In the previous article, I wrote about the many Federal tax law changes that can affect your April 2009 filing of your 2008 federal income taxes. There are so many changes that the IRS is sponsoring a special forum to help you learn about the significant income tax law changes for 2008 and how they will affect the next filing season. That forum isn't up and running yet, but it may be available by the first of the year.

Now that you have a fairly good grasp on some changes for 2008, I'm going to take you a bit further into tax law changes for 2009 through 2011. Since we're headed into unknown territory with unresolved economic worries and a new presidential administration, be aware that some of these laws may change. For instance, if you make over $250,000 per year, you may be looking at tax hikes in 2009 and 2010. President-Elect Obama has promised not to raise taxes on people making under $200,000 per year and to give refundable tax credits to all people making under $200,000 per year; regardless if they pay taxes or not. But, promises and reality are two different things.

With that said, you can use the following information to help define your economic goals for upcoming years. This information is based upon current common knowledge from the IRS (Internal Revenue Service) based on annual rates for inflation and rules already on the books.

Starting in 2009:

1. I mentioned in the previous article that principal residence owners who lost their homes to foreclosure in 2007 or 2008 will have their debt forgiven in connection with foreclosure, short sale or loan restructuring. The amount up to two million dollars will not be treated as income. This forgiveness will go forward into 2009, with expiration in 2010. In 2010, debt forgiven in connection with the foreclosure of a principal residence once again will be considered as taxable income – unless you are in bankruptcy or insolvent.



2. In 2009, the $2,000,000 federal estate tax exemption rises to $3,500,000, based upon annual inflation.



3. 2008 will be the last year to receive $2,000 maximum credit for installing of solar water heating equipment, photovoltaic or fuel cell equipment in your primary residence or a second home. You can write or call your Congressional representatives if you'd like to see this law reinstated for 2009.

Starting in 2010:

1. If you plan to die in 2010, the federal estate tax will be eliminated for your estate. Prior to the act, the amount one could pass was $675,000 per person - the "exclusion" amount - and the maximum estate tax rate was 55 percent. A person may pass an unlimited amount to his or her spouse.



2. The act mentioned in #1 above did not repeal the federal gift tax. Beginning Jan. 1, 2002, the gift tax exemption, which mirrored the estate tax exemption, was increased to $1 million and the gift tax rate will be identical to the estate tax rate. After Dec. 31, 2009, the maximum gift tax rate will be 35 percent under the act.



3. Starting in 2010, if you have more than $100,000 of modified adjusted gross income, you'll be free to switch an IRA to a Roth IRA. If you plan that conversion in 2010, you can spread the tax due over two years. Half the tax will be due in 2011 and the remaining half will be payable in 2012.



4. If you're engaged in, or plan to start, a business in construction, engineering or architectural services, film production or the lease, rental or sale of equipment that you manufacture, then the domestic production activities deduction will increase to nine percent of qualifying business net income.



5. If you're a homeowner, the special itemized deduction for mortgage insurance premiums paid on mortgages taken out after 2006 is slated to expire in 2011. 2010 marks the last year for this deduction.

Starting in 2011

1. If you plan to die after 2010, the federal estate tax will return to haunt you with a $1,000,000 exemption and a fifty-percent maximum rate, unless Congress has addressed the issue again for this year.



2. In 2011, the tax rate reductions for long-term capital gains and dividends is intended to expire, and rates may increase. If this tax law succeeds, the maximum long-term capital gains tax rate will go up to twenty percent from fifteen percent. A lower ten-percent tax rate will apply to individuals who are in the ten- and fifteen-percent tax brackets. Long-term capital gains for those in the lower tax brackets should remain tax-free (as of 2008).



3. Dividend income, other than capital gain distributions from mutual funds, is slated to be taxed as ordinary income at the taxpayer's highest marginal tax rate.



4. In 2011, the credit of $1,000 per eligible child may revert to $500.



5. If you are in business and if you purchase qualifying business property, you may elect to deduct the cost of the new or used property in the year that you place that property into service. This new “Section 179 Expense Deduction” is $125,000 as indexed for inflation.  In 2011 and for future years, the maximum deduction may drop to $25,000.

As I mentioned above and in the previous article, your participation with tax law changes may help alter how you pay taxes in upcoming years. If you're an Internet freak or if you stay on top of business journals, take note of any action that others are taking to help maintain or alter current tax laws. Their efforts may be in line with what you would like to see done. If that's the case, jump on board, as there is strength in numbers. If, however, you don't like what you see, then take it upon yourself to start an opposing initiative.

It's your money, after all – at least up to a certain percentage. The rest belongs to Uncle Sam.

Until Later,