This section summarizes important changes that could affect your estimated tax payments for 2008.

Work opportunity tax credit. The work opportunity tax credit has been modified and extended through August 31, 2011. See Publication 954, Tax Incentives for Distressed Communities, for more information.

Personal exemption and itemized deduction phaseout. The amount by which these deductions are reduced in 2008 will be one-half of the reduction that applied in 2007. These reductions are reflected in Worksheets 2 and 3.

Capital gain tax rate reduced. The 5% capital gain tax rate is reduced to zero. This is reflected in Worksheet 5.

Clean renewable energy bonds. The credit for clean renewable energy bonds has been extended to bonds issued before December 31, 2008.

Forgiveness of mortgage debt. A law was just passed that may allow you to exclude from income part or all of the mortgage debt forgiven on your principal residence. This applies for debt forgiven in 2007 through 2009. See Publication 553, Highlights of 2007 Tax Changes, for more details.

Volunteer firefighters and emergency medical responders. Certain qualified payments and other state and local tax benefits are not included in taxable income. For more information, see Publication 553.

Insurance premiums for retired public safety officers. Beginning in 2007, if you are an eligible retired public safety officer, you may be able to exclude from your income the amount paid for certain insurance premiums. See Insurance Premiums for Retired Public Safety Officers, later.

Credit or exclusion for adoption benefits increased. The maximum adoption credit has increased to $11,650. The maximum exclusion from income for benefits received under an employer's adoption assistance program has increased to $11,650. These amounts are phased out if your modified adjusted gross income (AGI) is between $174,730 and $214,730. You cannot claim the credit or exclusion if your modified AGI is $214,730 or more.

Special rule for sales of principal residences by surviving spouses. A surviving spouse who sells his or her principal residence within 2 years after the spouse's date of death may be allowed to exclude up to $500,000 of qualified gain instead of $250,000. See Publication 553 for more information.

Earned income credit (EIC). You may be able to take the EIC if:

The maximum investment income you can have and still get the credit has increased to $2,950. For more information, see Publication 596, Earned income Credit (EIC).

Retirement savings plans. The following paragraphs highlight changes that affect individual retirement arrangements (IRAs) and pension plans. For more information, see Publication 590, Individual Retirement Arrangements (IRAs). Traditional IRA deduction limits increased. You and your spouse, if filing jointly, each may be able to deduct up to $5,000 ($6,000 if age 50 or older at the end of the year). You may be able to take an IRA deduction if you were covered by a retirement plan at work and your 2008 modified adjusted gross income (AGI) is less than $63,000 ($105,000 if married filing jointly or a qualifying widow(er)). Retirement savings contributions credit. For 2008, you may be able to claim this credit if your modified AGI is not more than $26,500 ($53,000 if married filing jointly, $39,750 if head of household).

Standard mileage rates. Beginning in 2008, the standard mileage rate for the cost of operating your car is:

Tax on child's investment income. Form 8615 will be required to figure the tax for the following children with investment income of more than $1,800.

The election to report a child's investment income on a parent's return and the special rule for when a child must file Form 6251, Alternative Minimum Tax—Individuals, also will apply to the children listed above.

Extended Tax Benefits. 

Expired Tax Benefits. 

The following tax benefits expired and, unless extended, will not apply for 2008.

Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

The federal income tax is a pay-as-you-go tax. This means you must pay the tax as you earn or receive income during the year.

As a wage earner, you pay federal income tax by having it withheld from your pay during the year. This is your “withholding.” Your withholding is based on the number of allowances you claim when you file Form W-4, Employee's Withholding Allowance Certificate, with your employer.

The purpose of this publication is to help you check your withholding and, if necessary, prepare Form W-4 to adjust your withholding. When you first begin a job, you must complete a Form W-4 and give it to your employer to establish your initial withholding. You can adjust your withholding by giving a new Form W-4 to your employer at any time.