Tax Season Launches

The 2009 income tax filing season got under way Friday, Jan. 16, as the IRS began accepting electronic filing of returns due April 15 for calendar year 2008. E-filing, available through tax preparation software used by most return preparers and many self-filing taxpayers, is again being promoted by the IRS as the most expeditious method of filing.

The IRS has announced that it has expanded its e-file program for this year, including its Free File program, which is available to taxpayers with 2008 adjusted gross income of $56,000 or less. The Free File program now includes online fillable forms that can be used by taxpayers regardless of income level to e-file. Vendors of tax preparation software generally charge a fee to e-file for taxpayers not income-eligible for the Free File program. However, some software providers are waiving the fee this year for first-time e-filers, the IRS said.

Responding to the current recession, the IRS has also announced a number of initiatives to help financially distressed taxpayers. IRS employees now have greater flexibility to suspend collection actions in certain hardship cases, such as where a taxpayer has recently lost a job or is facing significant medical bills. The IRS is also allowing more flexibility for hardship cases when a taxpayer misses a payment under an existing installment agreement.

Taxpayers receiving Form 1099-B, Proceeds From Broker and Barter Exchange Transaction, as well as other items that reporting entities customarily report with it on an annual composite form (including forms 1099-DIV and 1099-INT) might not receive them until after Feb. 17. The Energy Improvement and Extension Act of 2008, enacted Oct. 3, 2008, as part of the Emergency Economic Recovery Act, now requires brokers to report cost basis along with proceeds of securities sold. To provide relief in reporting the additional information, the law changed the information statements’ reporting deadline from Jan. 31 to Feb. 15, but that date falls on a Sunday this year, and Feb. 16 is a legal holiday, Presidents Day.

Changes affecting individual taxpayers for 2008 include higher, inflation-adjusted standard deduction and exemption amounts, as well as several extended and new deductions and credits. Taxpayers who own qualifying real property but don’t itemize their deductions, for example, can take advantage of the new additional standard deduction for state and local real property taxes paid in 2008, up to $500 for single filers and $1,000 for married couples filing jointly.

Another home-related item, the first-time homebuyer credit, became available for a qualifying taxpayer’s principal residence purchased between April 9, 2008, and June 30, 2009. The refundable credit of up to $7,500 must be repaid, so it is in effect an interest-free, 15-year loan. Deductions that expired at the end of 2007 but were extended for 2008 include the itemized deduction for state and local sales taxes and above-the-line deductions for educator expenses and qualifying post-secondary tuition and fees.

Taxpayers who were eligible for an economic stimulus payment in 2008 but didn’t receive one or had a qualifying child in 2008 may claim a recovery rebate credit. If a taxpayer receives this credit, it will be included in the taxpayer’s refund and will not be issued as a separate payment.

The maximum deductible contribution limit for traditional IRAs rose to $5,000 ($6,000 for individuals 50 or older) for 2008. The contribution limit for employer plans, including 401(k) and 403(b) plans, remains unchanged from 2007 at $15,500, as does the catch-up contribution limit at $5,000. The limits for 2009 are $16,500 and $5,500, respectively.

Descriptions of these and many other significant developments affecting individual returns in this filing season may be found in “Individual Taxation: Filing Season Update,” The Tax Adviser, January 2009.