TAX TIPS

Tax incentives still available under the stimulus bill

by Alan Shattuck, CPA

SACRAMENTO

Below are highlights of several tax incentives contained in the new law as they relate to individuals and families. Watch for additional tips on more tax incentives offered by the “American Recovery and Reinvestment Act of 2009” in future articles.

Some tax breaks for individuals and families

● Making Work Pay Credit: The refundable credit is equal to 6.2 percent of a taxpayer's earned income with a maximum credit of $800 for a married couple filing a joint return and $400 for other taxpayers, but it is phased out for higher income taxpayers. The phase-out applies for those with adjusted gross income above $75,000 for individuals and $150,000 for married couples filing jointly.

The credit is available for 2009 and 2010, but may be extended under President Obama’s budget proposals

Ineligible individuals include nonresident aliens, those claimed as a dependent on another person’s tax return and those who do not include a social security number on their tax return. For joint filers, only one Social Security number is required on the return.

Two Important Points: Taxpayers will not get a separate check mailed to them from the IRS like last year's economic stimulus payment. Also, with the adjusted withholding tables, employees need to ensure that enough taxes are withheld, as the credit could reduce the withholding for a married couple with dual income by too much if the couple is ineligible or only partially eligible for the credit.

● First-Time Homebuyer Credit: Qualifying taxpayers who purchase a home before Dec. 1, 2009 receive a credit of 10 percent of the cost of the home purchase up to $8000 or $4,000 for married individuals filing separately. You can qualify if you have not owned a home for the past three years. Taxpayers have the option of claiming the credit either on their 2008 tax returns or on their 2009 tax returns next year. The amount of the credit begins to phase out for taxpayers whose adjusted gross income is more than $75,000, or $150,000 for married couples filing jointly.

Taxpayers buying the home after Dec. 31, 2008 do not have to repay the credit. (Taxpayers who bought a home under the previous provision during calendar year 2008 have to repay the credit over 15 years.)

Some filing options to consider are:

1) Amend the 2008 tax return. Taxpayers who buy a home after they filed their 2008 return can consider filing an amended tax return. The amended tax return will allow them to claim the homebuyer credit on the 2008 return without waiting until next year to claim it on their 2009 return.

2) Claim the credit in 2009 rather than 2008. For some taxpayers, it may make more financial sense to wait and claim the homebuyer credit next year when they file the 2009 tax return, rather than claiming it on the 2008 tax return. This could benefit taxpayers who might qualify for a higher credit on the 2009 tax return because they have less income in 2009 due to a job loss or a drop in investment income and, thus, will not be penalized by the phase-out provisions.

3) Instant credit may be available. Buyers eligible for the credit who get FHA loans may soon also be eligible for cash advances from their loan companies up to the amount of the credit. The Federal Housing Administration has announced it will authorize lenders who do business with the agency to provide bridge loans at closing secured only by the tax credit the borrower will receive from the IRS. The bridge loans act as advances on the credit which the homebuyer can use to make the down payment or pay closing costs without waiting for the normal tax filing cycle to claim their credit.

● Deduction for Sales and Excise Taxes on Purchase of Vehicle: Taxpayers can deduct state and local sales and excise taxes they pay on the purchase of a new automobile in 2009. The deduction is limited to tax amounts paid on up to $49,500 of the purchase price of a qualified new car, light truck, motor home or motorcycle. Also, the deduction is allowed for purchases of motor homes or vehicles with a gross vehicle rating of not more than 8,500 pounds. The deduction is phased out for taxpayers whose adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for married couples filing jointly. To qualify, the vehicle must be purchased after Feb. 16, 2009, and before Jan. 1, 2010. The deduction may be taken on the 2009 tax return and is available to both those who itemize their deductions and those who take the standard deduction instead.

● American Opportunity Tax Credit for College Costs: The HOPE college credit has been renamed the “American Opportunity Tax Credit” and has been increased to $2,500 per eligible student, beginning in 2009 or 2010. The new credit rate is 100 percent of the first $2,000 of qualified tuition and related expenses and 25 percent of the next $2,000 of qualified tuition and related expenses. The credit is available for the first four years of higher education. The credit is phased out for taxpayers with adjusted gross income between $80,000 and $90,000 ($160,000 and $180,000 for married couples filing jointly. A portion of the credit is refundable.

● Computer Equipment Qualifies as College Expense: Taxpayers may use funds from tax-qualified 529 Plan Accounts for purchases of computer hardware, software, internet access or related services used by a college student. The purchases must take place in 2009 or 2010. Software designed for sports, games, or hobbies does not qualify unless it is mainly educational in nature.

If you are interested in learning more about “The American Recovery and Reinvestment Act of 2009”, I am presenting an eight hour seminar sponsored by the Center for Professional Education Inc. (CPE Inc.) on Sept. 23 in Santa Clara. If you are interested in finding out more about this seminar and the professional continuing education hours you might earn, please call 1-800-544-1114 or go online at www.cpeonline.com. Please be sure to tell them you found out about this seminar from the “Central Valley Business Times” or “CVBT.”

This helpful information has been provided by Alan Shattuck, CPA who can be reached at 866.305.5210 or alan@shattuckaccounting.com