Publication #17 from the IRS, Your Federal Income Tax, is one of the most important tax booklets issued by the IRS each year. It features details on taking advantage of new tax-saving opportunities, such as the making work pay credit for most workers, American opportunity credit for parents and college students, energy credits for homeowners going green, first-time home buyer credit, sales or excise tax deduction for new car buyers, and the expanded child tax credit. Off course, most people don’t have the time or the interest in going through all the 308 pages in the publication. Luckily for you, I’ll be doing that over the next few weeks and will point out the most useful tax breaks that 95% of us can take advantage off.
In this article, I’ll cover some of the tax items that were new in 2009 and may well have a very positive impact when filing your tax return in 2010. In particular I will focus on the economic recovery tax credits and deductions most Americans received under the President’s $787 billion economic stimulus package. The good news is that the Economic recovery payments you received are not taxable for federal income tax purposes, but it could have impacts on your overall tax situation and deductions in 2010 since the credits are part of your gross income.
Making work pay credit. If you have earned income from work, you may be able to take this credit. It is 6.2% of your earned income but cannot be more than $400 ($800 if married filing jointly). See this post for details on the making work pay credit and how it has been extended into next year.
Government retiree credit. You may be able to take this $250 credit if you get a government pension or annuity, but it reduces any making work pay credit. This SSI credit has been extended into 2010 as well, to offset the lack of a COLA increase. The Making working Pay $400/$800 credit is being paid by the IRS (via adjusted withholding tables for employers), while the $250 social security payment is being paid out by the SSA
Cash for clunkers. A $3,500 or $4,500 voucher or payment made for such a voucher under the CARS “cash for clunkers” program to buy or lease a new fuel-efficient automobile is not taxable for federal income tax purposes. This widely successful program was heavily used and was rumored to have single handedly saved the US auto industry from total collapse over the summer. The $3 billion Cash for Clunkers program was shut down at the end of August and you should have got your rebate from the dealer when buying the car.
2009 and 2010 First-time home buyer credit. The credit increases to as much as $8,000 ($4,000 if married filing separately) for homes bought after 2008 and before May 1, 2010 (before July 1, 2010, if you entered into a written binding contract before May 1, 2010). You can choose to claim the credit on your 2009 return for a home you bought in 2010 that qualifies for the credit. You generally must repay any credit you claimed on your 2008 return if you sold your home in 2009 or the home stopped being your main home during 2009. For more information on these changes and other changes when the credit was extended into 2010, see 2010 Extension of $8,000 First Plus New $6500 Existing Home Buyer Tax Credit From the 2009 Stimulus Package and Increase in Income Limits
Unemployment compensation. You do not have to pay tax on unemployment compensation up to $2,400 per person for the year. Amounts over $2,400 are still taxable.
American opportunity education credit. The maximum Hope education credit was increased to $2,500 and is available for 2009 and 2010. The increased credit has been renamed the American opportunity credit and part of it is refundable. This new education tax credit (a modification of the Hope credit). The maximum credit per student is $2,500 (100% of the first $2,000 and 25% of the next $2,000 of qualified education expenses). The credit is available for the first 4 years of post secondary education, and 40% of the credit is refundable for most taxpayers. For 2009, the amount of your credit is gradually reduced (phased out) if your modified adjusted gross income (MAGI) is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return). You cannot claim a credit if your MAGI is $90,000 or more ($180,000 or more if you file a joint return).
Deduction for motor vehicle taxes. If you bought a new motor vehicle in 2009 after February 16, you may be able to deduct any state or local sales or excise taxes on the purchase. In states without a sales tax, you may be able to deduct certain other taxes or fees instead. Take the deduction on Schedule A (Form 1040) if you are itemizing deductions and are not electing to deduct state and local general sales taxes. If you are not itemizing deductions, these taxes increase your standard deduction as figured on Schedule L (Form 1040A or 1040).
Tax on child’s investment income. The amount of taxable investment income a child can have without it being subject to tax at the parent’s rate has increased to $1,900. This tax free income should encourage all parents to teach their kids to invest and take advantage of any tax free income.
Alternative minimum tax (AMT) exemption amount increased. The AMT exemption amount is increased to $46,700 ($70,950 if married filing jointly or a qualifying widow(er); $35,475 if married filing separately).
Standard mileage rates. For 2009, the standard mileage rate for the cost of operating your car for business use is 55 cents per mile. See this article, 2010 vs. 2009 Standard Mileage Rate Tax Deduction Breakdown & Rules for more details and 2010 rates.
Retirement savings plans. Traditional IRA income limits. You may be able to take an IRA deduction if you were covered by a retirement plan and your modified AGI is less than $65,000 ($109,000, if you are married filing jointly or a qualifying widow(er). If your spouse was covered by a retirement plan, but you were not, you may be able to take an IRA deduction if your modified AGI is less than $176,000.
Roth IRA income limit. You may be able to make a Roth IRA contribution if your modified AGI is less than $120,000 ($176,000, if you are married filing jointly or a qualifying widow(er). Retirement savings contributions credit. The AGI limit for claiming this credit is increased to $27,750 ($41,625 if head of household; $55,500 if married filing jointly). For IRA purposes, your compensation includes any military differential pay you receive from your employer while you are serving on active duty for a period of more than 30 days.
Elective salary deferrals. The maximum amount you can defer under all plans is generally limited to $16,500 ($11,500 if you have only SIMPLE plans; $19,500 for section 403(b) plans if you qualify for the 15-year rule). The catch-up contribution limit for individuals age 50 or older at the end of the year is increased to $5,500.
Certain amounts increased. Some tax items that are indexed for inflation increased for 2009. Standard deduction. The standard deduction for taxpayers who do not itemize deductions on Schedule A (Form 1040) has increased. The amount depends on your filing status. You are allowed a $3,650 deduction for each exemption to which you are entitled. However, you will lose part of your exemption amount if you have high income. Some of your itemized deductions may be limited if your adjusted gross income is more than $166,800 ($83,400 if you are married filing separately). The maximum wages subject to social security tax (6.2%) increased to $106,800. All wages are subject to Medicare tax (1.45%).
COBRA subsidy. The 65% subsidy for payment of COBRA health care coverage continuation premiums is not taxable and cannot take this credit in your 2009 tax return. The subsidy is provided to an assistance-eligible individual only in the form of reduced COBRA premiums. That is, the assistance-eligible individual only has to pay 35% of the premium in order to receive COBRA coverage. The employer is reimbursed for the remaining 65% through a credit on its payroll tax returns.
Limit on exclusion of gain on sale of main home. Generally, gain from the sale of your main home is no longer excludable from income if it is allocable to periods after 2008 when neither you nor your spouse (or your former spouse) used the property as a main home. For details on this see, Taxes and Gains I Can Exclude When Selling My Home.
To get Publication 17, go to www.irs.gov and enter “17” in the search box in the upper right corner of the home page. Those who do not have access to the Internet can call 1-800-TAX-FORM (829-3676) to request a free copy from the IRS.