That is the great question this tax season. President Obama’s plan to help the American taxpayer by with holding less tax from their paycheck may just backfire. For many taxpayers, especially low to moderate income taxpayers, those working more than one job could be surprised to find out that they owe money this year to good ole’ “Uncle Sam.”
When the plan was put into place to give taxpayers more take home money, their was not a plan in place for those that are working more than one job, receiving a pension and working another job, two income families and students that are claimed by a parent to communicate with a unified system. So an example would be one system doesn’t know the other one gave the taxpayer a credit so in fact they will get two credits, one from each employer thus creating a new shortage.
Be smart, be tax wise. Knowing current changes in the tax law, tax credits and refunds is imperative for your financial stability. If you are not sure of “What’s new, in the tax world,” work with a professional tax preparer, one that has your best interest in mind – not their pocketbook. The only time you should pay a contingent fee to a tax preparer, based on a percentage could possibly be on an amended return or a payment negotiation or offer in compromise plan. All other times you should pay either a flat fee based on your tax return and schedules or an hourly rate.
With that said, let’s look at what’s new this tax season. As we enter the 2009 season, corporate returns are due the 15th day of the third month of the end of the tax year, ex: tax year ends 12/31/2009, Corporate return is due March 31, 2010 while individual returns are due April 15 and a 6 month extension will be auto granted by completing Form 4868 Application for Automatic Extension of Time to File U.S. Individual Tax Return, this extension can be e-filed.
There was a lot of tax legislation during 2009, that affected quite a few credits, with the two newest being The Make It Work Pay Credit, and The American Opportunities Credit. There was also a revision made to the First Time Home Buyers credit making it possible for existing home-buyers purchasing a new principle dwelling to get a tax credit as well.
Many of the new credits are refundable credits. The difference between refundable and nonrefundable credits is nonrefundable credits only reduce your tax liability and can zero it out. A refundable credit is a credit that the taxpayer receives that actually puts cash in their pocket. Taxpayers can receive a refundable credit even if they are not paying any income tax.
The Nonrefundable credits are:
o Child and Dependant Care Credit
o Child Tax Credit
o Hope Education Credit
o Lifetime learning Credit
o Residential Energy Credit
o Retirement savings Credit
The Refundable credits are:
o Making Work pay Credit
o Earned income Credit
o Additional Child tax Credit
o Government Retiree Credit
o First-time Homebuyer’s Credit
BOTH Nonrefundable and refundable
o American Opportunity Education Credit
As always there is also adjustments for inflation as well as other tax law revisions and income limit changes.
Let’s go through the changes brought about by, The American Recovery and Reinvestment Act of 2009:
Making Work Pay Credit & Government Retiree Credit
Both are refundable credits, both are claimed on the New Schedule M, Standard Deduction for Certain Filers. There is a maximum of $400.00 for the two combined credits per individual. The maximum for the government retiree credit as a stand alone is $250.00 per retiree. The total of the two must be reduced if a $250.00 economic stimulus payment was received in 2009. The only way it was received is if you are receiving Social Security benefits, and were receiving them in Nov. 2008, Dec. 2008 and Jan. 2009 you would have received the $250.00 credit. This credit must be deducted from the Make IT Work pay credit if you qualify to receive both.
The maximum Make It Work pay credit is 6.2% of earned income. In order to receive this credit the tax payer must have earned income. Earned income includes both wages and self-employed income. The taxpayer cannot be claimed as a dependent by someone else to qualify for this credit. Non-resident aliens are not eligible. A valid social security number is required if single, if married one individual must have a valid social security number.
The American Opportunity Credit is an expansion of the Hope credit. The credit can now be used for the first FOUR years of post-secondary education. The maximum credit is $2500.00, 100% of the first $2000 of expenses, and 25% of the next $2000.00 of expenses. Expenses can now include BOOKS, tuition, fees and other required course material. This credit cannot be taken the same year the tuition and fees deduction is claimed for the same student. Qualified tuition and expenses has been elaborated on to include expenditures for “course materials.” For IRS purposes course materials include books, supplies, and equipment needed for a course of stuffy whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance. This is the key as to whether or not the computer or software is included as a deduction or not.
The student must be taking at least one-half of the full time course requirements. This credit cannot be used with married filing separately status. The student cannot have had a felony conviction for possessing or distributing a controlled substance. Forty percent ($1000.00) of this credit is refundable.
The student must be taking at least one-half of the full time course requirements. This credit cannot be used with married filing separately status. The student cannot have had a felony conviction for possessing or distributing a controlled substance. Forty percent ($1000.00) of this credit is refundable. This credit is effective for both 2009 and 2010 tax years.
Unemployment Compensation – The first $2400.00 is not taxable for the 2009 tax year.
