Tax Tips

Special Tax Break on New Car Purchase:

The new vehicle (not used vehicle) must be purchased after 02/16/2009 and before 01/01/2010. You can deduct State or local sales or excise taxes paid on the purchase. The deduction is limited to the fees or taxes paid on up to $49,500 of the purchase price of a qualified new car, light truck, motor home, or motorcycles. The special deduction is available regardless of whether taxpayers itemize deductions on their tax returns. Taxpayers who do not itemize will add this additional amount to the standard deduction on their 2009 tax return.

First Time Home Buyers:

First-time homebuyers may be able to take advantage of a tax credit for homes purchased in 2008, 2009 or 2010.

First-time homebuyers Credit:

• Applies to purchases that close after April 8, 2008, and before 05/01/2010.
• Applies only to homes used as a taxpayer's principal residence.
• Reduces a taxpayer's tax bill or increases his or her refund, dollar for dollar.
• Is fully refundable, meaning the credit will be paid out to eligible taxpayers, even if they owe no tax or the credit is more than the tax owed.

The credit is claimed using Form 5405. The credit is 10% of the purchase price of the home with a maximum available credit of $7,500 ($8,000 if purchased in 2009) for either a single tax payer or MFJ. MFS is eligible for half of these amounts. The credit phase out range is $150,000 to $170,000 of MAGI for MFJ and $75,000 to $95,000 of MAGI for other tax payers. A new law has increased this income limit for people who purchase home after Nov 6, 2009. The full credits will be available to taxpayers with MAGI up to $125,000 for single filers and $225,000 for joint filers. Those with MAGI between $125,000 and $145,000 (single filers) and $225,000 and $245,000 (joint filers) are eligible for reduced credit. Those with higher income do not qualify.

For 2008 Home Purchases:
The Housing and Economic Recovery Act of 2008 established a tax credit for first-time homebuyers that can be worth up to $7,500. For homes purchased in 2008, the credit is similar to a no-interest loan and must be repaid in 15 equal, annual installments beginning with the 2010 income tax year.

For 2009 and 2010 Home Purchases:
The American Recovery and Reinvestment Act of 2009 expanded the first-time homebuyer credit by increasing the credit amount to $8,000 for purchases made in 2009 before 12/01/2009. A new law that went into effect 11/06/2009 has extended the deadline for qualifying home purchase from 11/30/2009 to 04/30/2010. Additionally, if a buyer enters into a binding contract by April 30, 2010, the buyer has until June 30, 2010 to settle on the purchase. For home purchased in 2009, the credit does not have to be paid back unless the home ceases to be the taxpayer's main residence within a three-year period following the purchase. For all qualifying purchases in 2010, taxpayers have the option of claiming the credit on either their 2009 or 2010 tax returns. There are several new restrictions on purchase that occur after Nov 6, 2009 and they are: Dependents are not eligible to claim the credit. No credit is available if the purchase price of a home is more than $800,000. A purchaser must be at least 18 years of age on the date of purchase.

New Long-time resident Credit of up to $6,500:

The new law also provides a "long-time resident" credit of up to $6,500 to others who do not qualify as "first-time homebuyers." To qualify this way, a buyer must have owned and used the same home as a principal or primary residence for at least five consecutive years of the eight-year period ending on the date of purchase of a new home as a primary residence.

Child Tax Credit:

If qualified, you can claim $1000 for each child. (Minimum earned income of $3,000 + child must be under 17 at the end of year)

Additional Child Tax Credit:

If your income tax is reduced to zero and your earned income is more than $8500 (for 2008), you may be qualify for additional child tax credit.

Saver’s Credit:

If you qualify, you can claim a tax credit of up to half of what you contribute to a qualified retirement plan or IRS. You have to meet all of the qualifications:

You are age 18 and older. You are not a full time student. You are not claimed as dependent on someone else’s return. Your AGI does not exceed $26,500 ($53,000 if MFJ, or $39,750 for Head of Household)

Educational Tax Benefits:

You could save money with these educational credits, even if you do not itemize.

