70,000 for singles and increases to $115,000–$145,000 for married filing jointly.

Gift and estate tax

• Gift tax. The $1 million lifetime gift tax exemption remains unchanged, as does the annual exclusion amount of $12,000 ($24,000 for spouses splitting gifts). The top gift tax rate remains at 45%.
• Estate tax. The lifetime exemption amount remains at $2.0 million ($780,800 equivalent credit), as does the top estate tax rate of 45%.

FICA

The wage base limit for Social Security (OASDI) withholding goes to $102,000 (maximum of $6,324 employee withholding at 6.2%) while the wage base for Medicare withholding remains unlimited (employee tax rate of 1.45%).

For more information on these and other 2008 changes, visit the IRS Web site and see the official Inflation-Adjusted Tax Items for Tax Year 2008

(0108-3855)