You could owe the IRS this year

Taxpayers could have a surprise when they file their taxes this year. It's the result of the Making Work Pay credit.

The credit began in 2009 and is also available to taxpayers in 2010 as part of the American Recovery and Reinvestment Act (ARRA). It consists of two components:

1. the new form Schedule M which includes a $400 credit for most taxpayers ($800 for married couples filing together) and
2. a change in employer withholding.

Starting April 1, 2009 employers began withholding less federal income tax so most workers may have noticed an increase in their take-home pay. The idea is this decrease in withholding will be offset by the Making Work Pay Credit when taxpayers include the Schedule M as part of their income tax return.

Don't forget to take the Making Work Pay Credit

In 2009 and 2010, the Making Work Pay Credit has been added to the tax code under the American Recovery and Reinvestment Act (ARRA). It's a refundable credit of 6.2 percent of earned income with a maximum of $400 per individual and up to $800 for married filing joint tax returns.

The credit phases out for taxpayers with modified adjusted gross incomes over $75,000 and $150,000 for married couples filing together.

Back to School = Big Rewards

Higher education expenses can be a huge benefit come tax time. There are several options available.

American Opportunity Credit tax years 2009 through 2010

• The maximum credit is $2,500 (same as 2009) per student (100% of the first $2,000 of expenses, 25% of the next $2,000 of expenses)
• The credit can be claimed for first four years of post-secondary education.
• 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).

It's not too late to take the First-Time Homebuyer's Credit

Taxpayers can still take advantage of the first-time homebuyer credit if an eligible buyer purchased a home as their primary resident in 2008, 2009, or 2010. Eligibility depends on the date of purchase. Those rules are listed below.

The IRS has been notifying taxpayers via mail who claimed the first-time homebuyer credit of repayment requirements. For example, those who purchased their homes between April 9, 2008 and Dec. 31, 2008 are required to repay the credit starting in 2010 by completing Part IV of Form 5405. If the home was purchased in 2009 or 2010, the letter from the IRS reminds the taxpayer that the credit must be repaid if the home is sold within three years or is no longer the main home.

Recovery Act Recap

The Obama stimulus plan, also known as ARRA - the 2009 American Recovery and Reinvestment Act, is over a year old. Here's a summary of all the tax code changes:

March 3 Did you receive an Economic Recovery Payment?
Feb. 8 You could owe the IRS this year
Jan. 24 Don't forget to take the Making Work Pay Credit
Dec. 28 Make home improvements & lower your tax bill
Dec. 26 Tax break for the unemployed
Dec. 24 Bought a car? Don't forget Sales Taxes
Dec. 22 More Eligible for Child Tax Credit
Dec. 20 Earned Income Tax Credit going up
Dec. 19 Higher credit for college students
Dec. 17 I'm a First-Time Homebuyer. What can I claim on my taxes?

In addition, the ARRA included:

• Extension of AMT relief for 2009
• Increased Transportation Subsidy
• Health Coverage Tax Credit

Did you receive an Economic Recovery Payment?

Don't forget the $250 when you prepare your income taxes or the IRS will reject your return.

As part of the 2009 American Recovery and Reinvestment Act (ARRA), taxpayers who receive social security benefits, SSI benefits, railroad retirement benefits, veterans' disability, or pension benefits received a $250 economic recovery payment sometime in late spring/early summer.

In addition, taxpayers who did not work in 2009 but received a pension or annuity in 2009 for services performed as a government employee were eligible for the new $250 Government retiree credit. The credit cannot be taken if the taxpayer received a $250 economic recovery payment.

For working taxpayers, the Making Work Pay Credit has been added to the tax code under ARRA. It's a refundable credit of 6.2 percent of earned income with a maximum of $400 per individual and up to $800 for married filing joint tax returns.

To take advantage of the Making Work Pay credit, complete Schedule M and report the total on Form 1040, line 63.

Caution:
When completing the Schedule M, you need to indicate the amount received under the economic recovery payment on line 10 or the Government retiree credit line 11. Failure to report the correct amount will result in your tax return getting rejected by the IRS.

You may not have realized you received the $250. If you typically received your monthly Social Security via direct deposit, the Economic Recovery Payment would have been deposited into the same bank account. The payment itself isn't taxable income and is not listed on Form SSA-1099 the annual benefits statement Social Security recipients are sent for tax purposes.

For additional information, review Schedule M instructions.

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