• American Opportunity Tax Credit: A tax credit equal to 100% of first $2,000 and 25% of the next $2,000 per student for Tuition, required fees, and course materials. Maximum credit per student is $2,500. It is restricted to the first 4 years of the college.

• Lifetime Learning Credit: A credit of 20% of your annual tuition and related fees, with a credit maximum of $2,000 per return. The tax credit may be claimed for an unlimited number of years.

• Tuition & Fees Deduction: Deduction up to $4,000 per student

• Student Loan Interest Deduction: Up to $2,500 per return

You cannot use the same expenses to claim more than one of the above benefits, and other restrictions apply.

Moving Expenses:

Even if you don’t itemize deductions, you can claim job related unreimbursed moving-related expenses. You must meet these 2 conditions. (A) Your new job would have increased your commute by more than 50 miles if you had not moved. (B) You must be employed full time for at least 39 weeks during last 12 months after you move. If you are self employed, the applicable figures are 78 weeks and 24 months, respectively, and at least 39 of the weeks must be in the first 12 months.

Out-of-pocket Job Expenses:

Keep track of job expenses not reimbursed by your employer. You can claim non-commuting kind driving expenses, travel expenses, uniforms, union dues, continuing education expenses.

Medical Deductions:

Keep track of your unreimbursed medical expenses all year. You can deduct them only if they exceed 7.5% of your Adjusted Gross Income. If you think, you are close to the 7.5% requirement, see if you can have elective or necessary procedure before the end of the year. Make sure that it is qualified deductible expenses.

Flexible Spending Account (FSA):

What if your medical expenses are less than the amount you set aside in your FSA? You could lose the money. If you still have balance under FSA, it is good idea to use them by last minute appointments. Please make sure to save your receipts for medications.

Charitable Donations:

This helps tax savings. You can include checks mailed thru December 31. Be sure to get receipts.

Please keep in mind that in case of non-cash gifts, the deduction of donated items is limited to the item’s current fair market value.

Cash Gifts:

Cash gifts up to $13,000 per person do not warrant gift tax return filing requirement. ($26,000 in case of MFJ) In most cases, the gifts are not complete until the recipient of a check cashes or deposits it. Please make sure the recipient does this before the end of the year.

Capital Stocks:

You might want to consider selling some stock to generate losses before the end of the year to reduce your net capital gain. In doing this, please keep in mind that you are prohibited from buying substantially the identical stock within a period beginning 30 days before and ending 30 days after the sale that generated the loss.

Mutual Funds:

Before planning for substantial investment during last quarter of the year, do some research on company’s website and try to avoid buying Mutual Funds/Shares which might declare large amounts of dividends in December. If you buy such Funds or Shares before the dividend is declared, the dividend will increase your taxable income even if they are reinvested.

Unemployment Compensation:

The first $2,400 of unemployment compensation received in 2009 will not be subject to Federal Taxes.

Self-employed Strategies:

If you are self employed and use CASH method of accounting, you can decrease your taxable income by buying supplies before the end of the year instead of in coming year. You can also delay your billing to decrease your taxable income. 

Avoid under deduction of FIT on your paycheck:

The new withholding table under the American Recovery and Reinvestment Act reduces the Federal Income Tax withholding (FITW) to reflect the Make Work Pay tax credit. With this some of the employees might end up with under deduction of taxes and resulting in possible penalties. Employees most likely to be affected are: Two-earner married couple, Individuals with more than one job, A dependent on another’s tax return (they do not qualify for the credit but you will withhold as though they were), Individual receiving pension, and/or Economic Recovery Payments

How to fix this? Do not wait until the end of the year. You might want to submit a new W4 with voluntary higher tax deduction. If it is too late to do this, you can pay some estimated FIT to avoid possible penalty.