Tax Law Changes for Individuals
TAX YEAR 2009
Tax Credit of Up to $8,000 for First-Time Homebuyers and
$6,500 for Existing Homeowners
The Congress and the Obama Administration have extended and
expanded the wildly popular 2008 first-time homebuyer tax
credit. Now, existing homebuyers are eligible to receive a
tax credit of up to $6,500 if they buy a replacement home by
June 30, 2010. In addition, the income limits have been
increased, making even more people eligible for these
credits.
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 percent 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 credit is refundable to the extent it exceeds your
regular tax liability, which means that if it more than
offsets your tax liability, you’ll get a refund check. But
it does not offset the Alternative Minimum Tax.
You can even elect to claim the credit for a 2009 home
purchase on your 2008 tax return. (If you filed for 2008
before buying, but before the December 1, 2009, deadline,
you can claim your credit by filing an amended return using
Form 1040X. Doing so will guarantee you a refund check.) The
credit for 2009 purchases generally doesn’t have to be paid
back. But you will have to repay it if you sell the house
within three years of the date you bought it.
In November 2009, the program was broadened 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. They are not required
to sell or dispose of their current home, but the new home
must become their principal residence. To be eligible,
homebuyers must buy, or enter into a binding contract to
buy, a replacement principal residence after Nov. 6, 2009,
and on or before April 30, 2010, and close on the home by
June 30, 2010.
In addition, income limits were expanded from earlier
versions 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.
Payroll Tax Credit
For 2009 and 2010, Congress gave workers a credit of 6.2
percent of their earned income, capped at $400 for single
filers and $800 for joint filers. For single filers, the
credit starts phasing out at $75,000 of Adjusted Gross
Income and dries up at $95,000. The phaseout zone for
couples is $150,000-$190,000. Employees will get the credit
in advance via lower income tax withholding in each
paycheck, not as a rebate check.
Self-employed taxpayers can reduce their quarterly estimated
payments to get an advance benefit from the credit. The
exact amount of the payroll tax credit for the year will be
calculated on the filers’ tax returns. Recipients of Social
Security benefits, Railroad Retirement benefits,
Supplemental Security Income or veteran disability pensions
get a one-time $250 check for 2009. Federal retirees who
don’t receive Social Security payments also get a $250
check.
Sales Tax Deduction for New Vehicles
Buyers of new vehicles can deduct the sales tax paid on the
purchase, even if they don’t claim sales taxes as itemized
deductions. They can add the tax they pay to their standard
deduction. This break 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 of cost qualifies. The benefit begins phasing out
for married couples with AGI over $250,000 and singles with
Adjusted Gross Income over $125,000. It is completely gone
for single filers with Adjusted Gross Income of $135,000 or
more, or joint filers with AGI of at least $260,000.
Itemizers who elect to deduct state sales taxes in lieu of
state income taxes get no benefit from this change, since
the auto sales tax is already included in the sales tax
deduction. Itemizers who deduct state income taxes will get
a separate deduction for auto sales taxes; non-itemizers
will add the sales tax amount to their standard deduction
amount.
Indexed Tax Brackets
The 10 percent, 15 percent, 25 percent, 28 percent, 33
percent and 35 percent tax brackets all kick in at more than
4 percent higher levels of income than in 2008.
Personal Exemptions
For 2009, each personal exemption you can claim is worth
$3,650, the same as in 2008.
Higher Standard Deductions
For 2009, the standard deduction for married taxpayers
filing a joint return is $11,400, up by $450 from 2008.
Joint filers can also add in up to $1,000 of property taxes
paid.
For single filers, the amount is $5,700 in 2009, up by $250
over 2008. Singles can also deduct up to $500 of real estate
tax payments.
Heads of household can claim $8,350 in 2009, a jump of $350
from 2008.
Non-itemizers who pay real estate taxes can claim even
larger standard deductions. Non-itemizers can also add any
casualty losses that occurred in presidentially-declared
disaster areas.
Reduction in Itemized Deductions and Personal Exemptions for
High-Income Taxpayers
Itemized deductions and personal exemptions are phased out
as your income rises. In 2009, the reductions are a bit less
painful than they were in 2008. The cutback in itemized
deductions occurs once your Adjusted Gross Income exceeds
$166,800, regardless of your filing status. Your itemized
deductions are reduced by 1 percent of the amount by which
your AGI exceeds $166,800, but you can never lose more than
80 percent of your itemized deductions. Also, your medical
expenses, investment interest deduction, deductible gambling
losses and any casualty and theft losses are not subject to
the cut. Personal exemptions are reduced by 2 percent for
each $2,500 of Adjusted Gross Income over $250,200 for
married filing jointly, $208,500 for heads of households and
$166,800 for singles, but the reduction cannot exceed $1,217
per exemption.
