Overlooked IRS Tax Deductions

Numerous tax breaks are available because of earlier this year in the American Recovery and Reinvestment Act (ARRA).  The recovery law provides tax incentives for first-time homebuyers, people purchasing new cars, those interested in making their homes more energy efficient and parents and students paying for college. But all of these incentives have expiration dates so taxpayers should take advantage of them while they can.

The first-time home buyer’s credit has been extended into 2010, and more people will qualify for a tax break.  The qualification period for first-time home buyers to purchase a home and qualify for the credit will continue through April 30, 2010.  First-time home buyers who have not owned a principle residence for 3 years prior to the purchase of a new home will continue to be eligible for a credit of up to $8,000.  For homes purchased after December 31, 2008, the credit will not have to be repaid if the home buyer uses the home as their principal residence for 3 or more years.  Those serving in the military will not be penalized if they claimed the credit and then have to deploy and sell their home within three years.

The first-time home buyer’s credit has been expanded so that more homeowners now qualify for a tax break.  People who have owned a home and used it as a principal residence for a 5-consecutive-year period during the 8-year period ending on the date of purchase of a new personal residence may qualify as first-time homebuyers and receive a credit of up to $6,500.  To claim this credit, the taxpayer must have a signed purchase contract for a principal residence in force before May 1, 2010 and must close on their home purchase by June 30, 2010 (this also applies to the up to $8,000 credit). This credit is available for purchases of principal residents after November 6, 2009.  Taxpayers who make qualified purchases after December 31, 2008 do not have to repay the amount of the credit if they reside in the home as their principal residence for 36 months after the purchase.

The act also provides a tax break to taxpayers who make qualified new vehicle purchases after Feb. 16, 2009, and before Jan. 1, 2010. Qualifying taxpayers can deduct the state and local sales and excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles. There is no limit on the number of vehicles that may be purchased, and the taxpayer may claim the deduction for taxes paid on multiple purchases. But the deduction per vehicle is limited to the tax on up to $49,500 of the purchase price of each qualifying vehicle and phases out for taxpayers at higher income levels. This deduction is available regardless of whether a taxpayer itemizes deductions on Schedule A. The act also encourages homeowners to make their homes more energy efficient. The credit for non-business energy property is increased for homeowners who make qualified energy-efficient improvements to existing homes. The law increases the rate to 30 percent of the cost of all qualifying improvements and raises the maximum credit limit to a total of $1,500 for improvements placed in service in 2009 and 2010.
Qualifying improvements include the addition of insulation, energy-efficient exterior windows and energy-efficient heating and air conditioning systems. The American opportunity credit is designed to help parents and students pay part of the cost of the first four years of college. The new credit modifies the existing Hope credit for tax years 2009 and 2010, making it available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. Tuition, related fees, books and other required course materials generally qualify. Many of those eligible will qualify for the maximum annual credit of $2,500 per student. Generally, 40% of the Hope credit is now a refundable credit, which means that the taxpayer can receive up to $1,000 even if they owe no taxes. However, none of the credit is refundable if the taxpayer claiming the credit is a child:

(a) who is under age 18 (or a student who is at least age 18 and under age 24 and whose earned income does not exceed one-half of his or her own support),
(b) who has at least one living parent, and
(c) who does not file a joint return.

The act adds computer technology to the list of college expenses (tuition, books, etc.) that can be paid for by a qualified tuition program (QTP), commonly referred to as a 529 plan. For 2009 and 2010, the law expands the definition of qualified higher education expenses to include expenses for computer technology and equipment or Internet access and related services to be used by the designated beneficiary of the QTP while enrolled at an eligible educational institution. Software designed for sports, games or hobbies does not qualify, unless it is predominantly educational in nature. The Making Work Pay economic stimulus credit is a refundable tax credit of up to $400 for working individuals and $800 for working married couples for 2009 and 2010. This credit resulted in a decrease in withholding for most taxpayers. As a result it may also cause a surprise for some taxpayers who discover that they need to adjust their withholding amounts, or owe at tax time.  Taxpayers who have more than one job and families with two working spouses may be having too little withheld.  Working dependents, pensioners who have earned income, and some employees receiving Social Security, SSI, Railroad Retirement or Veteran’s Disability payments may also be in this category, and find it beneficial to check their withholding amounts.  It’s easy to check your withholding, using our online withholding calculator.