Major federal tax law changes coming in 2008

By John Johnston
Managing Editor

Just as millions of taxpayers are breathing a sigh of relief, many millions of those same persons might be crying the tax blues at the end of 2008.

Congress "patched" the Alternative Minimum Tax (AMT) for the 2007 tax year just before the holidays. That last-minute legislation allows an estimated 20 million taxpayers to avoid the dreaded AMT tax on 2007 returns.

The AMT was never intended to apply to middle-class taxpayers, according to the National Society of Accountants (NSA). Some Americans will pay the tax, says the NSA, but the AMT exemption amounts were raised significantly.

Before the patch, the AMT exemption for married couples filing jointly was $45,000 - now the exemption is raised to $66,250. Similar increases apply to other types of tax filers, the NSA said.

“But watch out for 2008,” says NSA President Andrew T. Morehead.

Morehead said the AMT patch only applies to 2007 – and that there are several just as unpleasant tax realities also waiting in 2008.

"Even as people begin scrambling to wade through the complex tax code to complete their 2007 returns, said Morehead, “they need to think about how several tax law changes will affect them in 2008.”

Morehead also pointed to another reality. "Most of these expiring provisions haven't been publicized. But since 2008 is an election year, opportunities may exist to persuade Congress to extend some of them."

The Changes

Morehead said key changes that will affect millions of Americans include:

• AMT patch only good for 2007 - For the 2008 tax year, the AMT exemption amount drops back to $45,000 for married couples filing jointly, with large drops for other types of tax filers as well. These levels again threaten to catch millions more taxpayers. Unless Congress votes again to change the law, taxpayers will face the same tax that was just avoided at the last minute for 2007.

• No more state and local sales tax deductions - This popular tax break expired at the end of 2007. For the past few years, taxpayers have had the option of deducting either state and local income taxes or state and local general sales taxes. In 2008, the option to deduct state and local general sales taxes expires.

• Kiddie tax will apply to older kids - Through 2007, the so-called "kiddie tax" required children under 18 to pay tax at his or her parents' highest marginal tax rate on unearned income in excess of $1,700. But watch out for 2008, when the applicable age rises and the kiddie tax will apply to a child under the age of 19 and full-time students under age 24.

• "Classroom" deduction comes to an end - Full-time teachers, instructors, counselors and other educators could deduct up to $250 worth of books, supplies, software, and other qualifying materials through 2007. But this deduction expires for 2008.

• "Qualified conservation" deductions ended in 2007 - The enhanced deduction for contributions of real property interests dedicated exclusively for conservation purposes ended in 2007. This includes many tax deductions for energy savings measures.

• Tuition and fees deduction expires - Through 2007, taxpayers could deduct qualifying tuition and fees required for the student's enrollment or attendance at a post-secondary school. The tuition and fees deduction, depending on adjusted gross income, reduced taxable income by as much as $4,000. However, this provision expires for 2008.

"These changes for 2008, plus a host of other last-minute tax law changes that apply to the 2007 tax year, put the onus on taxpayers to keep up to make sure they receive any tax breaks they are entitled to," Morehead adds. "Fortunately, professional tax preparers are paid to know all the latest changes, so we encourage taxpayers to turn to them to help sort through the complex tax code," he said.

The Dates

And unlike last year when April 15 fell on a Sunday and the IRS extended the filing date to April 17, this year the date to file and pay will again be April 15, 2008.

Florida taxpayers can also lament that in 2007, the state was 12th in the nation in the number of days its residents had to work to pay all of its taxes – 122 days, making Tax Freedom Day in Florida May 2 for 2007.

Every year the Tax Foundation makes the calculation, comparing the number of days Americans work to pay taxes to the number of days they work to support themselves – amounting to Tax Freedom Day. This year, Tax Freedom Day is expected to be a few days later for most states.

The IRS has also reported that millions of tax packages are now in the hands of taxpayers.

"The IRS will work to make this tax season as smooth as possible for taxpayers," said Linda Stiff, Acting IRS Commissioner. “We strongly encourage taxpayers to file electronically, particularly those affected by late tax law changes. Filing electronically makes things easier by reducing errors and speeding up refunds.”

The IRS is sending 16.5 million 1040 tax packages to taxpayers this month who have filed paper tax returns in the past. The number of paper packages has dropped rapidly in recent years, falling from 34 million packages in just four years. Last year, nearly 80 million tax returns used e-file, representing about 57 percent of all returns.