Inflation Adjusted Figures for 2008
 
December 12, 2007
 
Todd Schneider - Chicago

The Internal Revenue Service recently released Revenue Procedure 2007-66, which provides that personal exemptions and standard deductions will rise, tax brackets will widen and income limits for individual retirement accounts will increase in 2008. Several of these changes are described below.

Income Tax Changes

For 2008, the tax rate tables are as follows:

Dependent. The standard deduction amount for an individual who may be claimed as a dependent by another taxpayer is $900.
Aged or blind. The additional standard deduction amount for the aged or the blind is $1,050 (or $1,350 if the individual is also unmarried and not a surviving spouse).
Overall Limitation on Itemized Deductions. Itemized deductions are reduced for those with adjusted gross incomes of $159,950 (or $79,975 for a separate return filed by a married individual).
Personal Exemption. The personal exemption amount is $3,500 ($2,333 for taxpayers with adjusted gross income in excess of the maximum phase-out amount).
Phase-Out of Personal Exemptions. The personal exemption amount begins to phase out at, and reaches the maximum phase-out amount after, the following adjusted gross income amounts:

“Kiddie Tax.” The net unearned income of a child under 18 will generally be taxed at the parents’ highest marginal tax rate. Beginning in 2008, the kiddie tax continues to apply to children under the age of 18, but it also applies to a child attains age 18 (or, if a full time student, attains age 19-23) by the end of the year. In 2008, the first $900 of a child’s income is generally exempt from this rule. The combination of the $900 standard deduction for a child without earned income plus the $900 used to calculate the child’s net unearned income for kiddie tax purposes usually shields $1,800 of a child’s unearned income from taxation at the parents’ rate.
Adoption Credit. The credit allowed for an adoption of a child is $11,650. The available adoption credit begins to phase out for taxpayers with modified adjusted gross income in excess of $174,730 and is completely phased out for taxpayers with modified adjusted gross income of $214,730 or more.
Child Tax Credit. The maximum credit for each qualifying child is $12,050.
Hope and Lifetime Learning Credits. The maximum Hope Scholarship Credit is $1,800. The available credit begins to phase out for taxpayers with modified adjusted gross income in excess of $48,000 ($96,000 for a joint return).
Earned Income Credit. The amounts in the following table are used to determine the earned income credit. The “earned income amount” is the amount of earned income at or above which the maximum amount of the earned income credit is allowed. The “threshold phase-out amount” is the amount of adjusted gross income (or, if greater, earned income) above which the maximum amount of the credit begins to phase out. The “completed phase-out amount” is the amount of adjusted gross income (or, if greater, earned income) at or above which no credit is allowed. The earned income tax credit is not allowed if the aggregate amount of certain investment income exceeds $2,950.

