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Facing a struggling economy, lawmakers in Washington, D.C., turned to the tax code to help get it, and us consumers, moving again. Most of the tax changes were part of the stimulus package enacted last February, the American Recovery and Reinvestment Act of 2009. There are seven new tax laws you should know, and some old tax laws with new amounts adjusted for inflation.
Bankrate's 2010 Tax Guide
Tax breaks were created, or in some cases expanded, for autos and home purchases, as well as for certain residential improvements. Uncle Sam now pays more of some educational costs. Some workers get bigger tax benefits to offset their commute to work. Folks who no longer have jobs at least get some tax relief. Even how you pay your IRS bill could turn into a deduction.
Here’s a look at some popular tax laws that could come in handy as you work on your 2009 tax return.
1. More homebuyer credits
In February 2009, the popular first-time homebuyer credit became a true credit, meaning that it can directly reduce dollar-for-dollar any tax you owe. Even better, the amount of the credit was increased; it’s now up to 10 percent of the cost of the house up to a maximum $8,000. Best of all, it’s a refundable credit so if your tax bill is zero, any credit for which you qualify will be sent to you as a refund.
A few months later, Congress extended the credit for the rest of the year (as well as into 2010). At that time, lawmakers added a new credit for “long-time” homeowners who’ve owned and lived in their residences for at least five consecutive years of the eight years before they buy a new house. Those folks now might qualify for a $6,500 credit.
While the first-time home purchase credit is generally a good thing for taxpayers, it will require some care in claiming it. Because of the various law changes, different income eligibility limits apply depending on when you bought the house and which type of buyer, first-time or move-up, you are.
- Homebuyer credits.
- New vehicle deduction.
- Expanded education credit.
- Home energy improvements credit.
- Unemployment income exemption.
- Bicycle commuter benefit.
- Credit card convenience fee deduction.
The new law also requires stricter proof of purchase. This safeguard against fraud requires you to send in a copy of settlement sheet, so you won’t be able to file your 2009 return electronically. And that could slow down your refund.
2. New-car sales tax deductions
If you bought a new vehicle — that includes a car, light truck, motorcycle or even a motor home — on or after Feb. 16, 2009, and by Dec. 31, 2009, any sales or excise tax you paid could be a deduction.
This isn’t a new option for taxpayers who itemize. But now even taxpayers who claim the standard deduction can take advantage of the tax break. Standard deduction filers will have to fill out a new form, Schedule L, to claim the automotive sales tax. Itemizers still will have the choice of claiming the deduction for the sales tax on Schedule A.
Just don’t count on writing off the sales taxes on a luxury vehicle. The deduction is limited to the tax paid on up to $49,500 of a vehicle’s purchase price. You can, however, claim the tax deduction for each new vehicle you bought last year.
And your deduction might be limited by your income. You’ll get a partial deduction if your income as a single taxpayer is between $125,000 and $135,000; between $250,000 and $260,000 for joint filers. If you make more than those top amounts for your filing status, you can’t claim any amount.
3. Expanded education credit
For 2009 (and 2010, too) the Hope Education credit is replaced by the American Opportunity Credit. The new credit is worth $2,500 per student, based on the first $4,000 of qualifying educational expenses. The Hope Credit only allowed for an $1,800 tax break.
In addition to upping the credit amount, the American Opportunity Credit can be claimed for expenses for the first four years of post-secondary education, versus the first two years of expenses allowed under the Hope Credit.
More expenses can be counted in calculating the new credit. Its income limits are larger, meaning more folks making more money — up to $90,000, or twice that for joint filers — can claim at least a partial credit.
And if you claim the American Opportunity Credit but don’t owe the IRS, you still might still get a refund. Forty percent of the credit if refundable, which means you could receive up to $1,000 even if you owe no taxes.
4. Enhanced home energy credits
Credit for homeowners who make their homes more energy efficient reappeared in 2009 and in a much more generous incarnation.
Homeowners who make energy-efficient improvements to their existing homes now can claim a credit of 30 percent of the cost of all qualifying upgrades, up to a maximum credit of $1,500. This covers such relatively simple things as adding insulation, energy-efficient exterior windows and energy-efficient heating and air conditioning systems.
If you really want to take the extra energy-efficiency step, more-costly and complex upgrades, such as various solar, wind and geothermal systems, offer a credit of 30 percent of the purchase price with no maximum credit cap. In these cases, the cost of installation also can be used in the credit calculation.
Improvements must meet Energy Star standards and must have been put into service at your home during the tax year.
5. Jobless benefits less taxing
Last year was a tough one for many workers. Layoffs hit record levels. Unfortunately, unemployment compensation is considered taxable income. Now, however, the first $2,400 of such benefits are excluded from income.
6. Biking tax break
Last year bicycling commuters were included in the tax code section that allows for employer reimbursement of workplace transportation costs. Thanks to the Bicycle Commuter Act, cyclists now get some of the same type of tax-free fringe benefits as do their motoring co-workers. If a company provides the benefit, which is $20 per month, a worker can put into a special tax-favored account, bicycle commuters can use that money to help defray such costs as the purchase of a bicycle, bike lock, helmet, bike parking fees, shower facilities and general bike maintenance.
7. Deduction for credit card fees
If you pay your income tax (including estimated tax payments) by credit or debit card, you can deduct the convenience fee you are charged for the transaction. You include the fee amount as a miscellaneous itemized deduction on line 23 of Schedule A. This means that the card fee, along with any other IRS approved miscellaneous deductions, must exceed 2 percent of your adjusted gross income before they count. That will limit the value of this break for many filers, but if you do have substantial expenses to claim in this category and charge any tax payments, be sure to add the card fee to the mix.