The first time home buyer tax credits in 2009 didn’t really interest us that much since we’ve owned our home for just under ten years now.  However, the latest version of the bill now includes a tax credit through 2010 for homeowners who have lived in the same place for five of the last eight years consecutively.

This new home buyer tax credit will give you a credit up to 10% of the cost of your new home, with a cap of $6500.  I’ve had a busy week and hadn’t given much thought to new bill yet until my wife called me up at work yesterday.

New House Fever

My wife’s been wanting to move into a new house for a few years now and has been contributing to a “moving fund”.  The issue is that she has her eye on a bigger house but I don’t want our house payments to increase any. The planner that she is, my wife opened a separate account and has been putting away money to fund an eventual purchase of a house upsizing.  Our family has grown since we bought our house and future plans project additional growth so we may need the space someday.

Based on home sales in our area and the estimated cost of a new home, she had in mind about how much she needed to put away before we could start looking at houses.  A tax credit of $6,500 would accelerate her schedule by almost a year so she was pretty excited when she heard about the new law.

Since the home buyer tax credit is a dollar for dollar reduction of taxes and is refundable, you could look at it as knocking $6,500 off the purchase price of a home we would buy.  We would still be short of the total figure she was trying to save up but the “free” $6,500 is rather enticing.

Home Purchase Timing

The latest version of the law says that we would need a contract on a house before May 1^st of next year and that the sale would have to close before July 1^st.  While Obama did extend the first time home buyers tax credit with this bill, the general consensus is that there won’t likely be another extension.

That means we’d have to find a house by May of 2010, which gives us about 6 months of searching, planning, and maneuvering our finances before we’d have to pull the trigger. According to the bill we could file an amended tax return for 2009, claiming the tax return for 2009 so we would potentially “see the money” sometime in 2010.

Are the Home Buyer Tax Credits Working?

In one night, our family went from talking about buying a house two years down the road to suddenly considering purchasing a home by next May so I’d say that the home buyer tax credits are having an impact.

Of course at this point it’s just talk so we don’t know if we’ll actually go through with it but my wife signed up for new home alerts from several real estate websites last night and we we spent about an hour talking through some of the details so momentum is building.

I’m not a big fan of moving, it takes time and money and the whole process of home searching and buying can be quite stressful.  Plus I really like where we live now so I’m not really jumping up and down about buying a new house.  But life has a way of shifting when you least expect it to.  Thanks a lot Obama for signing the bill and pulling the rug out from under me, you’re going to give me a ulcer : )

Year end tax deductions are a good way to squeeze some extra tax savings into your budgeting and tax planning efforts.  It’s been a crazy year for the economy and as a result the government created all sorts of tax incentives and tax credits that can potentially help reduce your 2009 taxes. Here are some year end tax tips to help, chances are at least one of them will apply to you.

Plan your retirement contributions: Though you have until April 15 or your extension deadline next year to make IRA contributions for 2009, right now is a good time to find out if you can push 401(k) contributions to their regular and catch-up limits. Here are the basics:

401(k) contributions: For tax year 2009, the regular contribution limit in a traditional 401(k) is $16,500 and $11,500 for a SIMPLE 401(K). For anyone who is age 50 or older in 2009, you can make an additional contribution of $5,500 for a traditional 401(k) and an additional $2,500 for a SIMPLE 401(k). 

Traditional and Roth IRAs: For tax year 2009, traditional and Roth IRA contributions are limited to $5,000 for those under age 50; for those over 50 during 2009, the contribution limit is $6,000. For Roth IRAs, keep in mind that if you are married and filing jointly with modified adjusted gross income (MAGI) of less than $166,000, you can contribute up to the limit, BUT between $166,000 but less than $176,000, the limit is reduced.

Those with MAGI over $176,000 cannot contribute to a Roth. For single filers or married taxpayers filing separately, those reporting MAGI of less than $105,000 can contribute up to the limit, BUT between $105,000 and less than $120,000 that contribution is reduced. Over MAGI of $120,000, no contribution is allowed.