Interest on Education Loans. The $2,500 maximum deduction for interest paid on qualified education loans begins to phase out for taxpayers with modified adjusted gross income in excess of $55,000 ($115,000 for joint returns), and is completely phased out for taxpayers with modified adjusted gross income of $70,000 or more ($145,000 or more for joint returns).
Periodic Payments Received Under Qualified Long-Term Care Insurance Contracts or Under Certain Life Insurance Contracts. The per diem limitation for periodic payments received under a qualified long-term care insurance contract, or periodic payments received under a life insurance contract that are treated as paid by reason of the death of a chronically ill individual, is $270.
Roth IRAs. Contributions to Roth IRAs are subject to the same contribution limits as traditional IRAs. In 2008 the contribution limit is $5,000. In 2008, taxpayers with adjusted gross incomes over $101,000 cannot contribute to a Roth IRA ($159,000 for married taxpayers filing jointly). Married taxpayers filing separately cannot contribute to a Roth IRA.
Medical Savings Accounts. Individuals who work for certain employers may be able to maintain medical savings account to pay medical expenses, provided that the account is used in conjunction with a “high deductible health insurance plan.” For 2008, a high deductible health plan has the following deductibles and limitations: (1) for individual coverage, the minimum deductible is $1,950, the maximum deductible is $2,900, and the maximum out-of-pocket limitation is $3,850; (2) for family coverage, the minimum deductible is $3,850, the maximum deductible is $5,800, and the maximum out-of-pocket limitation is $7,050.
Qualified Transportation Fringe. The monthly fringe benefit exclusion for a transit pass is $115 (increased from $110 in 2007), and the fringe benefit exclusion amount for qualified parking is $220 (up from $215 in 2007).
Income from United States Savings Bonds for Taxpayers Who Pay Qualified Higher Education Expenses. The exclusion from income for taxpayers who use U.S. savings bonds to pay for qualified higher education expenses begins to phase out for modified adjusted gross income above $100,650 for joint returns and $67,100 for other returns. The exclusion is completely phased out for modified adjusted gross income of $130,650 or more for joint returns and $82,100 or more for other returns.
Adoption Assistance Programs. The amount that can be excluded from an employee’s gross income for the adoption of a child with special needs is $11,650. The maximum amount that can be excluded from an employee’s gross income for the amounts paid or expenses incurred by an employer for qualified adoption expenses furnished pursuant to an adoption assistance program for other adoptions by the employee is $11,650. The amount excludable from an employee’s gross income begins to phase out for taxpayers with modified adjusted gross income in excess of $174,730 and is completely phased out for taxpayers with modified adjusted gross income of $214,730 or more.
Eligible Long-Term Care Premiums. Premiums paid for qualified long-term care insurance are deductible, subject to limitations based on the age of the individual at the close of the year. The maximum deductible amounts for long-term care premiums paid in 2008 are as follows:

Expatriation to Avoid Tax. An individual with “average annual net income tax” of more than $139,000 for the five taxable years ending before he or she gave up United States citizenship is subject to tax.
Foreign Earned Income Exclusion. The foreign earned income exclusion amount is $87,600.
Social Security Tax. The wage base for computing the Social Security tax in 2008 will rise to $102,000 from $97,500 in 2007.

Transfer Tax Changes

Estate Tax Exemption. The applicable exclusion amount remains at $2 million per individual in 2008. Under current law, the exclusion is scheduled to increase to $3.5 million in 2009 and will be unlimited in 2010.
Generation Skipping Transfer (GST) Tax Exemption. The GST exemption will also remain at $2 million per individual in 2008. It is scheduled to increase to $3.5 million in 2009.
Annual Exclusion for Gifts. The first $12,000 of gifts to any person (other than gifts of future interests in property) are not included in the total amount of taxable gifts made during that year. This exclusion remains unchanged from 2007.
Annual Exclusion for Gifts to a Non-Citizen Spouse. The first $128,000 of gifts to a spouse who is not a citizen of the United States (other than gifts of future interests in property) are not included in the total amount of taxable gifts made during that year. This is an increase from $125,000 in 2007.
Lifetime Gift Tax Exclusion. The lifetime exclusion remains frozen at $1 million. There is no pending legislation to increase this amount.
Estate and Gift Tax Rate. In 2008, the top estate and gift tax rate will remain at 45 percent. For all practical purposes, this results in a flat tax of 45 percent on the value of assets included in a decedent’s estate over $2 million.
Valuation of Qualified Real Property in Decedent’s Gross Estate. For an estate of a decedent dying in calendar year 2008, if the executor elects to use the special use valuation method under Section 2032A of the Internal Revenue Code for qualified real property, the aggregate decrease in the value of qualified real property resulting from the election cannot exceed $960,000.
Notice of Large Gifts Received from Foreign Persons. Recipients of gifts from certain foreign persons may be required to report these gifts if the aggregate value of gifts received in a taxable year exceeds $13,561.

For more information, email Todd J. Schneider at todd.schneider@hklaw.com or call toll free, 1-888-688-8500.