The so-called “kiddie tax” has been expanded for 2008, and young adults may now be ensnared in its trap. The kiddie tax basically treats the investment income of children as if it were received by their parents. So instead of a child paying tax on the investment income at a low tax rate, the tax is computed in the parents’ higher bracket. In 2007, the kiddie tax applied only to taxpayers under age 18. For 2008, it applies to taxpayers who are either (1) under age 19 or (2) age 19 through age 23 and are full-time students.

Starting in 2008, the capital gains tax from the sale of stocks, real estate and the like will be eliminated for taxpayers in the bottom tax brackets. Tax law changes had reduced this tax rate to 5% by 2007, but in 2008 the tax rate is 0%. However, this freebie may not be around forever. Unless Congress takes action, the capital gains tax will increase starting 2011.  If you are eligible, you may want to strike while the iron is hot!

Starting in 2008, you may be able to get more tax savings from your personal exemption and itemized deductions (Schedule A). Tax rules limit your tax savings if your income is too high ($239,950 for Married Filing Jointly and $159,950 for Single). The good news is that this limit is being gradually relaxed. Tax savings you lose in 2008 will only be one-half of what you lost in 2007, and in 2009, you lose nothing on these deductions.