Roth IRA Conversion: Starting in 2010, anyone will be able to convert a traditional IRA into a Roth without income limitation. 

SEP IRAs: For SEP IRAs, the maximum contribution is $49,000.

If you’re planning to buy a home very soon: First-time homebuyers have until November 30 to close on their home purchase in order to qualify for the $8,000 tax credit provided by the American Recovery and Reinvestment Act (ARRA). The credit is available to those who have not owned a home during the past three years. The full credit is available for married couples filing a joint return whose MAGI is $150,000 or less and for other taxpayers whose MAGI is $75,000 or less.

If you’ve been unemployed in 2009: Under the American Recovery and Reinvestment Act, the first $2,400 of unemployment benefits an individual receives in 2009 are tax free. This provision applies only to benefits received in 2009: Normally, unemployment benefits are taxable.

Take advantage of the IRA charitable donation provision: If you’re age 70 ½ or older, 2009 is the last scheduled year that you’ll be allowed to direct your IRA trustee to make a tax-free direct transfer of up to $100,000 from your IRA to a charitable organization.

Green tax incentives: The American Recovery and Reinvestment Act also provides tax incentives for energy-efficient investments for the home. The new law increases the credit rate to 30 percent of the cost of all qualifying improvements and raises the maximum credit limit to $1,500 for improvements placed in service in 2009 and 2010. The credit applies to improvements such as adding insulation, energy-efficient exterior windows and energy-efficient heating and air conditioning systems.

If you’re still looking for a car: You might have missed Cash for Clunkers, but the American Recovery and Reinvestment Act  allows taxpayers to take a deduction for state and local sales and excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles on purchases made through December 31.

The deduction is limited to taxes and fees paid on up to $49,500 of the purchase price of the eligible vehicle and reduced for joint filers with MAGI between $250,000-$260,000 and other taxpayers with incomes between $125,000 and $135,000. Taxpayers with income exceeding these limits don’t qualify.

If you suffered disaster damage: Severe storms and flooding this year designated many parts of the country eligible for tax relief. To check if your community has been designated, go to the IRS website.

Check investment gains and losses: If you have depreciated investments in your taxable investment accounts, see if it makes sense to sell and offset them against any capital gains you’ve realized this year. Also, keep in mind that if you are in the 10-15 percent income tax bracket, the current tax rate for long-term capital gains is zero percent and will stay there through 2010. If you have a capital loss carryover from 2008, you can use this to offset any capital gains you’ve realized this year too.

Defer income if possible: Self-employed people and some business owners might elect to invoice customers in January so they don’t have to include that income on their 2009 return. Keep in mind that it may only make sense to defer income if you think you will be in the same or lower tax bracket next year.

Make sure donations are documented: You must have either a receipt or a canceled check to back up any contribution, regardless of the amount, and you can’t simply give away junk and state a “like new” value for it. If you don’t have such a written record, the IRS will reject the write-off if the lack of proper record keeping is discovered in an audit.

Also, you can write off out-of-pocket costs you incur while doing good works. Ingredients for casseroles you regularly prepare for a nonprofit organization’s soup kitchen, for example, or the cost of stamps you buy for your school’s fundraiser count as a charitable contribution.

Good luck filing those tax returns!

These year end tax tips were produced in association with the Financial Planning Association (FPA), the leadership and advocacy organization connecting those who provide, support and benefit from professional financial planning.

Federal income tax withholding tables were adjusted earlier in 2009 due to the “Making Work Pay” tax credit as part of the economic stimulus package.  The reduction of federal income tax withholding was intended to provide a gradual financial benefit to the economy by putting a little more money in your paycheck each month.

Federal Income Tax Credit Impact

Many employers and payroll companies automatically handled the change in tables so many workers didn’t have to fill out any paperwork to take advantage of the tax credit.  Of course, based on your financial situation, this change could potentially result in withholding less than your personal income tax liability.

