New deductions, credits could save you some pain at tax time
Published: Saturday, January 23, 2010 at 6:01 a.m.
Last Modified: Friday, January 22, 2010 at 2:19 p.m.
More forms to file. New and expanded credits and deductions.
IRS + YouTube
Amid all the music videos and celebrity news, cute animal shots and comedy routines, you'll find some helpful tax tips from the Internal Revenue Service on YouTube.
The IRS channel on www.YouTube.com features dozens of videos informing people about new credits and deductions and other changes in the tax law.
Launching the YouTube channel was “a natural choice” for the IRS, said Terry Lemons, the agency's senior spokesman. “Our approach is to use multiple avenues to get information out to people.”
There are currently 70 to 75 videos.
“Here's a tip from the IRS,” the videos begin. They cover such issues as the new homebuyer tax credit, the sales and excise tax deduction for new car purchases and use of the withholding calculator to make sure you're not having too much tax withheld as part of the Making Work Pay credit.
The videos feature IRS employees. There are versions in English, Spanish and American Sign Language. Most run about a minute or a minute and a half, although there are some longer how-to videos on topics such as how to track a refund. All refer people to the IRS Web site, www.irs.gov.
Numbers to know
Important numbers as you prepare to file your 2009 tax return:
Each personal or dependent exemption is now worth $3,650, up $150 from 2008.
$11,400 for married couples filing a joint return and qualifying widows and widowers
$5,700 for singles and married individuals filing separate returns
$8,350 for heads of household
You may be able to claim a higher standard deduction if you are 65 or older, blind, paid state or local real estate taxes or sales or excise taxes on a new vehicle, or were a victim of a federally declared disaster.
Alternative minimum tax exemption:
$70,950 for a married couple filing a joint return, and qualifying widows and widowers
$35,475 for a married person filing separately
$46,700 for singles and heads of household
Home buyer credit:
Up to $8,000 for first-time homebuyers for purchases made through April 30, 2010
Up to $6,500 for longtime homeowners for purchases made between Nov. 7, 2009, and April 30, 2010
To qualify, the home must be used as a primary residence. The credit begins phasing out for married couples filing jointly with modified adjusted gross incomes above $225,000 and for individuals with incomes above $125,000.
Energy efficiency credit:
30 percent of the cost of installing energy-efficient windows or doors, air conditioners or furnaces, or other energy-saving improvements, up to a maximum $1,500
American Opportunity Credit:
Up to $2,500 to cover college tuition, fees and required course materials
To qualify, the student may not have completed four years of college. There also are income limits.
Earned Income Tax Credit:
The maximum Earned Income Tax Credit was raised to:
$5,657 for people with three or more qualifying children
$5,028 for people with two children
$3,043 for those with one child
$457 for people with no children
If you're covered by a retirement plan at work, the maximum modified adjusted gross income you can have and still take a deduction for IRA contributions rose to $65,000 - $109,000 if married filing jointly. The maximum deduction is $5,000 - $6,000 if you were 50 or older by the end of 2009.
Long-term capital gains taxes:
0 percent if taxed in the 10 percent to 15 percent brackets
15 percent maximum for taxpayers in higher brackets
55 cents for each mile driven for business
24 cents for each mile driven for medical reasons or part of a deductible move
14 cents for each mile driven as part of charity work
When taxpayers sit down to file their 2009 returns, they will find plenty new - some the result of adjusting for inflation, and others changes passed by Congress last year to try to bring the country out of recession.
“Depending on their individual situation, there could be good news, and there could be bad news,” said Amy McAnarney, executive director of the Tax Institute at H&R Block.
Some things affect all taxpayers. The personal exemption, for example, has increased, to $3,650 each for the taxpayer and dependents, up $150 from 2008.
And tax brackets have been adjusted upward by about 5 percent since 2008, said Greg Rosica, tax partner at Ernst & Young and a contributing author to the “Ernst & Young Tax Guide 2010.” That means you might not jump to a higher tax bracket if you earned more.
“Certainly, there are benefits there for all taxpayers,” Rosica said. “There are ones that span the entire income spectrum out there.”
Other revisions are more likely to affect low- and moderate-income workers. Income limits for the earned income tax credit have been raised, and there's a new category: families with three or more children. The Internal Revenue Service says one in six taxpayers claim the credit.
Still other changes affect those at higher income levels. The exemption for the alternative minimum tax has been increased once again, this time to $70,950 for joint returns and $46,700 for individuals. If your income is higher than these amounts, you could be subject to the AMT tax.
These changes are among those that happen every year, to keep taxes in line with inflation. But there are a host of other revisions, new for 2009, that will make filing your tax return this year a little more complicated.
For one thing, the standard deduction for taxpayers who don't itemize has become a little less standard.