Section 179 Expense Deduction
The maximum amount of equipment placed in service in 2009
that businesses can expense stays at $250,000. And the
annual investment limit remains $800,000. Thus, you won't
begin to lose the benefit of expensing until you place more
than $800,000 of assets in service in 2009. However, you
need to act quickly because the allowance drops to $135,000
for tax years beginning in 2010.
Tax-Free Parking for Employees
Starting in 2009, firms can pay for $230 a month of parking
tax-free for employees, up $10 per month from 2008. The cap
on tax-free transit passes is now $230 a month as well, the
same as for parking. The limit had been $115 a month in
2008.
Tax Credit for College Tuition
For 2009 and 2010, the Hope credit is replaced by a new
credit of up to $2,500 per student per year for four years
of college. It now also covers the cost of books, and begins
to phase out at $80,000 of Adjusted Gross Income for single
filers and $160,000 for joint filers. If the credit is more
than your income tax liability, 40 percent of it is
refundable. Also, the full credit is allowed against the
Alternative Minimum Tax.
Educators' Deduction
Educators may deduct up to $250 of classroom supplies that
they purchased with their own funds. This deduction is
scheduled to end after 2009.
Child Tax Credit
If the credit exceeds the filer’s tax liability, all or part
of the credit will be refunded if the filer earns more than
$3,000 in 2009 and 2010, down from $12,550 in earnings
previously.
Earned Income Tax Credit (EITC)
For families with three or more children, the maximum Earned
Income Tax Credit for 2009 and 2010 rises by $628.50. And
the phaseout of the credit for joint filers starts at higher
income levels in 2009 and 2010, allowing more of them to
claim the credit.
Nontaxable Combat Pay Allowed for Earned Income Tax Credit (EITC)
The election to include nontaxable combat pay in the
calculation of earned income for the Earned Income Tax
Credit applies for 2009.
Kiddie Tax
In 2009, a child's unearned income over $1,900, such as
gains and dividends, is taxed at the parents' marginal rate
until the year the child is age 19, or age 24 for full-time
students whose earned income is less than half their
support.
Direct Donations of IRAs to Charity
Unless Congress acts to extend it, 2009 is the last year
that IRA owners age 70 ½ and older can donate up to $100,000
of their IRAs to charity without having to report the
withdrawal as income and deduct the donation as a charitable
contribution. Deductions will not be limited by the Adjusted
Gross Income cap on charitable contributions or the itemized
deduction phaseout. Keeping IRA distributions out of
adjustable gross income in the first place can also have
other benefits. Amounts donated in this way count as all or
part the IRA owner’s required minimum distribution.
Higher Income Limits for Deductible IRAs and for Roth IRAs
If you are covered by a retirement plan at work, you can
take a full IRA deduction in 2009 if your modified Adjusted
Gross Income is less than $89,000 (married filing jointly)
or $55,000 (single or head of household). A partial
deduction is allowed until your Adjusted Gross Income
reaches $109,000 if you are married filing jointly, or
$75,000 if you are single or a head of household. Also, the
opportunity to contribute to a Roth IRA is now phased out as
your modified Adjusted Gross Income rises between $166,000
and $176,000 if you are married filing jointly, or $105,000
to $120,000 if you are single or a head of household.
Contribution Limit for 401(k) Plans
The maximum employee contribution rises to $16,500 in 2009
from $15,500 for 401(k) and similar workplace retirement
plans, including 403(b)s and the federal Thrift Savings
Plan. Workers age 50 and older in 2009 can put in an
additional $5,500, making their maximum $22,000. These
limits remain the same in 2010.
Capital Gains Tax Rates
The tax rate on capital gains from the sale of assets held
longer than one year remains at 0% for people in the 10
percent or 15 percent tax brackets. The 15 percent maximum
tax rate on long-term capital gains for taxpayers in higher
brackets also remains the same. Rates are scheduled to
increase in 2011.
Dividend Tax Rates
Similarly, the special 5 percent maximum rate on dividends
of taxpayers in the 10 percent and 15 percent tax brackets
remains at zero percent through 2010. Rates are scheduled to
increase in 2011.
Estate Tax Exemption
For 2009, the federal estate tax exemption is $3,500,000.
Higher Annual Gift Tax Exemption
For 2009, you can give up any individual up to $13,000
without owing any gift tax.
