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It wasn't just a bailout for financial companies: The Emergency Economic Stabilization Act of 2008 includes several tax breaks that could help you.
Many of the provisions extend, as expected, tax breaks that had expired at the end of 2007. Others provide disaster relief, primarily to Midwesterners, and some relief from the alternative minimum tax. Here are a few of the key consumer tax changes included in the new law:
Help for college bills. The new law extends the tuition and fees deduction through the end of 2009. This is a great way to write off college costs if you earn too much to qualify for the Hope and Lifetime Learning credits. You can deduct up to $4,000 if your adjusted gross income is $65,000 or less ($130,000 for joint returns) or $2,000 if your AGI is $80,000 or less ($160,000 for joint returns).
This deduction -- which you can claim even if you claim the standard deduction rather than itemizing -- is for expense paid for yourself, your spouse or a dependent.
Charitable contributions from an individual retirement account. People over age 70 1/2 can continue to give up to $100,000 directly from their IRA to a charity and avoid paying income taxes on the money in 2008 and 2009.
These new rules are particularly helpful for retirees who need to take required minimum distributions from traditional IRAs that have increased significantly in value through the years -- and would owe a big income-tax bill on their withdrawals -- but don't need the money to live on. The contribution counts as your required distribution but isn't included in your adjusted gross income.
You can't double-dip tax breaks and write off the charitable contribution, too, but you don't need to itemize to benefit from this tax break.
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Extended write-offs for sales taxes. Taxpayers will continue to have the option to deduct state and local sales taxes instead of state and local income taxes. This provision has been particularly valuable for people in states without income taxes and can help some retirees who don't have much taxable income and thus relatively low income-tax bills.
You can deduct whichever kind of taxes -- income or sales -- that cost you the most. This tax break had expired at the end of 2007 but now runs through 2009.
Deductions for teachers. Teachers can continue to deduct up to $250 of their personal expenses for books and classroom supplies, regardless of whether they itemize.
AMT relief. The new law makes a few changes to the alternative minimum tax, which has its own set of rates and rules and allows fewer deductions. The most notable is a "patch" that raises the AMT exemption, which is basically a standard deduction for AMT taxpayers. For 2008, the exemptions are set at $46,200 for single people and $69,950 for married folks filing joint returns. In each case, that's a few thousand dollars higher than the 2007 exemption, so people threatened to be pushed into AMT-land by inflation won't be.
Tax breaks for disaster victims. Several provisions of the new law provide tax breaks for victims in presidentially declared disaster areas in the Midwest (including Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska and Wisconsin) that were hit by major floods, storms and tornadoes in 2008.
For example, disaster victims whose primary residence was damaged between May 20, 2008, and Aug. 1, 2008, will be able to withdraw money from IRAs, 401(k)s, 403(b)s and other retirement plans without the normal 10% early-withdrawal penalty and can spread the tax bill over three years.
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Because it's generally a lousy idea to tap into a retirement plan for anything other than retirement, the law allows taxpayers to re-contribute the amount to their accounts later, if they can afford to do so.
Disaster victims also will not be subject to the regular limits for deducting casualty losses resulting from the Midwest disasters. (Before this change, people generally needed to reduce unreimbursed casualty losses by $100, then reduce the remaining amount by 10% of their adjusted gross income before deducting any disaster losses.)
This article was reported and written by Kimberly Lankford for Kiplinger's Personal Finance Magazine.
Published Nov. 21, 2008
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