The standard deduction itself has increased, to $11,400 for married couples filing jointly, $5,700 for individuals and $8,350 for heads of household. As before, it is even bigger if you are blind or age 65 or older.
But new this year, you can take more of a standard deduction if you paid state or local real estate taxes, bought a new car and paid sales or excise taxes and met the income limits, or were a victim of a federally declared disaster.
If you choose to increase your standard deduction by one or more of these items, you'll have to file a new form, Schedule L. Otherwise, you can just enter the standard deduction on Form 1040.
The three deductions - for state or local real estate taxes, sales or excise taxes on new car purchases or net disaster losses - also can be taken by people who itemize.
There are expanded tax credits for home purchases and education. And a tax credit for making your home more energy-efficient has been reinstated.
Tax experts caution people to be careful that they're claiming every deduction and credit to which they're entitled. A credit reduces the amount of tax you owe; a deduction reduces the income on which taxes are assessed.
You're likely already receiving the benefit of the Making Work Pay credit under the stimulus bill that Congress passed last year. However, you might have to pay a portion back if you're a married couple and both spouses work, or if you have more than one job. If you're a low- or moderate-income worker, you might have some money due to you. A new form, Schedule M, will have to be filed to claim the credit.
“Each year carries with it changes in the tax law. It's important that people understand what has changed in their personal situation,” Rosica said.
Did you get married or have a baby? Did you buy or sell stock? Did you inherit money, property or other goods?
Jeff Schnepper, MSN Money tax expert, recommends that people sit down with a tax professional at least once every three years to review their life changes and financial situation.
“First of all, it's deductible,” he said. “Second of all, if you're not a professional, you don't know the minutiae. You don't know all the things you can do right, and you don't know all the things you're about to do wrong.”
Experts point to common mistakes that people make, which could delay a refund.
According to the Ernst & Young tax guide, some of these errors are mathematical. Others involve omission - like failing to include your Social Security number or those of your dependents. Make sure you pick the correct filing status - head of household or surviving spouse instead of single, for example. And don't forget to sign your return.
Last year, the IRS received more than 141 million tax returns. Of those, about 70 percent were filed electronically. More than 110 million filers were due refunds, averaging $2,753 each.
The IRS encourages people to file electronically, saying it reduces errors and enables people to get their refunds more quickly. People who file electronically and use direct deposit can get their refunds as soon as 10 days after they file.
This year, the agency estimates that it will take taxpayers using form 1040 an average 21.4 hours to complete their taxes. That includes record keeping, tax planning and completing and filing the return. The more complicated your return, the more time it will take to complete it.
One major thing that taxpayers will find different this year is the homebuyer tax credit.
“It's already gone through three iterations,” said Mark Luscombe, principal analyst for CCH's tax and accounting group.
In 2008, the credit actually was an interest-free, long-term loan. For people who purchased a home in 2009, the credit is a true credit - it only has to be paid back if you stop using the home as your principal residence within three years of purchase. The credit is $8,000 for first-time homebuyers, defined as those who haven't owned a home in the last three years.
Congress also added a credit for long-time homeowners who purchase a new principal residence - $6,500. To qualify, a homebuyer would have had to live at least five years in a previously owned home.
There are income limitations for both.
There also is an expanded credit for college education.
The new American opportunity credit provides a maximum annual credit of $2,500 per student for each of the first four years of college. The Hope credit that the new credit replaces temporarily covered only the first two years and for most people was smaller. To be eligible, taxpayers would have to pay $4,000 or more in tuition, fees and course materials.
The credit, which phases out at higher incomes, is 40 percent refundable. “This means that even people who owe no tax can get an annual payment of the credit up to $1,000 for each eligible student,” the IRS said.
What about those students who take more than four years to finish college? “If you're in your fifth year, you're out of luck,” Luscombe said.
However, there is another credit - the lifetime learning credit - that may be available for students in their fifth or sixth year of college or in graduate school.
Other changes include the reinstatement of the credit for making your home more energy-efficient. The maximum credit has increased, to $1,500 for $5,000 in expenditures on things like insulation, storm windows or an energy-efficient furnace.
For people who lost jobs, the first $2,400 in unemployment benefits is not taxable.
To benefit from most of the tax breaks, you would have had to take action before the end of 2009. But there are a couple of exceptions.
You still might be able to claim the homebuyer credit if you have a signed contract by April 30.
And, if at the end of the day, you find you owe the IRS money or want a bigger refund, you might be able to contribute to an individual retirement account until April 15 and take a deduction on your 2009 taxes.
If you're covered by a plan at work, you might be able to deduct a contribution of $5,000 — $6,000 if you're at least 50 - if your modified adjusted gross income is less than $65,000 if you're filing as an individual or $109,000 if you're married filing jointly.
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