Make home improvements & lower your tax bill

You can receive a tax credit up to $1,500 this year for making energy efficient improvements to their homes. Under the American Recovery and Reinvestment Act (ARRA), the Residential Energy Credit has been increased to the smaller of 30% of the cost of qualifying improvements or $1,500 for improvements placed in service during 2009. The total credit is limited to $1,500 for both the 2009 and 2010 tax years combined.

Qualifying home improvements include:

• Energy-efficient exterior windows, doors and skylights
• Energy-efficient heating and air conditioning systems
• Insulation
• Water heaters (natural gas, propane or oil)
• Roofs (metal and asphalt)
• Biomass stoves

The credit only applies to a principal residence in the United States. To take advantage of this credit, complete Form 5695 and report the total on Form 1040, line 52. Please note, a similar law was in effect in 2007 where the maximum credit was $500.

Tax break for the unemployed

Unemployment compensation includes benefits to unemployed taxpayers that a state paid from the Federal Unemployment Trust fund. These benefits are reported on Form 1099-G (pdf.) and must be included on line 19 of Form 1040.

For 2009, taxpayers are able to exclude the first $2,400 of these benefits when they file their tax return. For a married couple, the exclusion applies to each spouse separately. If both received unemployment income in 2009, each would be able to exclude the first $2,400 of their income.

Those who are currently receiving benefits can use Form W-4V (.pdf) to have federal taxes withheld.

Bought a car? Don't forget Sales Taxes

Taxpayers who purchased a new vehicle between Feb. 17, 2009 and Dec. 31, 2009 will be able to deduct state and local sales taxes through the American Recovery and Reinvestment Act (ARRA). This deduction is available whether the taxpayer uses the standard deduction or itemizes.

Qualifying vehicle includes cars, light trucks, motor homes and motorcycles. Both foreign and domestic are eligible. Leasing or purchasing a used vehicle does not qualify.

The deduction is phased out for taxpayers with modified AGI between $125,000 and $135,000 ($250,000 and $260,000 for joint filers) and only includes taxes paid on up to the first $49,500 of the purchase price.

More Eligible for Child Tax Credit

You can claim up to $1,000 for each of your qualifying children. Child Tax Credit is reported on line 51 of Form 1040 but you can only use the amount of the credit that reduces your income tax to zero.

Then, you can claim the unused portion as an additional child tax credit on line 65 which is treated like a tax payment and added to your federal income tax withheld. In order to be eligible for the 2008 tax year, you need taxable earned income in excess of $8,500 and then 15% of that excess can be an additional child tax credit as long as it does not exceed the unused amount of the Child Tax Credit from line 51.

The American Recovery and Reinvestment Act of 2009 (ARRA) reduces the earned income threshold to $3,000 for 2009 and 2010 only. This will increase the eligibility by including more low income taxpayers.

To take advantage of the Additional Child Tax Credit, complete Form 8812 and report the total on Form 1040, line 65.

Earned Income Tax Credit going up

Earned Income Tax Credit (EITC) is a benefit for taxpayers who work and have earned income. The credit reported on From 1040 line 64 and is treated as a tax payment to be added to any federal income tax withholding. The amount of EITC depends on, earned income, adjusted Gross Income, filing Status, and number of qualifying children (either none, one, or two).

American Recovery and Reinvestment Act (ARRA) has adjusted the EITC for 2009 and 2010 to

• cover three children
• increase benefits 5% on the first $12,570 of earned income
• increase the beginning of the phase out range for the credit for all married couples

The maximum credit for 2009 is $5,657 compared to $4,824 in 2008:

• $5,657 - three or more qualifying children (N/A in 2008)
• $5,028 - two qualifying children ($4,824 in 2008)
• $3,043 - one qualifying child ($2,917 in 2008)
• $457 - no qualifying child ($438 in 2008)

EITC is disallowed if the taxpayer's investment income is more than $3,100 ($2,950 was the maximum in 2008).

Higher credit for college students

The new American Opportunity Credit modifies the existing Hope Credit for tax years 2009 and 2010. Under the American Recovery and Reinvestment Act (ARRA), more parents and students will qualify over the next two years for a tax credit, the American Opportunity Credit, to pay for college expenses. Include Form 8863 with your tax return.

American Opportunity Credit (new); tax years 2009 and 2010

• includes required course materials to the list of qualifying expenses
• allows the credit to be claimed for four post-secondary education years
• Maximum credit for each student is $2,500 (100% of the first $2,000 of expenses, 25% of the next $2,000 of expenses)
• Credit can reduce your tax liability dollar for dollar (Form 1040 line 49) and provide up to $1,000 additional refund (Form 1040 line 66).
• The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return.

Hope Credit; 2008 tax years and earlier

• only includes tuition and fees you are required to pay to the institution as a condition of enrollment or attendance - typically does not include books
• available for only the first two years of post-secondary education - usually the freshmen and sophomore years
• Maximum credit for each student is $1,800 (100% of the first $1,200 of expenses, 50% of the next $1,200 of expenses)
• Credit can only reduce your tax liability dollar for dollar
• The full credit is available to individuals whose modified adjusted gross income is $48,000 or less, or $96,000 or less for married couples filing a joint return.

I'm a First-Time Homebuyer. What can I claim on my taxes?

Congratulations on your major purchase.  Depending on when you purchase the home determines your tax benefit.

Nov. 7, 2009 to June 30, 2010 (H.R. 3548)

• The tax credit DOES NOT have to be repaid to the government providing the purchaser "live in the home" and not sell it for a minimum of 36 months
• The tax credit is equal to 10 percent of the home's purchase price (maximum of $8,000, $4,000 for married filing separate status). Credit can be claimed on the 2009 or 2010 return. 
• A copy of the properly executed settlement statement must be attached to the return. Therefore these returns can not be electronically filed.
  