As we approach the final quarter of the year it would be smart to check your tax withholding levels.  The following groups of people should pay close attention:

• Pensioners
• Married couples with two incomes
• Individuals with multiple jobs
• Workers who can be claimed as dependents by other taxpayers

Federal Income Tax Withholding Calculator

You can check out the IRS Withholding Calculator to make sure you’re withholding enough from your paycheck for 2009.  The IRS Publication 919 (How Do I Adjust My Tax Withholding) is another good resource for income tax withholding.

Remember, although your payroll department may have adjusted your withholding automatically they don’t know your personal finance situation. This means it’s up to you to submit a Federal W-4 if you need to change your amount of withholding.

Thanks to Grant Baldwin for this guest post. The author of Reality Check, a book about helping students transition into the real world, Grant is launching a new website, BrokePiggy.com, that answers questions from teenagers about personal finance, savings, and all things money.

The only thing I miss about earning an income as a teenager was that I knew I would ALWAYS get a refund! I’m sure it was the same way for you.

So because of that, I would have to say there was a brief time in my life where I actually liked the tax system (I stress “brief”).  I knew I would end up with a “bonus check” at the end of the year, so what’s not to like?

But then I started looking at my check stub a little closer and discovered Uncle Sam was getting a big cut of my money.  And that I don’t like! 

• Teach Them What They’re Paying For – We all hate to pay taxes, but deep down we all know it’s just a way of life.  Rather than gripe and complain about it, teach your teen what they’re funding.  Their taxes are helping fund the school they go to, the police and fire protection they have, and the roads they drive on.  We may take all of the above for granted but the fact is that’s part of what we’re paying for.  We just tend to focus on the negative.          
• Teach Them The Process – While you don’t need your student to necessarily become a junior CPA, it is healthy for them to understand the process.  Assuming they have an earned income and need to file taxes, help them with that process.  Whether you use good ole fashioned pencil and paper or you use some type of software program, let them learn how to file their own taxes. 
• Teach Them To Have Integrity – I don’t know what the statistics are for people who knowingly cheat on their taxes, but I would be willing to bet it’s far too high.  As we’ve already established, nobody likes to pay taxes, but it is the law, so we need to do it right.  Use filing your taxes as a teachable moment to talk about integrity and doing the right thing even when no one is watching.  The money someone saves by cheating on their taxes pales in comparison to what they give up with their integrity. 

This post is part of a series “12 Things Every Teenager Needs To Know About Money (And How To Teach Them)“, you can visit the sites below for the rest of the series:

• Money Doesn’t Grow On Trees @ Bargaineering.com
• Two Words: Compound Interest @ PoorerThanYou.com
• Delay Gratification To Succeed @ GatherLittleByLittle.com
• Living On A Budget Isn’t An Option @ TotalCandor.com
• Credit Cards Will Steal Your Lunch Money @ PTMoney.com
• Should You Earn A College Degree@ TheDigeratiLife.com
• Spend Money Based On Needs Not Wants @ MoneyNing.com
• There Is More Free Money Than You Realize For College @ FreeFromBroke.com
• Living On Your Own Isn’t Cheap @ Studenomics.com
• Taxes Are A Necessary Evil In Life @ MoneySmartLife.com
• Do What You Love, Love What You Do @ GenXFinance.com
• Don’t Be A Tightwad: Give Generously @ CashMoneyLife.com

Tax returns are due on April 15^th, many people have already filed their taxes but millions of others will be shuffling tax forms, digging out receipts, and searching for last minute tax deductions this weekend. 

A recent CBS article lists some ways you can still reduce your taxes due before tax day such as deducting any job search expenses or making an IRA contribution. One thing I wasn’t aware of is the recovery rebate credit, here’s what the article had to say:

“If you did NOT receive the maximum credit of $600 ($1,200 if married filing jointly) plus $300 for each qualifying child, then you MAY be eligible for an additional credit equal to the difference between what you received last year and the maximum credit allowed. So, if you had another child in 2008 or had a reduction in your 2008 income, then make sure to calculate your Recovery Rebate Credit — you could be eligible for more money back.“

Here’s a summary of some more tips for filing your taxes:

• How to file for a Tax Extension
• Alternative Minimum Tax
• Personal Tax Exemptions
• First Time Home Buyer Tax Credit
• Tax Preparation Services
• Federal Tax Brackets
• Common Tax Forms
• Free eFile
• TurboTax Review

If your taxes are done, congratulations! If you’re still working on them, good luck!

