New Tax Law Changes

As many are about to prepare their tax returns for the 2009 - a key for those who self-prepare returns or even those using a preparer is to make sure that all the new tax deductions and new tax credits are taken.

One that just about everyone is eligible for is the work credit.  If you remember back in April you probably saw a change in the amount of federal taxes withheld from your paycheck.  This change was the result of the “stimulus plan” going into effect.  The intention of the plan was to give taxpayers more to spend weekly or biweekly basis and then give a credit on the 2009 tax return to make up the difference.

That is the work credit.  For a single or head of household taxpayer the work credit is equivalent to $400.  That amount is $800 for a married filing joint couple.  To claim the work credit you must complete Schedule M.

Where individuals can end up in trouble is if they had more one job since the withholding would have been adjusted at each job.  Individuals receiving a pension saw an adjustment to their withholding but you are not eligible for the work credit unless you have earned income.

There is the new Energy Efficiency Credit available for insulation, exterior doors and windows, furnaces, and metal roofs.  Only certain doors and windows qualify – you need  to check irs.gov to see if the ones you purchased qualified or check with your installer.  Furnaces must be at least 95% efficiency in order to qualify.  The amount of  the credit is 30% of cost up to maximum of $1500.  The credit is available for 2009 and 2010.  You are eligible even if you took the $500 credit previously.

As part of this credit is improvements using solar, wind or geothermal energy.  These improvements can be taken with the 30% but there is not the $1500 limitation.

The education credits have changed.  The new American Opportunity Credit is a maximum of $2500 – 100% of the first $2000 of tuition and books and 25% of the next $2000.  Note this new credit includes books and course materials unlike the previous Hope Credit. You can take this credit for up to four years even if you previously took 2 years of the Hope Credit.

The income limits for the American Opportunity Credit are higher so you may find yourself eligible even if you previously could not take the Hope Credit.  If you do not qualify for the American Opportunity Credit there is still the Lifetime Learning Credit and the tuition and fee deduction. There are special rule for those in the Midwest Disaster area.  They are still eligible for the Hope Credit if that produces a higher credit amount.

A student must be at least half-time and working on an undergraduate degree to qualify for the American Opportunity Credit.

The American Opportunity Credit is 40% refundable.  Meaning even if you owe no tax you can get a refund of up to $1000 from the credit.

If you purchase a new vehicle during 2009 you are eligible to take the sales tax as deduction.  It is either claimed as a deduction with your itemized deductions or can be added to your standard deduction if you do not itemize.  To claim it as part of the standard deduction you must complete Schedule L.  The maximum purchase price that can be used in the calculation is $45,000.

For those states that do not charge sales tax on the purchase of a new vehicle, a deduction is availabe for certain fees charged.

Additionally for the purchase of a new car are the tax credits if you purchased a hybrid vehicle or an electric vehicle.  There a limitations to the hybrid credit since it available only on the first the 60,000 vehicles sold by a manufacturer.  A partial credit may be available if the full credit is not.  Check irs.gov to determine if your model is still eligible for the credit.  This credit is up to $3000 and does have income limitations attached to it.  Complete Form 8910 to claim this credit.

The electric vehicle credit is available for both full size models and the smaller low speed, two wheel and three wheel vehicles.  The full size credit is a maximum of $15000 and is available until 2016.  The smaller vehicle credit is a maximum of $2500 and ended on December 31, 2009.  Complete Form 8834.

Must individuals are aware of the first time home buyers credit.  This credit is 10% of the purchase price for a maximum of $8000.  To be a first time home buyer you or your spouse cannot have owned a primary residence in the past three years.  You must be under contract by April 30th and must close on the house by June 30th.

The new credit that came into existence on November 9th is the long term home buyer’s credit.  The same 10% of purchase price but for a maximum of $6500.  To qualify you must have owned lived in your previous primary residence for 5 of the last 8 years.

You must complete Form 5405 to claim this credit and you must attach a copy of the Statement of Sale or Settlement statement to your return.  This means you are ineligible to electronically file your tax return.

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