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Tax Changes For 2009

In this world nothing can be said to be certain, except death and taxes, wrote Benjamin Franklin in 1789. Well, its tax time again – time to file our annual reports on how we did – financially in 2009. And of course, to pay our share! In order to minimize the amount that you have to pay this year, here are some of the tax changes that may affect you when you file.

According to the Internal Revenue Service, approximately two-thirds of all taxpayers claim the standard deduction. The standard deduction has increased over 2008. If you are single or married filing separately, the deduction has increased from $5,450 to $5,700. For married taxpayers filing jointly, the increase is from $10,900 to $11,400. The deduction for “head of household” has risen from $8,000 to $8,350.

The amount that you can deduct for each dependent exemption you can claim on your federal income taxes has increased from $3,500 last year to $3,650 for the 2009 tax year.  

The IRS has recognized that in has become increasingly more expensive to drive a car. For 2009, the standard mileage deduction has increased. For qualified business miles driven in 2009, you may deduct 55.0 cents per mile (an increase of 4.5 cents per mile over 2008). For miles driven for charitable purposes, the deductible mileage rate is 14 cents per mile and for medical travel, the deductible rate is 24.0 cents per mile. As you can probably imagine, this deduction is one that is often abused. If you do claim this deduction, be sure to keep a detailed log of your mileage. If you claim a large deduction, there is a very good chance that the IRS may flag it for review or audit, especially if there is a large change from 2008.

The earned income tax credit (EIC)for 2009 for low and middle-income workers and working families has risen to $5,028, an increase from the 2008 deduction of $4,824. The most you can earn in order to qualify for the earned income tax credit has been increased to $43,415 over last years limit of $41,646. Additionally, the EIC has been increased to allow a maximum of three children. This is a fully refundable credit, meaning that the full amount of the tax credit is payable to you, even if you do not have tax liability to offset.

The maximum Hope education credit has been increased to $2,500. The increased credit has been renamed the American Opportunity Credit and part of it is refundable. The credit is worth $2500 for qualifying education expenses. Qualifying expenses include tuition, fees, and required materials. The credit does not include computer hardware or software unless they are specifically required by your teacher or institution. 40% of the credit is refundable, which means you still get a tax refund even if your tax liability is zero.

The popular first time homebuyer tax credit has been extended and expanded. If you purchased a primary residence in 2009 before December 1, 2009, and are a “first-time” homebuyer, you can qualify for a tax credit equal to 10% of up to $80,000 of the purchase price. To be eligible, you must not have owned a residence in the United States in the previous three years. The program was expanded in November 2009 to include existing homeowners, meaning those who have lived in the same principal residence for any five-consecutive-year period during the past eight years. Homeowners are eligible for a credit of up to $6,500 if they buy a replacement home to use as their principal residence. Homeowners are not required to sell their current home, but the newly purchased home must become their principal residence. In addition, income limits were expanded from the earlier version of the credit. Homebuyers who file as single or head-of-household taxpayers can claim the full credit if their modified adjusted gross income (MAGI) is less than $125,000. For married couples filing a joint return, the combined income limit is $225,000. Single or head-of-household taxpayers who earn between $125,000 and $145,000, and married couples who earn between $225,000 and $245,000 are eligible to receive a partial credit. The credit is not available for single taxpayers whose MAGI is greater than $145,000 and married couples with a MAGI over $245,000. Also, homes costing more than $800,000 are not eligible for the credit. The tax credit is refundable.

If you purchased a new car in 2009, you can deduct the sales tax on the purchase, even if you aren't itemizing your deductions. The Federal Sales Tax Deduction applies to new cars, motor homes, light trucks and motorcycles purchased after February 16, 2009 and before January 1, 2010. Sales tax paid on the first $49,500 may be deducted. This deduction may be taken if you have an adjusted gross income of less than $250,000 for married couples or less than $125,000 if you are single.

There was good news for you in 2009 if you are saving for retirement. Retirement contribution limits for 401k as well as 403b plans increased in 2009 from $15,500 to $16,500.  Catch up contributions also increased by $500 to $5,500 in 2009.  Contribution limits to SIMPLE retirement plans also increased by $1,000 to $11,500, while the catch up contributions remained unchanged at $2,500. The income limits for those willing to contribute to traditional IRAs as well as Roth IRA plans increased again in 2009.  The income phase-out threshold for Roth IRAs now starts at $166,000 for those filing joint returns, and $105,000 for taxpayers with a filing status of single or head of household. Lastly, if you're covered by a retirement plan at work and you are considering contributing to a tax-deductible traditional IRA, then the income phase-out limits start at $89,000 for joint filers, and increases to $55,000 for those with a filing status of single or head of household.

For additional information regarding these and other tax law changes for 2009, check out IRS Publication 17. It's free, and can be found online at http://www.irs.gov/publications/p17/index.html.

Published Jan 10 2010, 10:05 PM by moneycoach
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