In
2009, numerous new and expanded deductions and credits came into being for a broad
cross-section of taxpayers: College tax benefits for parents and students; energy
credits for homeowners who are going green; and even tax breaks for home buyers
and car buyers.
Following is a summary of these
and other key changes taxpayers will find when they start preparing their 2009
federal income tax returns.
Note: See Fact
Sheet 2010-6 for more information on the first-time homebuyer credit and Fact
Sheet 2010-7 for details on the making work pay credit.
American
Opportunity Credit Helps Pay for First Four Years of College
More
parents and students can use a federal education credit to offset part of the
cost of college under the new American Opportunity Credit. This credit modifies
the existing Hope credit for tax years 2009 and 2010, making it available to a
broader range of taxpayers. Income guidelines are expanded and required course
materials are added to the list of qualified expenses. Many of those eligible
will qualify for the maximum annual credit of $2,500 per student.
In
many cases, the American Opportunity Credit offers greater tax savings than existing
education tax breaks. Here are some of its key features:
- Tuition, related
fees and required course materials, such as books, generally qualify. In the past,
books usually were not eligible for education-related credits and deductions.
- The credit is equal to 100 percent of the first $2,000 spent and
25 percent of the next $2,000. That means the full $2,500 credit may be available
to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
- The full credit is available for taxpayers whose modified adjusted
gross income (MAGI) is $80,000 or less ($160,000 or less for filers of a joint
return). The credit is reduced or eliminated for taxpayers with incomes above
these levels. These income limits are higher than under the existing Hope and
lifetime learning credits.
- Forty percent of the American opportunity
credit is refundable. This means that even people who owe no tax can get an annual
payment of the credit of up to $1,000 for each eligible student. Existing education-related
credits and deductions do not provide a benefit to people who owe no tax. The
refundable portion of the credit is not available to any student whose investment
income is taxed, or may be taxed, at the parent’s rate, commonly referred
to as the kiddie tax. See Publication 929, Tax Rules for Children and Dependents,
for details.
Though most taxpayers who pay for post-secondary
education qualify for the American Opportunity Credit, some do not. The limitations
include a married person filing a separate return, regardless of income, joint
filers whose MAGI is $180,000 or more and, finally, single taxpayers, heads of
household and some widows and widowers whose MAGI is $90,000 or more.
There
are some post-secondary education expenses that do not qualify for the American
Opportunity Credit. They include expenses paid for a student who, as of the beginning
of the tax year, has already completed the first four years of college. That’s
because the credit is only allowed for the first four years of a post-secondary
education.
Students with more than four years
of post-secondary education still qualify for the lifetime learning credit and
the tuition and fees deduction.
For details
on these and other education-related tax benefits, see Publication 970, Tax Benefits
for Education.
Many Energy Improvements
Qualify for Expanded Tax Credits
People
who weatherize their homes or purchase alternative energy equipment may qualify
for either of two expanded home energy tax credits: the non-business energy property
credit and the residential energy efficient property credit.
Non-business
Energy Property Credit: This credit equals 30 percent of what a homeowner
spends on eligible energy-saving improvements, up to a maximum tax credit of $1,500
for the combined 2009 and 2010 tax years. This means that a homeowner can get
the maximum credit by spending at least $5,000 on qualifying improvements. Homeowners
must make the improvements to an existing principal residence; this tax credit
is not available for new construction. Due to limits based on tax liability, other
credits claimed by a particular taxpayer and other factors, actual tax savings
will vary. The cost of certain high-efficiency heating and air conditioning systems,
water heaters and stoves that burn biomass all qualify, along with labor costs
for installing these items. In addition, the cost of energy-efficient windows
and skylights, energy-efficient doors, qualifying insulation and certain roofs
are also eligible for the credit, though the cost of installing these items does
not count.
Residential Energy Efficient
Property Credit: Homeowners going green should also check out a second tax
credit designed to spur investment in alternative energy equipment. The residential
energy efficient property credit, equals 30 percent of what a homeowner spends
on qualifying property such as solar electric systems, solar hot water heaters,
geothermal heat pumps, wind turbines, and fuel cell property. Qualifying property
purchased for new construction or an existing home is eligible for the credit.
Generally, labor costs are included when calculating this credit. Also, no cap
exists on the amount of credit available except in the case of fuel cell property.
Not
all energy-efficient improvements qualify for these tax credits. For that reason,
homeowners should check the manufacturer’s tax credit certification statement
before purchasing or installing any of these improvements. The certification statement
can usually be found on the manufacturer’s Web site or the product packaging.
Normally, a homeowner can rely on this certification. The IRS cautions that the
manufacturer’s certification is different from the Department of Energy’s
Energy Star label, and not all Energy Star labeled products qualify for the tax
credits. Use Form 5695, Residential Energy Credits, to figure and claim these
credits.
(NOTE: The 2009 Form 5695 is expected
to be available by Jan. 15, 2010.)
New Vehicle
Purchase Incentive
New car buyers can deduct
the state or local sales or excise taxes paid on the purchase of new cars, light
trucks, motor homes and motorcycles. There is no limit on the number of vehicles
that may be purchased, and eligible taxpayers may claim the deduction for taxes
paid on multiple purchases. However, the deduction is limited to the tax on up
to $49,500 of the purchase price of each qualifying new vehicle. Qualifying new
vehicles must be purchased, not leased, after Feb. 16, 2009, and before Jan. 1,
2010.
