Changes to Credits and Deductions in the 2009 Federal Income Tax Code

Nothing is more cumbersome then the federal income tax code. But nothing is more important then understanding how these new and modified deductions and credits could affect your taxes.

American Opportunity Credit

First up is the American Opportunity Credit, which helps to pay for your first four years of college. It modifies the Hope credit in 2009 & 2010 to make it available to more people. This credit is primarily driven by broader income qualifications.

It has added regular course materials as qualified expenses and the maximum is now $2,500. The credit is applied at 100% for the first $2,000 and 25% for the next $2,000. This means you have to spend $4,000 to get the maximum but if you have ever been to college you know this is very easy.

Also 40% or $1,000 per student is refundable, which means that if you don't pay any taxes this year the government will send you a check up to $1,000 depending on your credit calculation.

Energy Improvements

People who weatherize their homes or purchase alternative energy equipment qualify for expanded residential energy tax credits.

There are basically two credits available. The first is called the Non-Business Energy Property Credit. This credit amounts to 30% of what is spent on qualifying home improvements up to a maximum of $1,500 for the combined tax years of 2009-2010.

New construction is exempt from this credit as it must be an existing primary residence. Included is high-efficiency cooling and heating systems, water heaters and stoves that burn biomass, along with the labor to install these systems.

Additionally the cost of energy efficient windows and skylights, doors, qualifying insulation and certain roofs are eligible, but not the cost of installation.

The second credit is the Residential Energy Efficient Property Credit. This credit equals 30% of what is spent on qualifying property, such as: solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines and fuel cell property.

Be careful as not all products qualify. Check the manufacturers tax credit certification statement before purchasing or installing any products. Please note that this certification is different then the DOE Energy Start Program.

Use form 5695 to figure and claim your credit.

New Vehicle Purchase Incentive

This credit was designed to stimulate the depressed automobile industry. This industry was extremely hard hit during the recent recession and the government is looking for ways to help revive their markets.

New car buyers can deduct the state or local sales or excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles. There has never been a better time to purchase a vehicle if you need one.

There is no limit on the number of vehicles you can purchase but there is a limit of $49,500 per vehicle that applies to this credit. Although there are income limits before the credit is modified they have been expanded to include as many taxpayers as possible.

Tax Credits are increased for Low and Moderate Income Workers

The Earned Income Tax Credit (EITC) has been modified so that more workers are eligible for expanded benefits.

The EITC helps those taxpayers whose incomes are below certain levels in 2009:

$48,279 for families with three or more qualified children

$45,295 for families with two children

$40,463 for families with a child

$18,440 for those with no children

This credit is refundable, which means you can receive it even if you owe no tax.

In addition to the EITC low and moderate taxpayers can possibly qualify for the full $1,000 child tax credit. See form 8812 for details on this credit.

Standard Deduction Increases for Taxpayers

Two thirds of all taxpayers use the standard deduction, which increases this year. The basic standard deduction is as follows:

$11,400 for joint filings

$ 5,700 for singles and married filing separately

$ 8,350 for heads of household

Unemployment Benefits

If you were unemployed in 2009 and received unemployment benefits then the unemployment you received is tax-free for the first $2,400 with the remainder being taxable.

Well there you have the rundown on changes in the tax law that could affect you. Please read the actual law carefully to see if these credits or deductions are right for your situation. If you can't decide then request the help of a tax professional to sort it out for you.