One of the problems that small business owners face when they start working on their income taxes is keeping up with the constant changes in the federal tax code year to year. It's hard to know what to claim and what to deduct and how federal tax law affects this from year to year. If your business is a sole proprietorship or some other form of business organization that is unincorporated and you file your business return with your personal return, here is a summary of the federal tax law changes for 2008.
Personal Exemption/Standard Deduction
If you itemize your expenses on Schedule A, your personal or dependent exemption is $3,500 for 2008, which is $100 more than in 2007. If you do not itemize, then the standard deduction is $5,450 for single individuals and married persons filing separate returns; $8,000 if you file head of household; $10,900 for married couples filing joint returns and qualifying widows and widowers.
For 2008 and 2009 only (at least at this time), you can deduct up to $500 for a single individual and up to $1,000 for married couples in property taxes by adding those amounts to your standard deduction.
If you had any disaster losses in 2008 from a natural disaster in an area that has been declared a federal disaster area, those losses can add to your standard deduction.
Credit for First-Time Homebuyers
If you are a first-time homebuyer and buy a home between April 9, 2008 and June 30, 2009, you are eligible for a tax credit up to $7,500. You are also eligible for this credit if you haven’t owned a home for three years. Understand that the credit is an interest-free loan that must be paid back in 15 years.
Earned Income Tax Credit
The maximum income levels and the earned income credit based on those income levels have increased for 2008. The maximum income levels are $41,646 for those with two or more children; $36,995 with one child; $15,880 with no children. The maximum earned income credit for those income levels are respectively as follows: $4,824; $2,917; $438.
Alternative Minimum Tax
The Alternative Minimum Tax is a system put into place to make sure the rich paid at least some tax. Unfortunately, it is a flawed system that sometimes affects middle-class taxpayers. To keep this from happening, Congress has put a temporary patch into place by raising the levels at which the AMT kicks into place. For a married couple filing a joint return and for qualifying widows and widowers, the exemption is $69,950. For a married person filing separately, the exemption is $34,975. For singles and heads of households, the exemption is $46,200.
Capital Gains Tax Rate
Beginning January 1, 2008, capital gains zeroed out for some taxpayers. The 5% capital gains tax rate for taxpayers in the 10% and 15% tax brackets is now zero, with a couple of exceptions.
Rebate Recovery Tax Credit
If you didn’t get the full rebate under the Bush administration, usually $600 for single taxpayers and $1200 for married couples, you may be able to get some of it through claiming the Rebate Recovery Tax Credit. If your financial situation has materially changed, such as if there is a new child in the family, could net you more of the rebate. This only applies if you got some of the rebate, but your financial situation kept you from getting all of the rebate.
These are the changes in the 2008 Federal Tax Code most likely to affect small business owners who own sole proprietorships. There are further changes that were enacted for 2008 for sole proprietorships and other forms of business organizations including small businesses that are incorporated that you can find in the Economic Recovery Act of 2008. Check the filing deadline for your taxes.