2008 Numbers to Bear in Mind

Is it too early to start thinking about 2008 when 2007 is not only not over, but changes that may retroactively apply are still being hashed out in Congress?

Kiddie tax. The portion (or entirety) of the child's standard deduction that may be subtracted in determining net unearned income under the kiddie tax is increased to $900. If the child has unearned income in excess of $1,800, it will be taxed at the parent's highest marginal tax rate. (Remember, the definition of a child in 2008 is different from the definition that was applicable in 2007). Likewise, a parent may elect to include the unearned income of a minor child on his return, thereby eliminating the need of the child to file a tax return if a child has gross income (exclusively from interest and dividends) between $900 and $9,000. The maximum amount of AMT exemption a child may claim in 2008 will increase to the child's earned income plus $6,400 (but no more than the AMT exemption for single taxpayers).

Adoption expenses. In 2008 the first $11,650 of adoption expenses will qualify for the credit and the credit will begin to phase out when a taxpayer's AGI exceeds $174,730. The available credit is phased out ratably over a range of $40,000 for taxpayers. If employers provide adoption assistance, an income exclusion is available to the employee. In 2008 the total income exclusion available is $11,650 per child.

Education. Interest income earned on a qualified U.S. Series EE savings bond used to finance the higher education of the taxpayer, spouse, or dependents is excluded from gross income, but is phased out over a $30,000 ($15,000 for other than married filing jointly) range of modified adjusted gross income in excess of $100,650 ($67,100 for other than married filing jointly).

The Hope scholarship credit base increases to $1,200. As a result, the maximum Hope scholarship credit in 2008 is $1,800 (100 percent of the first $1,200 of qualifying expenses and 50 percent of the next $1,200).

Up to $2,500 of interest expense paid on qualified education loans is deductible. The deduction is subject to a phaseout for taxpayers with modified adjusted gross income in excess of $115,000 ($55,000 for taxpayers not filing joint returns).

Transportation fringe benefits. In 2008, the maximum monthly commuter vehicle/transit pass fringe benefit is $115; for qualified parking the monthly maximum increases to $220.

Health Savings Accounts (HSA). In 2008 a high-deductible health plan is one with an annual deductible of at least $1,100 for individual coverage ($2,200 for family coverage) and maximum out-of-pocket expenses of $5,600 for individual coverage ($11,200 for family coverage). For 2008 the maximum monthly contribution for eligible individuals with self-only coverage under a high-deductible health plan is one-twelfth of $2,900. For eligible individuals with family coverage under a high-deductible health plan, the maximum monthly contribution is one-twelfth of $5,800.

Long-term care insurance premiums. These premiums may qualify as a medical expense up to a dollar limit that depends on the age of the insured. For taxpayers aged 40 or younger, the limit is $310; for those aged 41 to 50 it is $580; for those aged 51 to 60 it is $1,150; for those aged 61 to 70 it is $3,080; and for those older than 70 it is $3,850. When benefits are received from a long-term care insurance policy, whether funded by an employer or self-funded, an exclusion from gross income is the greater of a daily rate ($270 in 2008) or the actual cost of the care.

Section 179 expense. In 2008 the maximum §179 expense election will be $128,000, and this amount will be subject to a phaseout once property placed in service exceeds $510,000 (completely phased out at $638,000).

Traditional IRAs. If the taxpayer is an active participant, then the IRA contribution deduction in 2008 is phased out beginning at a modified AGI of $53,000 for single taxpayers or heads of household, $85,000 for a married taxpayer filing a joint return, and $0 for a married taxpayer filing separately. If the taxpayer is not an active participant but his spouse is, the contribution deduction in 2008 is phased out proportionally for modified AGI between $159,000 and $169,000.

Roth IRAs. In 2008 the maximum annual contribution to a Roth IRA is phased out beginning at a modified AGI of $101,000 for single taxpayers or heads of households, $159,000 for married taxpayers filing a joint return, and $0 for a married taxpayer filing separately.

These and other issues are examined in The Best Federal Tax Update Course by Surgent McCoy (BFTU).