Some new relief as Americans file 2008 taxes

updated 1:40 p.m. ET Jan. 26, 2009

WASHINGTON - If you're a first-time home buyer, victim of a natural disaster, or if you installed a small wind turbine in your backyard to generate electricity, you could find some tax relief when you file your 2008 return.

There also are new incentives to save for retirement, and some popular tax breaks have been renewed.

Start filling out your taxes, in fact, and you might find, "The IRS really gives me an opportunity to save some money this year," said Jeff Schnepper, MSN tax expert and author of books on taxes and finance.

Knowing what to look for is key. "The tax code is convoluted, complicated, and even the tax pros aren't sure," he said.

The Internal Revenue Service makes this suggestion: "Just make sure you're not overlooking anything," said Terry Lemons, senior spokesman for the agency.

Some of the changes this year are aimed at helping homeowners — and stimulating the economy during what some analysts say could become the longest recession since the Great Depression.

Homebuyers' tax credit
First-time homebuyers are eligible for a maximum credit of $7,500. But there's a catch: The credit is actually an interest-free loan that must be paid back over 15 years. If you take the full credit, you will have to pay back $500 a year. If you sell the house before the 15 years is up, the full amount will be due.

To qualify, taxpayers cannot have owned a home in the previous three years and must use the property as their principal residence. The home must have been purchased between April 8, 2008 and July 1, 2009.

Like many tax credits, this one is phased out at higher incomes. Use Form 5405 to file.

A homeowner who doesn't itemize will be able to get an additional standard deduction up to $500 — or $1,000 for joint filers — for state or local real estate taxes. Before, you could only take a deduction for these taxes if you itemized. This is expected to help the elderly and others who have paid off their mortgages and no longer have mortgage interest to deduct. That deduction often is the kicker for itemization.

If you were the victim of a federally declared natural disaster in 2008, you also can increase your standard deduction by your net loss.

For all taxpayers, the standard deduction is increasing — to $10,900 for married couples filing a joint return, $5,450 for singles and married filing separately, and $8,000 for heads of household.

The value of a personal exemption also is rising: to $3,500, up $100 from 2007.

The higher standard deduction and personal exemption were put in place to account for inflation.

Last year, more than 155 million individual tax returns were filed. More than half were filed electronically, either by a software preparer or from a home computer. The average refund was $2,429.

The IRS expects e-filing to increase this year, especially as it expands its Free File program and providers of tax preparation software drop fees. To be eligible for Free File, you must have an adjusted gross income of $56,000 or less. The program in essence interviews you and helps walk you through filing.

However, there's another option if your income is above that. Free File Fillable Tax Forms are basically paper tax forms on the computer. You put in the data on your own and the program does the basic math. You can file it electronically regardless of income.

"It may be just right for those who are comfortable with the tax law or those who use electronic software to prepare their returns but file using paper forms," the IRS says.

Electronic filing, experts say, has a couple of key advantages: more accurate returns and quicker refunds. The IRS says the system safeguards a taxpayer's personal information, a view echoed by Bob Meighan, vice president of Intuit Inc.'s Consumer Tax Group. The company publishes the tax-preparation software TurboTax.

MSN's Schnepper says he's "less than secure with the system." Still, he says, "e-filing is the wave of the future."

In any case, he advises, keep good records. "What I tell my clients is get receipts for everything that's deductible," he said. Although you don't have to submit them to the IRS, you need a check or written receipt for every charitable contribution.

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