With the new year approaching, we would like to remind our clients and friends of some of the more significant tax law changes that will take effect in 2008.
Increase in IRA Contribution Limits. The contribution limit for both traditional IRAs and Roth IRAs will be $5,000 in 2008 (up from $4,000 in 2007). Individuals age 50 or older can make an additional “catch-up” contribution of $1,000 to a traditional or Roth IRA, resulting in a $6,000 aggregate contribution limit for these individuals. The contribution limit for both 401(k) and 403(b) plans, however, will remain $15,500 in 2008, as it was in 2007; the limit on catch-up contributions for these plans will also remain $5,000 for 2008, as it was in 2007.
Inflation Adjustments. The IRS has set forth, in Revenue Procedure 2007-66, those items that will be adjusted for inflation in 2008. Some of the more significant items are listed below.
a. Standard Deduction. The 2008 standard deduction amounts will be as follows: $5,450 for a single individual and for married couples filing separately (up from $5,350 in 2007); $10,900 for a married couple filing jointly and surviving spouses (up from $10,700 in 2007); and $8,000 for a head of household (up from $7,850 in 2007).
b. Personal Exemption Amount. The 2008 personal exemption amount will be $3,500 (up from $3,400 in 2007).
c. Phase-out of Personal Exemptions. The 2008 adjusted gross income threshold amounts at which personal exemptions are phased out will be as follows: for a single individual, the exemption phaseout begins when AGI exceeds $159,950 (up from $156,400 in 2007) and is fully phased out when AGI exceeds $282,450 (up from $278,900 in 2007); for married couples filing jointly and surviving spouses, the exemption phaseout begins when AGI exceeds $239,950 (up from $234,600 in 2007) and is fully phased out when AGI exceeds $362,450 (up from $357,100 in 2007); for a head of household, the exemption phaseout begins when AGI exceeds $199,950 (up from $195,500 in 2007) and is fully phased out when AGI exceeds $322,450 (up from $318,000 in 2007); and for married couples filing separately, the exemption phaseout begins when AGI exceeds $119,975 (up from $117,300 in 2007) and is fully phased out when AGI exceeds $181,225 (up from $178,550 in 2007).
d. Overall Limitation on Itemized Deductions. Total itemized deductions otherwise allowable are reduced if a taxpayer’s adjusted gross income exceeds certain threshold amounts. The threshold amounts for 2008 will be as follows: $159,950 (up from $156,400 in 2007) for all taxpayers other than married taxpayers filing separately; and $79,975 (up from $78,200 in 2007) for a married taxpayer filing separately.
e. Tax Rate Schedules. As a result of changes to the 2008 taxable income brackets, for single filers, married couples filing jointly and heads of household, the top bracket of 35% will apply to taxable income in excess of $357,700 (up from $349,700 in 2007); for married couples filing separately, the top bracket will apply to taxable income in excess of $178,850 (up from $174,850 in 2007); and for estates and trusts, the top bracket will apply to taxable income in excess of $10,700 (up from $10,450 in 2007).
f. Annual Gift Tax Exclusion. The annual gift tax exclusion for 2008 will remain $12,000, as it was in 2007. However, the annual gift tax exclusion for gifts to a spouse who is not a United States citizen will be $128,000 (up from $125,000 in 2007). g. Adoption Credit. The credit allowed for the adoption of a child with special needs will be $11,650 (up from $11,390 in 2007). The maximum credit allowed for other adoptions is the amount of qualified adoption expenses up to $11,650 (up from $11,390 in 2007). The adoption credit begins to phase out for taxpayers with modified adjusted gross income of $174,730 (up from $170,820 in 2007) and is completely phased out when modified adjusted gross income reaches $214,730 (up from $210,820 in 2007).
h. Hope Credit. The maximum Hope credit will be $1,800 in 2008 (up from $1,650 in 2007).
i. Earned Income Credit. The maximum earned income credit will be $2,917 for a taxpayer with one qualifying child (up from $2,853 in 2007), $4,824 for a taxpayer with two or more qualifying children (up from $4,716 in 2007), and $438 for a taxpayer with no qualifying children (up from $428 in 2007). The adjusted gross income phaseout range is $15,740 to $33,995 for a single, surviving spouse or head of household taxpayer with one qualifying child (up from $15,390 to $33,241 in 2007); $15,740 to $38,646 for a single, surviving spouse or head of household taxpayer with two or more qualifying children (up from $15,390 to $37,783 in 2007); $7,160 to $12,880 for a single, surviving spouse or head of household taxpayer with no qualifying children (up from $7,000 to $12,590 in 2007); $18,740 to $36,995 for married taxpayers filing jointly with one qualifying child (up from $17,390 to $35,241 in 2007); $18,740 to $41,646 for married taxpayers filing jointly with two or more qualifying children (up from $17,390 to $39,783 in 2007); and $10,160 to $15,880 for married taxpayers filing jointly with no qualifying children (up from $9,000 to $14,590 in 2007). The earned income credit is not allowed if the aggregate amount of certain investment income exceeds $2,950 (up from $2,900 in 2007).
j. Low-Income Housing Credit. The amounts used to calculate the state housing credit ceiling for the low-income housing credit will be the greater of (1) $2.00 multiplied by the state population or (2) $2,325,000 (up from $1.95 multiplied by the state population or $2,275,000 in 2007).
k. Alternative Minimum Tax Exemption for a Child Subject to the “Kiddie Tax.” For a child to whom the “kiddie tax” applies, the exemption amount for purposes of determining the alternative minimum tax may not exceed the sum of (1) the child’s earned income for the year, plus (2) $6,400 (up from the sum of the child’s earned income for the year plus $6,300 in 2007).
l. Expensing of Depreciable Business Assets. The aggregate cost that may be deducted for investments in certain depreciable business assets (known as Section 179 property) will be $128,000 (up from $112,000 in 2007). This amount is reduced by the amount by which the cost of the asset exceeds $510,000 (up from $450,000 in 2007).
m. Valuation of Qualified Real Property in Decedent’s Gross Estate. For an estate of a decedent dying in 2008, if the executor elects to use the Code Section 2032A special use valuation method for qualified real property, the aggregate decrease in value for estate tax purposes resulting from the election cannot exceed $960,000 (up from $940,000 in 2007).
n. Higher Income Limits for Retirement Savings. (1) Traditional IRAs. Effective January 1, 2008, for married couples filing jointly where both spouses participate in an employer sponsored plan, the deduction for contributions to a traditional IRA begins to be phased out at a combined modified adjusted gross income of $85,000 (up from $83,000 in 2007). For married couples filing jointly where only one spouse participates in an employer sponsored plan, the deduction for contributions by the non-participant spouse to a traditional IRA begins to be phased out at a combined modified adjusted gross income of $159,000 (up from $156,000 in 2007). For single individuals and heads of household who participate in an employer sponsored plan, the deduction for contributions to a traditional IRA begins to be phased out at a modified adjusted gross income of $53,000 (up from $52,000 in 2007).
(2) Roth IRAs. Effective January 1, 2008, for married couples filing jointly, the amount of the permissible contribution to a Roth IRA begins to be phased out at a combined modified adjusted gross income of $159,000 (up from $156,000 in 2007). For single individuals and heads of household, the phaseout begins at a modified adjusted gross income of $101,000 (up from $99,000 in 2007).
Year-End Reminder: Remember to make any remaining gifts for 2007 by December 31st (see the guidelines discussed separately in this newsletter). Gifts made in 2007 which aggregate more than $12,000 for any donee must be reported on an IRS Form 709 United States Gift (and Generation Skipping Transfer) Tax Return filed with the IRS by April 15, 2008.
