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What's New on the Old 1040 (Tax Year 2008)

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[TIME SENSITIVE: Affects 2008 returns.]
Several new tax laws enacted in 2008 drive changes in the Form 1040 you will soon be filing for clients. And some tax law changes in prior years have delayed effects that show up for the first time on the 2008 form.

In short, it's a good time to see what's new on the old 1040.

Line by Line Coverage

Here is a quick line-by-line look at the key tax law changes affecting the 2008 Form 1040.

Line 15a, IRA distributions. If a client's economic stimulus payment earlier this year was unintentionally directly deposited to an IRA and then withdrawn from the IRA, the withdrawal is not taxable. The total withdrawal is entered on line 15a. If the withdrawal was made by the due date of the return (including extension), “ESP” is written next to line 15b and "0" is entered on the line. A withdrawal in excess of the economic stimulus payment is, of course, taxable and must be reported on line 15b.

Line 16a, Pensions and annuities. In 2008, for the first time, clients were able to roll over distributions from qualified retirement plans into Roth IRAs. Unlike a rollover to a traditional IRA, a rollover to a Roth IRA is taxable. The taxable amount is included in line 16b.

Line 32, IRA deduction. The maximum annual IRA deduction has been increased to $5,000 ($6,000 if age 50 or older at the end of the year). A client covered by a qualified retirement plan can claim a deduction for an IRA contribution if he or she had a 2008 modified adjusted gross income (AGI) of less than $63,000 ($105,000 if married filing jointly).. If the client's spouse was covered by a qualified retirement plan, but the client was not, a deduction is allowed if 2008 modified AGI is less than $169,000.

Line 40, Standard deduction. Line 39c must be checked to allow clients to claim an increased standard deduction for real estate tax payments or disaster losses on Line 40.

For 2008, clients can claim an additional standard deduction for the difference between personal casualty losses and personal casually gains, to the extent they are attributable to a federally declared disaster.

Clients can also claim an increased standard deduction of up to $500 ($1,000 for marrieds filing jointly) for real estate taxes. These taxes must be the type that would have been deductible on Schedule A if the clients itemized their deductions.

Line 45, Alternative minimum tax. Congress increased the 2008 exemption amounts for the AMT to

• $69,950 for married couples filing a joint return;
• $46,200 for singles and heads of households; and
• $34,975 for married individuals filing separate returns.

Line 69, First-time homebuyer credit. If a client bought a main home after April 8, 2008, and before July 1, 2009, and did not own a home during the prior 3 years, he or she can claim a credit of 10% of the purchase price, up to a maximum of $7,500. The credit is computed on new IRS Form 5405. A client can elect to claim a credit for a 2009 purchase on his or her 2008 return (either original or amended).

The credit is phased out based on modified AGI. 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.

Line 70, Recovery rebate credit. The economic stimulus payment that most clients received earlier this year was technically an advance payment of a recovery rebate credit that can be claimed on the 2009 Form 1040. But since the advance payment was based on 2007 tax filing information, the payment may be greater or lesser than the amount of the credit a client is entitled to. If it's the former, the client can claim the difference between the actual credit and the advance payment on his or her return; if it's the latter, the client is not required to return the excess.

The Form 1040 instructions contain a worksheet that can be used to calculate the credit.

Terence M. Myers, J.D. and Dorinda D. DeScherer, J.D. are nationally renowned writers on tax topics for such publications as Accountants Tax Weekly, Tax Return Preparer's Letter, Nonprofit Tax and Financial Strategies, and Executive's Tax and Management Report. For many years Myers was Managing Editor and DeScherer Assistant Managing Editor for many Prentice Hall tax newsletters. Myers and DeScherer have published books and other publications with Harcourt Professional Publishing, Aspen Publishers, Prentice Hall, and the AICPA.

Last Updated: 01/12/2009