Tax Savings You Don’t Want to Miss
March 22, 2010
Here are a few tax deductions that you’ll definitely want to take advantage of if they apply to you for the 2009 tax year:
Granted, it would be kind of tough to miss these if you were in the home market at all last year, but there are substantial tax credits available to both first-time and repeat homebuyers who closed a deal in 2009. First-time homebuyers (defined as someone who didn’t own a home in the three years leading up to purchase) can qualify for an $8,000 credit on the purchase of a new home, and as of last November 6, existing homeowners (someone who owned a home continuously for at least five of the last eight years) can qualify for a $6,500 credit for a new purchase.
It’s also important to check income requirements. President Obama extended these 2009 credits into 2010 with some critical changes in income requirements, so it’s important to see which rules affect you based on when you made your purchase or if you’re planning to make one this year. Visit the Internal Revenue Service website for more information.
Sales Tax Deduction
All taxpayers that itemize their deductions have a choice between deducting state and local income taxes or the combination of state and local sales taxes, whichever is higher. For most taxpayers, the income tax (if their state has one) is a bigger bite and therefore the best choice for a deduction, but if you’ve made a major purchase like a car, boat or airplane, it makes sense to see what you might be able to deduct in your state.
For most citizens of income-tax states, the income tax is a bigger burden than the sales tax, so the income-tax deduction is a better deal. The IRS has an online calculator that can help you make the decision.
Points on a Refinance
Remember you can deduct the points you paid on a refinance over the life of the loan. If it’s a 30-year mortgage, you can deduct $33 per $1,000 of points you paid, which may not seem like much, but it’s worth a few bucks. If you sell the home before the loan is paid, however, you get to deduct the rest of the undeducted points.
See if you can push your 401(k) contributions to their regular and catch-up limits for those 50 years of age or older. 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).
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 and $176,000, the limit is reduced.
Those with MAGI more than $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 $120,000 that contribution is reduced. Over MAGI of $120,000, no contribution is allowed. A 2009 IRA or Roth IRA contribution can be made up until April 15, 2010.
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).
The new American Opportunity Credit, part of the economic stimulus effort, allows a tax credit of up to $2,500 for each qualifying student in a family for the first four years of college. The full credit is available to individuals whose modified adjusted gross income is $80,000 or less or $160,000 for married taxpayers.
This replaces the $2,000 Hope credit for the first two years of school and the Lifetime Learning credit that applies at a lower amount afterward. For more information visit the IRS website.
All posts by Ben Edwards