Exemptions for the Alternative Minimum Tax (AMT)
For 2009, the exemption levels rise to $70,950 for married
couples filing jointly, $46,700 for singles and heads of
household, and $35,475 for married couples filing
separately. Otherwise, about 28 million filers would have
been added to the AMT rolls. Congress is likely to act again
to prevent this from happening for the 2010 tax year. Also,
interest on private-activity bonds issued in 2009 and 2010
is exempt from the Alternative Minimum Tax.
Income Earned Abroad
The maximum foreign earned income exclusion is increased to
$91,400, up fom $87,600 in 2008.
Credit for Residential Energy-Efficient Property
The credit for 30 percent of the cost of installing solar
water heating equipment, solar electric equipment,
geothermal heat pumps or small wind turbines in your primary
residence or a second home is unlimited in 2009. But the
credit for fuel cell property cannot exceed $500 per
half-kilowatt capacity.
Credit for Energy-Saving Home Improvements
The tax credit for the cost of energy-saving home
improvements is 30 percent for 2009 and 2010, up to a
maximum of $1,500 in the two-year period. It applies to
qualified skylights, windows, outside doors, biomass fuel
stoves and high-efficiency furnaces, water heaters and
central air conditioners.
Converting a Second Home to a Primary Home
If you convert a second home into a principal residence
after 2008, you may not be able to exclude all of your gain.
A portion of the gain on a subsequent sale of the home will
be ineligible for the home-sale exclusion of up to $500,000,
even if the seller meets the two-year ownership-and-use
tests. The portion of the profit that’s subject to tax is
based on the ratio of the time after 2008 when the house was
a second home or a rental unit, to the total time you owned
it. So if you have owned a vacation home for 18 years and
make it your main residence in 2011 for two years before
selling it, only 10 percent of the gain (two years of
nonqualified second home use divided by 20 years of total
ownership) is taxed. The rest qualifies for the home-sale
exclusion of up to $500,000.
Refundable Child Tax Credit
The $8,500 income threshold needed to qualify to claim the
child tax credit if it exceeds your regular income tax bill
decreases to $3,000 for 2009.
Partial Exclusion for Unemployment Benefits
For 2009, the first $2,400 of unemployment benefits you
receive is tax-free. However, this benefit is scheduled to
end in 2010.
College Savings Plans
Beginning in 2009, 529 College Savings Plans can be tapped
tax-free to pay for a computer or Internet access.
Estimated Tax Relief for Owners of Small Businesses
If an individual’s Adjusted Gross Income for 2008 was less
than $500,000 and more than half of the gross income was
from a business with fewer than 500 workers, the estimated
income taxes for 2009 estimated tax payments can be based on
the lesser of 90 percent of tax liability for 2008 or 2009.
The usual estimated tax benchmarks of 100 percent or 110
percent of tax liability do not apply.
For the most up to date information you can download IRS.GOV Publication 17
Click Here RIGHT CLICK and SAVE AS
A PDF File Viewer is required to read this file. One can be downloaded here:
Adobe PDF Reader
top of page
Checking Your Work Record.
Your work record is crucial to your claim to Social Security benefits for two reasons. First, your eligibility for benefits depends on having earned enough work credits (quarters of coverage) to qualify. Second, the amount of your benefit is tied to the amount of money you have earned.
It's important to check your work record every few years as the Social Security Administration is not obligated to correct mistakes that occurred later than 3 years, 3 months, and 15 days after the year in which the mistake was made.
Social Security is now sending a Personal Earnings and Benefit Estimate Statement about three months before each taxpayer's birthday. Take the time to review it carefully. If you don't receive a statement, call toll free 1-800-772-1213 or stop by your nearest Social Security office and ask for Form 7004. Once you complete the form, you should receive your statement in two or three weeks.
If you find an error or an omission in your work record, take your statement and copies of your tax records or W-2 forms for the period in question to your local Social Security office and submit a "Request for Correction in Earnings Record."
Back Taxes?
If you are unable to pay back taxes and circumstances indicate that you won't be able to pay them in the foreseeable future, you might want to consider making a proposal to the IRS which would require you to pay less than the full amount of the bill. The IRS will often agree to compromise a civil tax liability if there is doubt as to its collectibility.
Compromise offers must be submitted on Form 656. "Offer in Compromise," along with detailed financial information on Form 433, "Statement of Financial Condition," if the offer is based on inability to pay.
Once the IRS receives your Offer in Compromise, the agency is required to stop all collection activity and investigate your request. The investigation normally takes about a minimum of six months, but often takes longer. At the very least, you are buying time. If your offer is rejected, you will receive back any amount tendered with your offer.
The IRS will take your future earning ability into account in determining if it will accept your proposal. In some cases, the IRS may ask you to make a "collateral agreement" promising to pay future amounts based on your earnings-in addition to the compromise amount.
Top of Page
|
|
Individual Income Tax