February 3rd, 2010 3:38 PM by Korene L Clopine-Seaman
The recession has led to new tax credits and deductions.
The changes along with increases in the standard deduction, personal exemption, alternative minimum tax exemption, and a few others may bring a little extra cash to some people during these economic hard times OR NOT.
Lawmakers tried to aid the ailing auto industry by producing a new deduction for sales and excise taxes incurred in the purchase of a new car. That's on top of the Cash for Clunkers program, which brought hundreds of thousands of people into auto showrooms around the country.
The first-time homebuyers credit was expanded to allow for a reduced credit for long-time homeowners who buy and move to another residence. The National Association of Realtors estimated that about 4.4 million people already have or will claim the credits before they expire.
And to put a little more money in consumers' wallets, the Making Work Pay tax credit kicked in last spring. Tax withholding tables were revised downward to give individuals up to $400 and couples up to $800. The result: more take-home pay for about 95 percent of working families.
There's a catch, though.
People with more than one job, couples in which both spouses work and some Social Security recipients may have received too much of a credit because of the way the program was set up. "It may wind up that they owe taxes or the big refund they expected might not be as big as they thought," said Barbara Weltman, author of J.K. Lasser's "1001 Deductions and Tax Breaks 2010" and "Small Business Taxes 2010."
Taxpayers have a new form, Schedule M, to claim the credit. However, like other changes to tax-rate brackets and personal exemptions, most workers already are seeing its benefits in their take-home pay. Weltman said the form isn't that complicated. "The shock is going to be whether you owe more than you think," she said.
The Treasury Department's inspector general for tax administration estimated that more than 15 million people could be affected. The extra tax bill could be up to $400 for individuals or couples or $250 for Social Security recipients.
So why give people the money in the form of lower withholding if there's a chance the government will take it back?
I think at the time lawmakers were just more concerned about getting the money into the hands of Americans and giving the impression of helping the American voter than they were with the long term economic effects this generated.
By the same token, the Internal Revenue Service says some taxpayers whose withholding was at or near zero may not have benefited from the credit during 2009. These people are predominantly low- or moderate-income workers.
It is important that people review their withholdings for 2010 because the tax credit will still be in effect.
Schedule M isn't the only new form for the 2009 tax year.
People who don't itemize their deductions are entitled to take a standard deduction. For 2009, it's $11,400 for married couples filing jointly, $5,700 for individuals and $8,350 for heads of households. As in the past, the standard deduction is bigger for people who are blind or 65 or older. If that's all you're claiming for your standard deduction, there are no extra forms to file. The IRS predicts that the majority of those claiming the standard deduction will fall into this category.
The standard deduction is not standard any more. Tax law changes passed by Congress in 2009 allow some taxpayers to increase their standard deduction even more, by adding to it the property taxes they paid, their sales or excise taxes on the purchase of a new car, or net federal disaster losses.
Taxpayers will have to file the new Schedule L to claim the higher standard deduction.
You have a full-page schedule that you have to figure out for your standard deduction. If you are not using a computer program like TurboTax or somethig similar you are coming to be lost. Even tax practioners and tqax experts have no idea with so many changes.
Homeowners can increase their standard deduction by a maximum $1,000 for joint filers or $500 for individuals if they paid state or local real estate taxes. The home has to be used for personal use. Business or investment properties do not qualify.
Think of all the people who bought a new car, truck, motorcycle or motor home after Feb. 16, 2009. They can add the sales or excise tax they paid to the standard deduction, provided that the vehicle cost less than $49,500. The deduction begins phasing out for individuals with incomes above $125,000 or joint filers earning more than $250,000. The deduction only applies to new vehicle purchases so if you bought a used car or leased a car, you are out of luck. Those who itemize deductions also may qualify for the motor vehicle sales tax deduction — provided they meet the income limitations.
The sales tax deduction is separate from Cash for Clunkers, which gave people rebates if they traded in cars for more fuel-efficient ones. The government estimated that nearly 700,000 people turned in gas guzzlers under the program in exchange for rebates of $3,500 or $4,500. If you did get a rebate, it is not taxable income. If you bought a car under the Cash for Clunkers program you can also deduct the sales tax.
When you add to motor vehicle sales tax deduction, Cash for Clunkers, the credit for certain hybrid models you may find that 2009 was a great time to buy a new car.
Let us not forget the homebuyer tax credits that have helped raise sales of new and existing homes.