• Single taxpayers with incomes up to $125,000 and married couples with incomes up to $225,000 qualify for the full tax credit. No credit is available if modified AGI is more than $145,000 ($245,000 for married filing jointly).
  
• Taxpayers who have lived in their home for five consecutive years during the eight years before closing on a new home may qualify for a reduced credit of $6,500 or $3,250 for married taxpayers filing separately.
• must purchase or be locked into a contract to close before midnight on April 30, 2010
• Military personnel, deployed overseas for a minimum of 90 days in 2009, would have until April 30, 2011 to claim the tax credit
• No credit is available if home purchase price exceeds $800,000 or if the home is purchased from a person related to the taxpayer (or taxpayer's spouse).
  

Jan. 1, 2009 to Nov. 6, 2009 (American Recovery and Reinvestment Act of 2009):

• The tax credit DOES NOT have to be repaid to the government providing the purchaser "live in the home" and not sell it for a minimum of 36 months
• The tax credit is equal to 10 percent of the home's purchase price (maximum of $8,000, $4,000 for married filing separate status). Credit can be claimed on the 2008 or 2009 return
• Single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualify for the full tax credit. No credit is available if modified AGI is more than $95,000 ($170,000 for married filing jointly).

April 9, 2008 to Dec. 31, 2008 (Housing and Economic Recovery Act of 2008):

• The tax credit DOES have to be repaid over a 15-year period in 15 equal installments starting the 2nd year after you claimed the credit (2010). If your home ceases to be your main home before the 15-year period is up, you must include the remainder of your credit as additional tax on your tax return for that year
• The tax credit is equal to 10 percent of the home's purchase price (maximum of $7,500, $3,750 for married filing separate status)
• Single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualify for the full tax credit. No credit is available if modified AGI is more than $95,000 ($170,000 for married filing jointly).

First-time home buyer is defined:

• Bought your main home in the US – can be a house, houseboat, condo, or mobile home
• You (and your spouse if married) did not own any other main home during the 3-year period ending on date of purchase

To take the credit, complete Form 5405 and include the credit on line 67 of the Form 1040.

Make sure you're eligible - the IRS has already started 107,000 examinations of returns claiming this credit.

Tax Benefits of ARRA

President Obama signed into law the American Recovery and Reinvestment Act of 2009 (ARRA) in February 2009. Stay tuned for future posts over the next week regarding these topics:

• Change in First-time Home Buyer Credit
• "American Opportunity" tax credit replaces the Hope Credit
• Increase in Earned Income Tax Credit
• Increase in the Child Tax Credit
• Sales Tax Deduction for vehicle purchases
• Temporary suspension of taxation of unemployment benefits
• Residential Energy Credits

In addition, ARRA includes:

• Making Work Pay Tax Credit
• One-time payment of $250 to Social Security Recipients, Veterans and Railroad Retirees.
• One-time refundable tax credit of $250 to certain government retirees who are not eligible for Social Security benefits
• Extension of AMT relief for 2009
• Increased Transportation Subsidy
• Health Coverage Tax Credit

Increase your Itemize Deductions

Pay bills now and increase your tax refund.

Itemized Deductions include the following:

• Uninsured medical and dental expenses during the year,
• Interest and taxes paid on your home,
• Unreimbursed employee business expenses or other miscellaneous deductions,
• Uninsured casualty or theft losses, and
  
• Contributions to qualified charities.

If you know already you will be completing a Schedule A Itemized Deductions for 2009, here are some tax tips to increase next year's refund:

State and local income taxes
Mail your January estimated payment in December and you can claim a deduction for the payment this year, not in 2010. This applies to taxpayers who make estimated State and/or local tax payments directly. Note: you'll realize no benefit if you're subject to AMT.

Real Estate Taxes
Soon you will receive your 2010 Cuyahoga County property tax bill in December 2009 (you usually receive it around Christmas). Paying this bill in December will allow you to claim an additional deduction in 2009.

Mortgage Interest
Make your January 2010 home-mortgage payment before the end of this year and you will have an additional interest that will appear on your Form 1098. In the 25% bracket for 2010 on a $1,000 interest payment, that saves you an immediate $250 on April 15, 2011. By doing that each year, you have created an interest-free loan of that $250 every year until the loan is paid off.

Go to Church regularly?
Consider putting your typical January 2010 contribution in the collection plate in December so you can claim the deduction this year. You are going to church on Christmas Day aren't you?

Medical Expenses
If you're close to exceeding the threshold of 7.5% of adjusted gross income for medical expenses, you may want to get caught up and paid in full before the end of 2009.

As with most tax breaks, you have to spend money in order to earned the benefit. The above may seem like a lot of money to spend before the end of the year. Think about this: these are examples of bills and expenses that you will have to pay anyway. Why not receive the tax benefit now instead of waiting to file your tax return in 2011.

Sell your stock and pay zero taxes

For tax year 2009 the rate on capital gains is 0% on capital gains if you find yourself in the 10% or 15% tax bracket. This will allow you sell assets for a profit tax-free. Your 2009 taxable income – gross income minus exemptions and deductions – can't exceed $33,950 for individuals or $67,900 for married couples filing jointly.
If your taxable income is above these amounts, your capital gains tax rate is 15%. The tax rate is figured after including the capital gains in your income. The tax rate on capital gains and the tax rate on other ordinary income is figured separately.

New College Credit for 2009