Overlooked IRS Tax Deductions

With 2009 now half over, it may be time to review some of the numerous tax breaks made available 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.

First-Time Homebuyer Credit 
The act extended and expanded the first-time homebuyer tax credit for 2009.
Taxpayers who didn’t own a principal residence during the past three years and purchases a home in 2009 before December 1 can receive a credit of up to $8,000. The taxpayer can claim the credit by amending their 2008 tax return or wait and claim it on their 2009 tax return. But the purchase must close before December 1, 2009, and an eligible taxpayer cannot claim the credit until after the closing date. The credit starts to phase out at modified AGIs of $75,000 ($150,000 for MFJ) and is not available if the taxpayers AGI is $95,000 or more ($170,000 or more for MFJ). If the taxpayer lives in the new home for 3 or more years, the credit does not need to be repaid.

New Vehicle Purchase Incentive
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.

Energy-Efficient Home Improvements
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.

Tax Credit for First Four Years of College 
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.

Certain Computer Technology Purchases Allowed for 529 Plans
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.

Making Work Pay and Withholding
The Making Work Pay Credit lowered tax withholding rates this year for 120 million American households. However, particular taxpayers who fall into any of the following groups should review their tax withholding rates to ensure enough tax is withheld, including multiple job holders, families in which both spouses work, workers who can be claimed as dependents by other taxpayers and pensioners. A taxpayer’s failure to adjust their withholding could result in potentially smaller refunds or in limited instances may cause them to owe tax rather than receive a refund next year.

Cash For Clunkers
New car buyers may qualify for a $3,500-$4,500 cash voucher for trading in their “clunkers” for more fuel-efficient models this year. The new Car Allowance Rebate System (CARS) incentive takes effect August 1st.   Here are some conditions that must be met in order to qualify:

• The trade-in vehicle must be under 25 years old, working, and have an average gas mileage of 18 miles per gallon or less. It must be owned and insured by the same person for the past year.
• To qualify for a $3,500 credit, the buyer must purchase either a new passenger car getting at least 4 more miles per gallon, a new small truck getting at least 2 more miles per gallon, or a new large truck weighing 6,000-8,500 pounds getting at least 1 more mile per gallon. The new passenger vehicle must have a new mile per gallon requirement of 22 miles, a small truck at 18 miles per gallon, and a large light-duty truck at 15 miles per gallon.

• To qualify for a $4,500 credit, the buyer must purchase either a new passenger car getting at least 10 more miles per gallon, a new small truck getting at least 5 more miles per gallon, or a new large truck weighing 6,000-8,500 pounds getting at least 2 more miles per gallon.

The CARS Act requires that the trade-in vehicle be crushed or shredded so that it will not be resold for use in the United States or elsewhere as an automobile. 

Under the CARS Act, you may purchase a new vehicle or lease a new vehicle, provided the lease period for the new vehicle is at least five years.

Participating car dealers will apply the credit to qualifying new car purchases at the time of the purchase. The program will operate on a first-come, first serve basis until the billion dollars of funding is exhausted, or until November 1, 2009.