Save on Taxes in 2009 with Short-Lived Tax Deductions and Credits

There are a surprising number of short-lived special or enhanced tax deductions and tax credits available to U.S. taxpayers in 2009. Be sure that you don't miss out on any of them. Here are six that could save you money.

First-Time Homebuyer's Credit. The American Recovery and Reinvestment Act (AARA) extended a tax credit of up to $8,000 to first-time homebuyers (defined as those who didn't own a home in the past three years) who closed on a home purchases by November 1. More recently, this credit was extended through April 30, 2010 and an additional tax credit of up to $6,500 was allowed for existing homeowners (defined as those who have lived in the same home for five consecutive years of the past eight years). There are limits on these credits, so check the rules before you take them. Tax credits are more valuable than tax deductions because they reduce your tax bill dollar for dollar by the credit amount, while a deduction reduces only your pretax income.

Unemployment Benefits. AARA made $2,400 of unemployment benefits received by an individual in 2009 tax free. Generally unemployment benefits are taxable income.

Green Investments. Qualified green investments in your home, such as installing insulation, energy-efficient windows, and energy-efficient heating and cooling systems, are eligible for a 30% tax credit, up to a maximum of $1,500, in 2009 and 2010.

Tax-Free IRA Charitable Donations. Taxpayers who are older than 70 ½ can transfer up to $100,000 from an individual retirement account (IRA) to a charity tax free in 2009. This is the last year these tax-free transfers are allowed.

Sales Tax Deduction on a Vehicle. ARRA allows taxpayers to deduct state and local sales taxes and excise taxes paid on the purchase of a new car, light truck, motor home or motorcycle in 2009 (starting February 17). The deduction is limited to taxes on a maximum of $49,500 of the vehicle's purchase price and it phases out at defined income levels, so check the details before taking this deduction.

Capital Gains Rates. Long-term capital gains rates on investments such as stocks are 0% in 2009 and 2010 for taxpayers in the 10% to 15% marginal tax brackets. If you are in these tax brackets and have long-term investments you've been thinking about selling, now might be a good time to do it. These rates don't apply to all categories of assets. For example tax rates on collectibles are significantly higher.

Education Tax Credit. ARRA created the American Opportunity Tax Credit, which replaced and enhanced the Hope Tax Credit. The new tax credit is a maximum of $2,500 per student annually, up from $1,800 previously; it is partially refundable (that is, those with no or little taxable income may be able to receive a portion of the credit in cash) whereas the Hope Credit was nonrefundable; it is available to more taxpayers because income limits for eligibility were raised significantly; and it is available for students in the first four years of college versus only the first two years for the Hope Credit. Currently, the American Opportunity Tax Credit expires after 2010.

Sources:

moneysmartlife.com, Year End Tax Tips 2009 - Money Smart Life

John Wu, personal-tax-planning.suite101.com, Free Money for College from the Hope Credit: American Opportunity Tax Credit Replaces Hope Education Credit

William Perez, taxes.about.com, Capital Gains Tax Rates for Short-Term and Long-Term Capital Gains