Sales tax on a new car purchase – This deduction is added to the standard deduction for vehicles purchased after February 16, 2009 and before January 1, 2010. The vehicle can be a car, motorcycle, van or truck weighing 8,500 lbs or less. It can also be used for the purchase of a motor home -no weight limit applies. The deduction is for state and local sales tax paid on above said vehicles with a purchase price up to $49,500.00. This deduction is claimed on Schedule L, Standard Deduction for certain Filers.
Residential Energy Credit – Residential energy credits for non-business properties have been reinstated. This is a non-refundable credit up to 30%, limited to $1500.00 of the cost of certain energy-efficient home improvements. The credits are claimed on form 5695, Residential Energy Credit. The 2009 credits are more restrictive than previous years. Manufacturers are allowed to certify that their products qualify for the Residential Energy Credit. The qualifying items are:
o Furnaces/Heat pumps
o Air conditioners
o Water heaters
o Windows and Doors
o Insulation and Roof materials
First-time Home Buyers Credit
This credit originally was for only first-time homebuyers in 2008. In 2008 the credit was $7500.00 maximum or 10% of the purchase price. The homebuyers could not have owned a home in the last three years. This credit was available during April 9, 2008 through December 31, 2008. This credit was a refundable credit putting hard cash into the hands of the first time homebuyer. This could also be claimed on your 2008 (as an amended return) or 2009 tax return. This credit must be repaid over a fifteen year period, with repayment being $500.00 per year for fifteen consecutive years starting repayment in 2010. Use From 5405 for this credit.
Then the new one kicked in on January 1, 2009 through November 30, 2009, it to was 10% of the purchase price with a maximum of $8000.00 to First-time home buyers. NO Repayment a refundable credit only, putting real hard cash into the pockets of the first-time homebuyers. This credit was allowed to be taken on either their 2008 tax returns as an amended return or on their 2009 return due April 15, 2009. Use From 5405 for this credit.
The new credit, The Worker, Homeownership and Business Assistance Act of 2009 was signed into law Nov. 6, 2009. The new version of the First-Time Home Buyers Credit was revised with this law. The dates were extended; you must buy or enter into a binding contract to purchase a principle residence on or before April 30, 2010. The transaction for this home must close before June 30, 2010. The taxpayer can still claim 10% or $8000.00 maximum for married filing jointly, or $4000 married Filing Separately, Single or Head of Household. The taxpayer is also allowed to take the credit on either 2009 or 2010. An Updated Form 5405 will be used. The tax return cannot be filed electronically as additional documentation is required to be attached. The IRS is requiring a settlement statement, HUD be attached to the return.
Long time residence of the same house can now also qualify for a reduced credit of up to $6500.00 Married Filing Jointly, or ($3250.00 married filing separately) or 10% of the purchase price which ever is less. The long time resident must have lived in the same house for any five consecutive years during an eight year period that ends on the date the new home is purchased. The settlement date must be after November 6, 2009 through the April 30, 2010 closing by June 30, 2010.
Both the First-time home buyers and Long-time residence credit cannot be used for homes that have a purchase price that exceeds $800,000.00. The purchaser must be 18 years old, if married one must be 18 years old. A dependent cannot claim either credit.
Divorced or separated parents new rule, a non-custodian parent cannot claim an exemption by merely attaching a copy of the divorce decreed, this is the old way. The new way states that if the divorce was finalized after 2008, so beginning on January 1, 2009 Form 8332 or a similar form must be signed by the custodial parent.
Retirement savings contribution credit. Is designed for low income taxpayers. Low income taxpayers can receive a credit based on amounts contributed to certain retirement plans, including IRA’s, 401K’s, and 403(b). An example of income ranges would be less than 27750 for the single filer and less than 55,000 for the married filing jointly filer. The credit is a non-refundable credit. In order to qualify for this credit the taxpayer cannot be a fulltime student, cannot be claimed as a dependent by anyone else and must be 18 years of age. This credit is commonly referred to as, “the savors” credit. Please ask your tax professional for more details.
U.S. Savings Bonds are back. These bonds are savings instruments for the taxpayers issued by the Department of the Treasury, currently for this new program only Series I bonds will be issued. You can purchase up to $5000.00 per tax payer annually. The may be purchased in increments of $50.00. The Series I bonds pay interest based on a combination of a fixed rate and a semiannual inflation rate which is updated twice a year, in May and November. These savings bonds will continue to accrue interest for 30 years which at the end of the thirty years they will have reached their maturity. The savings bonds maybe redeemed for principle and accrued interest at any time after a 12 month period from the date of purchase. If the bond is redeemed within the first five years of purchase a penalty of the most recent three month interest will occur. After five years no penalty will be incurred. Special circumstances apply for taxpayers living in an area affected by natural disaster.
Well that wraps it up…all the new tax news you need. Here’s hoping you benefit from one of these new credits this tax season.