If you need to file a tax extension, you can fill out form 4868 from the IRS website to apply for a 6 month extension on filing your taxes.  Remember, the extension allows you more time to file your tax return but it doesn’t extend the date that your taxes are due. 

You still need to mail in a payment for your taxes by April 15^th or the IRS will charge you late fees and penalties.  So how can you pay if you don’t know how much you owe?  Well you’ll have to estimate how much you owe but remember if you underestimate you may have to pay fees on the unpaid amount. All of the programs in our best tax software list can help with filing an extension.

Here are some other tax tips that TurboTax put together for the last minute tax filer:

The 11 most overlooked deductions looks at things like reinvested dividends, state sales taxes, and the child care credit.

As you scurry to get your taxes ready, here’s a tax preparation checklist that helps you gather and organize your documents for income, tax deductions, and deductible expenses.

TurboTax and Kiplinger offer some comparisons on when it makes sense for you to itemize.

Here are some tax law changes to be aware of; things like the first-time homebuyers tax credit, income limits for deductible IRAs & Roth IRAs, tax-free parking for employees, and exemptions for the alternative minimum tax.

TradeKing has released the latest edition of their “Intelligence Report” series, this one is called “Taxes and Trading”.  It caught my eye since just yesterday I just published our Investor’s Tax Guide.

TradeKing Taxes & Trading

Of course I was curious and downloaded the TradeKing report to see how it compared to the information in our investing tax guide.  They cover some of the same terminology such as cost basis and capital gains and how you can carry over capital losses over from one year to the next.

One of the things that the TradeKing report talks about that we missed was wash sales.  It goes into detail about what a wash sale is and gives specific wash sale examples.  The report has a section on retirement accounts but doesn’t go into as much detail as we do about options for deferring taxes on investments.

Next time we revise our report, I’ll make sure it includes more details on wash sales.  I’ve gotten several questions via email on wash sales, for now I’ll just refer people to the TradeKing report.

Downloading the Reports

As I expected, our investing tax guide and TradeKing’s report have some overlap, but each also offers details not found in the other.  You have to submit your email address to download the Taxes and Trading report from TradeKing, which wasn’t a big deal for me since I’m already a customer.

You can get our Investor’s Tax Guide when you signup for the free newsletter, I guess the good news is that both reports are free!

Tax season has probably never meant more to taxpayers than it does this year.  As we prepare our 2008 tax returns the government is spending billions of dollars of our tax money in an effort to unfreeze credit markets and stimulate the economy.

Stock Market Losses

At the same time, many of us saw the value of our investments plummet significantly over the last year.  So with both investments and taxes on many of our minds, I announced last week that we’d have a resource ready covering investing and taxes.

Well, it’s ready but before I go into detail I want to highlight the various tax posts we’ve had over the last few months.

• Alternative Minimum Tax & Federal Income Tax Withholding Changes
• Tax Deductions and Personal Exemptions for 2008
• First Time Home Buyer Tax Credit
• Tax Software & Tax Forms for Your Tax Return
• Tax Preparation Services – Should You Use One?
• 2008 Federal Tax Brackets Explained
• Common Tax Forms to Gather For Your Tax Return
• Free eFile – Freefile & Online Free Tax Prep Options
• Top Tax Credits For Your Federal Tax Return
• TurboTax Review – 2008 Tax Software Product Review

Investing and Taxes

As the market moves up and down and you wonder about buying or selling and the tax implications of a loss or capital gain, hopefully our investor’s tax guide will give you a good overview.

You can get access to the investor’s tax guide by signing up for our free newsletter below.  If you want to know more, you can read more about the free newsletter.

