There’s been a lot of buzz about the tax goodies. Congress has doled out to shore up the housing market and stimulate the economy. You may have heard you can get a break for “going green” expenditures at home. Potential first time home buyers are asking about the credit for a 2009 home purchase. And what about the new sales tax deduction for new car buyers?
Let’s start with “going green.” Taxpayers can save up to a maximum of $1,500 through a federal tax credit for improving home energy efficiency. You’ll get a credit of up to 30% of what you spend for “qualified” improvements and “energy property” for your principal residence in 2009. Improvements include insulation, roofs, windows and doors, although not all Energy Star items qualify so confirm the item’s qualification before you buy. “Energy property” includes heat pumps and hot water heaters. A full description is available at www.energystar.gov/taxcredits with a description of the documentation you will need in the FAQ’s section. The 30% stipulation means that to get the entire $1,500 credit, you would have to spend at least $5,000. However, there are no income limits on this tax break and credits are great because they reduce your taxes dollar for dollar.
The First-Time Homebuyer Tax Credit may benefit those who purchase a “principal residence” during the 2009 calendar year. The maximum credit is $8,000. Like many tax benefits, taxpayers with modified adjusted gross incomes, MAGI, above certain amounts cannot claim the credit. For single tax payers, the full credit is for those with MAGI less than $75,000; those with MAGI over $95,000 will get no credit. For married taxpayers, the phase out is between $150,000 and $170,000. If you are married, it must be a “first-time” purchase for both of you and you must keep the home for 3 years. Other restrictions apply, so consult your tax professional if you need to know if you’ll qualify.
Perhaps you’re thinking about buying a new car. There’s a new Vehicle Tax deduction for state and local sales taxes paid to purchase up to $49,500 on qualifying vehicles. Again, there are income limits; single taxpayers can take the full deduction only if their MAGI is less than $125,000. The limit for married taxpayers is $250,000. The good news is that taxpayers who don’t itemize can still take the deduction. Most individuals who are renters and many seniors who’ve paid off their mortgages don’t itemize. Taking the deduction in addition to their standard deduction will save taxes.
For example, if you don’t itemize and pay 8% in taxes on a $25,000 new car purchase, you’ll get a tax deduction of $2,000 which reduces your taxable income, not your tax like a credit does. If your marginal tax bracket is 25%, the $2,000 deduction will save you $500 in income taxes. Unless you’re a tax maven, you probably don’t remember that those who do itemize have to choose between deducting state and local income taxes or local sales taxes. For the same $25,000 car with $2,000 of sales tax, if you itemize deductions and have taxable Illinois income over $67,000, the 3% you pay for Illinois income tax provides a similar deduction. Since you can’t deduct both, you won’t get an additional benefit from buying that new car.
Other tax breaks. There’s some good news for those who have been laid off. They can receive unemployment benefits tax free on the first $2,400 in 2009. Eligible individuals can also receive a 65% government provided subsidy on their COBRA premiums. There are even some potential breaks for businesses that had operating losses in 2008 so small business owners should consult their tax experts.
There are other deductions and credits in the recent law, The American Recovery and Reinvestment Act of 2009 and more changes may still come. Remember that most steps you can take to reduce your tax bill need to be taken in 2009 and not in early 2010 next year when you’re thinking about your 2009 return. Tax planning is as important as ever to minimize your tax bill so you have more to save for your financial future, give to others or spend on what’s important to you.