A Review of IRS 2009 Tax Law Changes

It's getting to be that particular time of year again. The Super Bowl is over and the winter months are waning. April 15^th gets circled on the calendar, in red, and your shoebox receipts get dumped on the dining room table in preparation of a long night of sorting. The 2009 tax returns are due this spring. For some, this means a sizeable refund and a new flat screen. For others, it means last minute, last hour return preparation with the hope that the end result doesn't yield any nasty surprises. No matter what your expectations are, here is a rundown of the major changes you should be aware of for the 2009 tax season. New changes to the tax law are designed to help almost all working families.

The First Time Homebuyer Credit

Planted in 2008 as a seedling to help re-launch a dwindling housing market, the first-time homebuyer credit was extended to include homes purchased prior to May 1^st of 2010. The Homebuyer Credit is a refundable credit, and puts money directly into your hands. A refundable credit creates a tax refund, similar to the Earned Income Tax Credit. Other tax credits, like the Child Tax Credit or the Residential Energy Credit, discussed later, are pre-tax or non-refundable credits; they reduce the amount of tax owed down to zero but do not generate a refund.

The previous cutoff date on the Homebuyer credit was November of 2009. In order to be eligible for the credit, a potential new homeowner only needs to have a signed contract in place on or before April 30^th. Additionally, new legislation now allows for purchases to be made after April 30, 2010, and before July 1, 2011, as long as you have entered into a binding contract before May 1, 2011 that states intent to close on the home before July 1, 2011.

The maximum homebuyer credit available is the lesser of ten percent of the purchase price of the property, or $8,000 for joint filers. For separate or single filers, the credit amount caps out at $4,000. As long as you have not owned a home for three years prior to a new purchase, you are considered a first time homeowner for the purposes of this credit, with an important exception introduced this year.

The post November 2009 changes modified some of the requirements for the credit. For those who purchased a home after November, in order to be eligible for the credit, you must be 18 years of age, not considered a dependent on anyone else's tax return, and have an adjusted gross lower than $125,000, or $225,000 for joint filers. Prior to November the income limitations were $75,000 and $150,000.

If you do not qualify as a first time owner under the above terms, a recent change has opened up a qualifying option for previous homeowners who lived in another home for at least 5 consecutive years, during any 8 year period, prior to purchasing their new home.

For additional information see Form 5405 (December 2009 revision) and Instructions for Form 5405.

The Making Work Pay Credit

The Making Work Pay Credit is a sweeping credit that most wage earners and self employed individuals should be able to take advantage of, up to $800 for joint filers. An adjunct to his credit targets former government workers who are not currently receiving Social Security benefits.

Most individuals saw the benefit of this credit rolled out in late summer 2009. Federal pay and withholding tables were adjusted which resulted in a higher take home pay. The second part of this credit can be claimed by using a new IRS Schedule M, and reported on your 1040 line 63 (Line 40 on 1040A).

The American Opportunity Credit

The new American Opportunity Credit modifies the existing Hope Credit, used to fund college expenses. The Opportunity Credit broadens the eligibility of the Hope Credit to certain individuals whose income levels previously phased them out, as well as to those taxpayers who owe no tax or have no filing obligation. The full credit is $2,500, up from $700, and is available to individuals that have an adjusted gross income under $80,000 ($160,000 for married couples filing jointly).

Residential Energy Efficient Property Credit

If you are going green, the IRS wants to give you some green.

Alternative and efficient energy purchases can equate into a 30 percent credit, up to $1,500, on the purchase price of qualified equipment. The credit is available to those upgrading their existing home with fuel efficient alternatives; it is not available for new builds. Claim the credit for the price and installation on high-efficiency heating and air conditioning systems, and certain types of water heaters and stoves. The purchase price of energy efficient windows, doors, skylights, roofs and insulation also may qualify, though labor and installation costs cannot be deducted.

Other home energy credits can be claimed as well, such as the cost of a high efficiency furnace. See Form 5695, Residential Energy Credits, for more information.

Purchasing a New Vehicle

If you are thinking about buying a new car, this may be the time to do it. New car buyers can deduct state, local or excise taxes paid on the purchase price of qualified cars, light trucks, motorcycles and even motor homes. The tax can be deducted up to a ceiling of $49,500. If your adjusted gross income is between $125,000 and $260,000, the deduction is reduced. For those who are itemizing their deductions, this incentive is reflected on either Line 5 or 7 of their 1040 Schedule A. Non itemizers can make use of Schedule L.

Earned Income Tax Credit

The eligibility for this credit continues to expand, with the amount of credit also seeing an increase. The EITC is available to approximately 20% of households, and is designed to assist lower income families, especially those with up to three qualifying children.

Income thresholds must be under the following in order to qualify for the credit:

• $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

Standard Deduction Rate

For those who do not have enough deductions to make it worthwhile to itemize, the standard deduction rates have been bumped up.

• Married couples filing joint can deduct $11,400, up $500 from 2008.
• Single or married couples filing separate can deduct $5,700, an increase of $250.
• Head of Household filers can deduct $350 more, or a total $8,350.

Those who are elderly, blind, or paid at least $1,000 in real estate taxes can deduct even more.

See irs.gov for a complete rundown on these changes and others.