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Preparing to File Your 2008 Tax Return

By: Lee Richardson, Executive Director, Legal Aid of Arkansas

Income tax time is fast approaching. When it comes to getting ready to file your income tax return, things will move along much easier if you are prepared.

Before you do anything, make sure you have all your forms. This will usually include your W-2 forms and 1099 forms from any employer or financial institution where you have interest-bearing accounts. These forms should be in your hands by January 31, 2009.

If you are itemizing deductions, you will need to keep track of your property tax and interest paid on your home. The company that services your mortgage should send you a Form 1098, Mortgage Interest Statement. You should also start gathering documentation of any charitable deductions you have made.

There are several changes in the tax laws for 2008 that may have some impact on your return.

• The value of each personal and dependency exemption, available to most taxpayers, is $3,500, up $100 from 2007.
• The new standard deduction is $10,900 for married couples filing a joint return (up $200), $5,450 for singles and married individuals filing separately (up $100) and $8,000 for heads of household (up $150). Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions.
• Tax-bracket thresholds have increased by 2% for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $65,100, up from $63,700 in 2007.
• The maximum earned income tax credit for low and moderate income workers and working families with two or more children is $4,824, up from $4,716. The income limit for the credit for joint return filers with two or more children is $41,646, up from $39,783.
   
• The maximum Hope credit, available for the first two years of post-secondary education, is $1,800, up from $1,650 in 2007.
• The standard mileage deduction rates have increased to 50.5 cents for business miles, 14.0 charitable services, 19.0 medical travel, and 19.0 moving travel.

• The maximum IRA (traditional or Roth) contribution increases from $4,000 to $5,000. Filers who reach age 50 before the end of 2008 can contribute another $1,000.

There are certain tax law changes you may want to take advantage of, but that opportunity may pass after December 31, 2008. A few examples include:

• First-Time Homebuyers Tax Credit applies to primary home purchases between April 9, 2008, and June 30, 2009.  Normally, this tax credit must be paid back in equal payments over 15 years. The credit is 10 percent of the purchase price of the home, with a maximum available credit of $7,500 for either a single taxpayer or a married couple filing jointly. First-time homebuyers are those who have not owned a home in the three years prior to a purchase.
• There is an additional standard deduction for those who don’t itemize their deductions, but pay real estate taxes. The additional deduction amount is equal to the amount of real estate taxes paid up to $500 for single filers or up to $1,000 for joint filers. 
•  You may be able to deduct qualified tuition and required enrollment fees up to $4,000 that you pay for yourself, your spouse or a dependent. However, a taxpayer cannot take both the tuition and fees deduction and education credits (Hope & Lifetime Learning Credits) for the same student in the same year. Income limits and other special rules apply to each of these provisions.  
• The educator expense deduction, worth up to $250, allows teachers and other educators to deduct the cost of books, supplies, equipment and software used in the classroom. Eligible educators include those who work at least 900 hours during a school year. 
•  If you did not qualify or did not receive the maximum amount for the 2008 economic stimulus payment you may be entitled to a recovery rebate credit when you file your 2008 tax return. 
• Since tax year 2007, to deduct any charitable donation of money, you must have a bank record, credit card statement or a written communication from the recipient showing the name of the organization and the date and amount of the contribution.
• Some taxpayers, such as the self-employed, may have some discretion regarding when they receive income. Properly deferring income until next year can lower your taxable income and tax bill this year. This strategy will raise your tax bill next year.
• Taxpayers have various options to save for retirement. You need to be mindful of their contribution deadlines and limits. For example, Dec. 31 is the deadline for contributions to a 401(k) plan, while April 15 is the deadline for IRA contributions.
• If you had or adopted a child in 2008, you should get a Social Security number for that child as soon as possible to ensure that you can include the child as a dependent on your 2008 return.

Free tax preparation assistance is available in most communities for those with low- to middle incomes and the elderly. The most common free services are the IRS's Volunteer Income Tax Assistance program – frequently called VITA – and AARP's Tax Aide program.
You should consider e-filing your tax return.  More than 90 million taxpayers used this safe, easy and accurate method in 2007. It is the quickest way to receive a refund (always avoid tax preparation services offering refund anticipation loans, known as Rapid Refunds). When combined with direct deposit, you will receive your refund in as little as 10 days, and the error rate averages only 1% as opposed to 20% for paper filed returns.
You may be able to e-file for free using I-CAN by visiting our website at www.laalitc.org and following the File Your Taxes for Free link.