Tax day is quickly approaching and so is the IRA contribution deadline, April 15th. If you haven’t funded your IRA or Roth IRA for last year, time is growing short.  Vanguard is always a good option with lots of funds to choose from and Etrade is offering 100 free trades if you open a new IRA account.

But why should you open an individual retirement account at all? How does it help with your investment taxes?  To answer a lot of the investing tax questions that came up in our investing survey I’ve worked with a friend of mine who’s a tax attorney to put together an investor’s tax guide.

Investor’s Tax Guide

This is typically the busiest time of the year for tax attorneys so I want to thank my friend for taking time out of his busy schedule to work with me on this resource.  I think it will be a useful overview for those of you with questions concerning investing and taxes. 

The guide is broken up into three parts; the first takes a look at interest income, dividend income, & capital gains and how they are taxed.  It covers short term vs long term gains, stock basis, investment losses, tax rates, and some tax forms. 

The next section discusses how you can defer taxes on your investments with a variety of retirement plans and 529 plans.

Tracking and reporting on your investment returns is the final section.  It takes a look at tracking your stock basis and reporting capital gains and dividend & interest income.

Downloading the Tax Guide

We’re putting the finishing touches on the investor’s tax guide right now; look for a post over the weekend or on Monday about how you can download it for free!

Update: Instructions on how to download the Investor’s Tax Guide

How are we supposed to keep up with all the tax code changes?  That’s a question a reader emailed in after reading about the First Time Home Buyer Credit and other tax deduction changes we covered the last two days.

It’s certainly not an easy task, which is why a whole army of tax prep software, tax prep services, and tax attorneys exist to help us file our taxes each year. If you are using a program like Turbo Tax or some other tax software, you can install the latest updates when it prompts you to download them. If you’re in the middle of working on your tax return make sure you have your current return backed up before you update your software.

If you’re hiring someone else to prepare your taxes, include that as one of the questions you ask when screening for the right company or accountant to hire.  Ask what training and tools they use to keep up to date on the latest tax code changes.

Here are a few more tax changes for 2008 and one change for 2009 regarding federal income tax withholding. 

AMT Exemptions

For 2008, the exemptions on the alternative minimum tax (AMT) are $46,200 for single taxpayers and heads of households, $69,950 for married couples filing joint returns, and $34,975 for married couples filing separately. Unless Congress steps in, the exemption levels will drop to $45,000 for married filing jointly, $33,750 for singles and heads of household, and $22,500 for married couples filing separately.

Parking & Transit Passes

Employees won’t be taxed on up to $220 a month of employer-paid parking, up $5 per month from 2007. The cap on tax-free transit passes their employers can give workers rises to $115 a month, up $5 a month from 2007.

IRA Withdrawals & Donations

For 2009 only, you can choose not to take your Required Minimum Withdrawal from qualified plans or IRAs. This applies whether 2009 is your first year, or you have been withdrawing for a while. It does not apply if you postponed your 2008 First Required Minimum Distribution to the first quarter of 2009.

For 2008 and 2009, IRA investors age 70½ and older can donate up to $100,000 of their IRAs to charity without having to report the withdrawal as income.

Federal Income Tax Withholding 

The American Recovery and Reinvestment Act of 2009 (the Stimulus Plan) passed last month includes a provision for the reduction of Federal Income Tax withholding for many employees during years 2009 and 2010. Called the “Making Work Pay,” tax credit, it includes a 6.2 percent reduction of Federal Income Tax withholding.

If you qualify for this credit you should see a reduction in your federal income withholding beginning this month or next. The IRS site cautions that:

“Individuals and couples with multiple jobs may want to submit revised Form W-4 forms to ensure enough withholding is held to cover the tax liability for the combined income.  Publication 919 provides additional guidance for tax withholding.”

Taxpayers won’t have a check mailed to them from the IRS like last year’s economic stimulus check, instead the change should show up in your paycheck says IRS Commissioner Doug Shulman:

“Since employers and payroll companies will handle this change, people typically won’t need to take any additional action. The IRS will continue working to implement this and other provisions of the new law as quickly as possible.”