Taxpayers who buy a new vehicle may deduct
state or local fees or taxes that are similar to a sales tax whether or not their
state imposes a sales tax. To qualify, the fees or taxes must be assessed on the
purchase of the vehicle and must be based on the vehicle’s sales price or
as a per-unit fee.
The amount of the deduction
is reduced for taxpayers whose modified adjusted gross income is between $125,000
and $135,000 for individual filers and between $250,000 and $260,000 for joint
filers. This deduction is available regardless of whether a taxpayer itemizes
deductions on Schedule A. Itemizers claim the deduction on either Line 5 or Line
7 of Schedule A. See the Schedule A instructions for details. Non-itemizers claim
the deduction on new Schedule L, Standard Deduction for Certain Filers.
Tax
Credits Increased for Low and Moderate Income Workers
More
workers and working families are eligible for the Earned Income Tax Credit. In
particular, expanded benefits are now available for those with three or more qualifying
children and married couples. The EITC helps taxpayers whose incomes are below
certain income thresholds, which in 2009 rise to:
- $48,279 for families
with three or more qualifying children
- $45,295 for those with two
or more children
- $40,463 for people with one child
- $18,440
for those with no children
One in six
taxpayers can claim the EITC, which, unlike most tax breaks, is refundable, meaning
that individuals can get it even if they owe no tax and even if no tax is withheld
from their paychecks.
In addition, the earned
income formula for the additional child tax credit is revised for tax years 2009
and 2010. As a result, more low and moderate income families qualify for the full
$1,000 child tax credit. See Form 8812 for more information.
Standard
Deduction Increases for Most Taxpayers
Nearly
two out of three taxpayers choose to take the standard deduction rather than itemizing
deductions such as mortgage interest and charitable contributions. The basic standard
deduction is:
- $11,400 for married couples filing a joint return and
qualifying widows and widowers, a $500 increase compared with 2008
- $5,700
for singles and married individuals filing separate returns, up $250
- $8,350
for heads of household, up $350.
Higher
amounts apply to blind people and senior citizens. The standard deduction is often
reduced for a taxpayer who qualifies as someone else’s dependent.
In
addition, eligible taxpayers can further increase their standard deduction by
any of the following three deductions:
State
or local real estate taxes paid in 2009
A net disaster loss reported on Form
4684 and
State or local sales or excise taxes on the purchase of a qualifying
new motor vehicle.
Use new Schedule L, Standard Deduction for Certain Filers,
to claim these additional deductions.
AMT
Exemption Increased for One Year
For tax-year
2009, Congress raised the alternative minimum tax exemption to the following levels:
- $70,950
for a married couple filing a joint return and qualifying widows and widowers,
up from $69,950 in 2008
- $35,475 for a married person filing separately,
up from $34,975
- $46,700 for singles and heads of household, up from
$46,200
Under current law, these exemption
amounts will drop to $45,000, $22,500 and $33,750, respectively, in 2010. Form
6251 and the AMT calculator provide more information.
Other
Changes
The standard mileage rate for business
use of a car, van, pick-up or panel truck is 55 cents for each mile driven. The
standard mileage rate for the cost of operating a vehicle for medical reasons
or as part of a deductible move is 24 cents per mile. The rate for using a car
to provide services to charitable organizations is set by law and remains at 14
cents a mile.
The value of each personal and
dependency exemption is $3,650, up $150 from 2008. Most taxpayers can take personal
exemptions for themselves and an additional exemption for each eligible dependent.
This is one of more than three dozen individual and business tax provisions that
are adjusted each year to keep pace with inflation. A complete rundown of these
changes can be found in 2009 Inflation Adjustments Widen Tax Brackets, Change
Tax Benefits.
The amount of taxable investment
income a child can have without it being taxed at the parent's rate is $1,900,
up $100 from 2008. For details, see Form 8615.
There
are several modifications to the definition of a qualifying child. For example,
the child must be younger than the taxpayer, unless the child is totally and permanently
disabled. These changes affect who can claim various tax benefits including the
dependency exemption, child tax credit, credit for child and dependent care expenses,
head of household filing status and the EITC. See the instructions for Forms 1040
or 1040a for more information.
A new rule applies
to the noncustodial parent in situations where a couple is divorced or legally
separated after 2008. To claim a child as a dependent, the noncustodial parent
must attach Form 8332 or a similar statement to his or her tax return. For pre-2009
divorces and separations, the noncustodial spouse still has the option of attaching
certain pages from the divorce decree or separation agreement, instead of Form
8332. See Form 8332 for further details.
A
$3,500 or $4,500 voucher or payment made for such a voucher under the CARS “cash
for clunkers” program is not taxable to the consumer buying or leasing a
new car.
Unemployment benefits up to $2,400
received in 2009 are tax free for unemployed workers. Every person who receives
unemployment benefits can exclude the first $2,400 of these benefits on their
return. Unemployment benefit amounts over $2,400 are taxed.