There actually are three versions of the homebuyer tax credits. If you were a first-time homebuyer in 2008, the credit actually was a long-term loan that has to be repaid over 15 years. For first-time home buyers in 2009, the credit was a true credit; it doesn't have to be repaid. And long-time homeowners who purchased a home on or after Nov. 6, 2009 are eligible for a smaller credit.
The credits expire April 30, 2010 but as long as you have a binding contract by that date you can still get the credit if you close by June 30, 2010.
Because of the the IRS is putting in place new systems to verify claims to the homebuyers credit because of fraud potential. The IRS expects to begin processing tax returns claiming the credit in mid-February, after testing is completed. Some of these early taxpayers claiming the homebuyer credit may see tax refunds take an additional two to three weeks according to the IRS.
Congress also created the American opportunity education credit. The credit of up to $2,500 for college expenses is an expanded version of the Hope credit, available to students for the first four years of college instead of just the first two. Although the credit still phases out at higher incomes, those limits are higher than under Hope. Students must be enrolled at least half-time.
Hiring help OK, not just any help. But if you need to pay for child care because you are donating time to a nonprofit organization or you are doing charitable work you can deduct that fee from your 1040 form. That's right — if you pay someone to babysit because you're working for someone for no pay, you can write it off. Admirable to be sure, but it seems like a long way to go around the bend to save a little on your tax bill.
Medically necessary massagesSince this deduction was originally written into the tax code in 1962, accountants and tax lawyers have made sure their clients are keeping all their doctor's notes. The rule states that anything that your doctor prescribes as "medically necessary" can be deducted from your taxes.
That means that if your doctor tells you to get therapeutic massages you can keep the receipts and knock that expense off as deductible. The same goes for aqua therapy (backyard pool installation and maintenance anyone?) and restrictive diets (make that call to Jenny Craig).
However be aware that the IRS combs through medical deductions very carefully so don't try to get creative or it could end up costing you much, much more.
Shipping Fido So FedEx won't really overnight your family's pooch — but you can deduct the expenses associated with moving any of your personal effects due to a job-related relocation. And, as a personal effect, your favorite animal's transportation can be written off your personal taxes.
Attorney fees for illegal activityIt's true. While you are required to pay taxes on any income earned through illegal activity such as theft, bribery or drug-dealing, if you are unfortunate enough to get caught, the good news is you can write off the cost of hiring an attorney to defend you during your trial.
To ride the windConcerned about the environment? Not worried about what your neighbors think? Consider installing a wind energy system and you could get a tax write-off. Put up one of those attractive wind turbines that dot the plains and Uncle Sam will repay your environmental kindness with a nice little break on your tax return.
Houseboat ahoy! Most of us know that you can deduct the interest you pay on your mortgage but we typically tend to envision a neat single-family home surrounded by a white picket fence. However if you got a loan to finance a houseboat that you call home (provided it has sleeping, cooking and "toilet facilities"), you can write that interest expense off as well. I wonder if the Captain, Gilligan and his crew split the write-off?
If you are a small business owner the list of potential tax breaks can sound just downright strange.
Anything that is can be demonstrated to be a legitimate "ordinary and necessary" business expense can be deducted.
So that means you might be able to deduct the following:
Jetting off to JamaicaIf you decide to reward your employees with a company retreat in Bob Marley's home country, or to plan your company's next strategy meeting in sunny Barbados the tax man will allow you to write it off. In fact any business meetings held in some of the most beautiful places in this hemisphere including Barbados, Costa Rica, Dominica, the Dominican Republic, Grenada, Guyana, Honduras, Jamaica, Saint Lucia and Trinidad and Tobago — not to mention Canada, Mexico and any U.S. state or territory — can be claimed as a legitimate, and deductible, expense.
Captain Ahab would approveTo help Native American Eskimos in his home state preserve their cultural heritage and custom of whale-hunting, former Senator Ted Stevens was able to insert a $10,000 deduction for qualified whale-hunting expenses in the American Jobs Creation Act of 2004.
So if you're a whaling captain recognized by the Alaska Eskimo Whaling Commission you can write off money that you shell out for whale-related work expenses like repairing your boat or buying food for your crew.
Shipping sheep If you are a farmer and you need to pay for sheep — or any other qualified form of livestock including "fur-bearing animals" — to be shipped to your ranch, you can write if off on your taxes.
Remember this is my blog! It is not tax advice but food for thought. You need to consult your own tax practitioner to get the legal and proper advice that applies to you.