The end of the year is here, and it's time for individuals and businesses to buckle down and take advantage of any and all Federal tax deductions before the year ends. If you have your ducks in a row, you can figure a rough estimate of your tax rates from the new 2009 IRS (Internal Revenue Service) tax tables [PDF]. You may see many changes, based upon inflation adjustments and that widens tax brackets.

But, you'll also see many changes in tax laws, and these laws may affect you. For instance, in October, Congress introduced H.R. 7123, the Middle Class Investor Relief Act, which would increase the limit on capital losses from $3,000 to $20,000. If passed, this act would help the average long-term investor tremendously, especially if accounts were liquidated during a down market., or if mandatory 401k distributions were lower for selected individuals. Hopefully, this bill will encourage more participation in the financial markets in taxable accounts outside retirement account investments.

This week and next week, I'll give you an overview of the changes that may affect you and your taxes for 2008 through to 2011.

1. Personal exemptions and standard deductions will rise. For instance, the value of each personal and dependency exemption is $3,500, up $100 from 2007. And, the new standard deduction is $10,900 for married couples, up $200 from 2007 ($100 per person).



2. If you lost your principal residence to foreclosure in 2007 or 2008, your debt forgiven in connection with foreclosure, short sale or loan restructuring up to two million dollars will not be treated as income.



3. If you are covered by a retirement plan at work, you can take a full IRA deduction if your modified adjusted gross income is less than $83,000 (married filing jointly) or $52,000 (single or head of household).



4. Be prepared to face a tougher kiddie tax law. In 2007, a child's unearned income over $1,700, such as gains and dividends, was taxed at the parents' marginal rate until the year the child is 18. Although the threshold increases to $1,800 in 2008, the child's age is raised to 19 and, for full-time students whose earned income is less than half their support, the age of that child is increased to 24 after this year. With these moves, families can't shift appreciated assets to their kids to take advantage of the zero percent rate on capital gains.



5. If you needed to sell stocks for liquidity in 2008 (or in 2009) and you're in the ten- or fifteen-percent tax brackets, you can enjoy a reduction in capital gains tax rates. Prior to 2008, long-term capital gains from the sale of assets held longer than one year were taxed at a maximum rate of five percent to the extent the seller was in the ten or fifteen percent tax brackets. In 2008, the five percent maximum rate drops to zero percent through 2010. The fifteen percent maximum tax rate on other long-term capital gains stays the same.



6. Likewise, a reduction in dividend tax rates may thrill your bones. In 2008, the special five percent maximum rate on dividends of taxpayers in the ten- and fifteen-percent tax brackets drops to zero percent through 2010.



7. Take advantage of low prices and increased IRA contribution limits as it increases from $4,000 to $5,000. Filers who reach age 50 before the end of 2008 can contribute another $1,000.



8. For contributions to a traditional IRA, the deduction phase-out range for an individual covered by a retirement plan at work begins at an income of $85,000 for joint filers (up from $83,000) and $53,000 for a single person or head of household (up from $52,000).



9. Thanks to higher inflation, the fifteen- through thirty-five percent tax brackets will present more than two percent higher levels of income than in 2007.



10. Starting in 2008, employees were not taxed on up to $220 a month on employer-paid parking, up $5 per month from 2007. The cap on tax-free transit passes their employers can give rises to $115 a month, up $5 a month from 2007.



11. In 2007, the reduction of itemized deductions occurred once your adjusted gross income exceeded $156,400, regardless of your filing status. In 2008, the reductions are less painful. The cutback in itemized deductions occurs once your adjusted gross income exceeds $159,950, regardless of your filing status. Also, your medical expenses, investment interest deduction, deductible gambling losses and any casualty and theft losses are not subject to the cut.



12. The maximum Hope credit, available for the first two years of post-secondary education, is $1,800, up from $1,650 in 2007.



13. The annual contribution limit for most defined contribution plans rises to $46,000, up from $45,000 in 2007.

The following tax laws expired at the end of 2007, but Congress may reinstate them for 2008. With that said, don't count on these laws to be reinstated. That way, if they are, then you can consider them as plums.

1. The opportunity for itemizers to choose to deduct their state sales tax payments instead of deducting their state and local income taxes.



2. A deduction for up to $250 worth of teachers' classroom supplies.



3. The election to include nontaxable combat pay in the calculation of earned income for the earned income credit.



4. The deduction for up to $4,000 of college tuition and fees.



5. Starting in 2008, IRA owners who direct that all or part of their IRAs be given to charity once again have to report the withdrawal as income and deduct the donation as a charitable contribution. As a result, their deductions may be limited by the adjusted gross income cap on charitable contributions and the itemized deduction phaseout.

If you'd like to see the previous five laws reinstated, write or call your local and/or state representative to Congress. You can input your zip code into the box at top right on that linked page to find your representative(s).

Until Later,

The securities markets are subject to the risks of fluctuating prices and the uncertainty of rates of return and yields inherent in investing and past performance is no guarantee of future results.  Periodic Investment Plans, Dollar-cost averaging and Compounding do not assure a profit and do not protect against losses in declining markets and you should consider your financial ability to continue to purchase through periods of low price levels.