Tax Changes 2009: Ready for a Refund?

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When it comes to income taxes, if there’s one thing that never changes, it’s that nothing ever stays the same.

Income taxes are one way the government influences behavior, fine-tunes the economy and helps citizens endure hard times. And tax year 2009 is full of examples. Congress wanted to help the housing market so they created a tax break for home buyers. They wanted to help those suffering in the current economic downturn, so they expanded the child care credit and made part of unemployment benefits tax-free.

And that’s just the beginning. There are a ton of changes, many of which will provide nice tax breaks for all except those in the highest brackets.

If you use a professional or tax software to prepare your taxes, any changes that affect you should be taken into account: you needn’t worry about ferreting them out. But it still makes sense to look over a list of changes, because doing so may give you ideas on things you can do that might save you tax dollars for tax year 1010 or beyond.

And while you may think this odd, I’ve always thought of tax changes kind of like scientists think of tree rings or core samples of glacial ice: a permanent historical record of what was happening at one point in time. Tax changes reflect how those in power in our society attempted to influence the behavior of those who weren’t.

Too deep? Probably. But sit back and check out this 90-second news story I recently did on some of the major changes for tax year 2009; then meet me on the other side for more.

So that was a look at some of the biggest changes for last year, but there were plenty more: take a look at how busy Congress was last year by checking out a more complete list below. And you should also look at a clever way you can use your tax refund to pay off debt but checking out this recent story called Let Uncle Sam help you pay off $5,000 of debt.

Alternative Minimum Tax (AMT)

  1. The amount exempt from the alternative minimum tax has increased to $46,700 ($70,950 if married and filing jointly; $35,475 if married but filing separately).
  2. The exemption amount for a child whose unearned income is taxes at the same rate as the parent’s has increased to $6,700.
  3. If you claim a regular tax deduction for state or local tax on the purchase of a new auto, that tax is also allowed as a deduction for the AMT.
  4. If you earned tax exempt interest from a specified private activity bond that was issued to you in 2009 or 2010, then that interest is now exempt from the AMT.
  5. The 90% limit on the Alternative Tax Net Operating Loss Deduction (ATNOLD) will not apply to the portion of an ATNOLD attributable to any 2008 or 2009 loss you elected to carry back more than 2 years.

Child Related Tax Changes

  1. The maximum adoption credit has increased to $12,150, as well as the maximum exclusion from income for benefits under your employer’s adoption assistance program.
  2. The amount of taxable investment income a child can have without it being subject to tax at the parent’s tax rate has increased to $1,900.
  3. You now only need to earn $3,000 to claim the additional child tax credit.

Smaller Estimated Tax Payments for Individuals with Small Businesses

If you own a small business, you may be eligible to make smaller estimated tax payments. You’ll qualify if more than 50% of your gross income was from a business that had fewer than 500 employees in 2008 and your gross income in 2008 was less than $500,000.

Deduct Credit or Debit Card Convenience Fees

If you pay your income tax (including estimated tax payments) by credit or debit card, you can deduct any convenience fee you are charged for the payment.

Deduct Taxes Imposed on Purchase of New Motor Vehicles

You can now deduct the state or local taxes on any qualified motor vehicle purchased after February 16, 2009, but before January 1, 2010. A qualified motor vehicle includes “passenger automobile, light truck, or motorcycle, the original use of which begins with that purchaser and that has a gross vehicle weight rating of 8,500 pounds or less” as well as the first $49,500 of a motor home purchase.

Earned Income Credit Increased

The maximum amount of the credit has increased. You can now get a maximum of:

  • $3,050 if you have one qualifying child
  • $5,036 if you have two qualifying children
  • $5,666 if you have three or more qualifying children
  • $457 if you do not have any qualifying children

The amount of income you can earn and still get the credit has also increased. You can now get the earned income credit if:

  • You have three or more qualifying children and you earn less than $43,352 ($48,362 if married, filing jointly)
  • You have two qualifying children and you earn less than $40,363 ($45,373 is married, filing jointly)
  • You have one qualifying child and you earn less than $35,535 ($40,545 if married, filing jointly)
  • You do not have a qualifying child and you earn less than $13,460 ($18,470 if married, filing jointly)

If you get advanced payments of the credit from your employer, the total advance payments you can get has increased to as much as $1,830.

Economic Recovery Payments Not Taxable

If you are receiving $250 economic recovery payments, you do not need to pay taxes on any payments received in 2009.

Making Work Pay and Government Retiree Credits

Two new credits you may be able to take are the Making Work Pay Credit and the Government Retiree Credit. You may be able to take the Making Work Pay Credit if you earned income from work and:

  • Your adjusted gross income is less than $95,000 ($190,000 if married, filing jointly)
  • You aren’t a non-resident alien
  • You can’t be claimed as a dependent on someone else’s return

The Making Work Pay Credit is 6.2% of your earned income, but can’t be more than $400 ($800 if filing jointly) and will be reduced if:

  • You received $250 economic recovery payments
  • Your modified adjusted gross income is more than $75,000 ($150,000 if married, filing jointly)
  • You take the Government Retiree Credit

The Government Retiree Credit is for those who received a pension or annuity payment in 2009 for service performed for the U.S. Government (or any state or local government) and the service was not covered by social security. The credit is $250 ($500 if married, filing jointly and both you and your spouse qualify).

Education Related Tax Changes

  1. If you redeem a U.S. Saving Bond to pay for higher education expenses, you may be able to exclude interest income from those bonds from your taxes. However, the amount of that exclusion is gradually reduced if your modified adjusted gross income is between $69,950 and $84,950. If your modified adjusted gross income is more than $84,950, you cannot take the exclusion at all. For a married couple, filing jointly, the reduction occurs between $104,900 and $134,900 with couples making more than $134,900 ineligible for the exclusion.
  2. A new credit called the American Opportunity Tax Credit (AOC) is available. The maximum credit is $2,500 per student. This credit can be claimed for the first four years of post-secondary education (previously, you could only claim the first 2 years). Generally, 40% of the AOC is now a refundable tax credit for most people, meaning you can receive up to $1,000 even if you owe no taxes.
  3. The term “qualified tuition and related expenses” has been expanded to include expenditures for “course materials.” The IRS defines the term course materials as “books, supplies, and equipment needed for a course of study whether or not the materials must be purchased from the educational institution as a condition of enrollment or attendance.”
  4. Student loan interest deductions now phase out between $120,000 and $150,000 in adjusted gross income for married couple, filing jointly. Couples reporting more than a $150,000 adjusted gross income cannot take the deduction. For individual filers, the deduction phases out between $60,000 and $75,000, with those making more than $75,000 ineligible for the deduction.

Health/Medical Tax Changes

  1. For Archer Medical Savings Accounts (MSAs), the minimum annual deductible of a high deductible health plan has increased to $2,000 ($4,050 for family coverage). The maximum annual deductible of a high deductible health plan has increased to $3,000 ($6,050 for family coverage), and the maximum out-of-pocket expenses limit has increased to $4,050 ($7,400 for family coverage).
  2. The Health Coverage Tax Credit (HCTC) has increased to 80% for coverage months beginning after April 2009 and before 2011.
  3. What the IRS considers a “qualified health insurance plan” has expanded to include employee benefit plans funded by voluntary employees’ beneficiary associations (instead of your employer directly).
  4. For Health Saving Accounts (HSA) purposes, the minimum annual deductible increased to $1,200 ($2,400 for family coverage) while the maximum annual deductible and other out-of-pocket expenses limit increased to $5,800 ($11,600 for family coverage). The maximum HSA contribution has also increased to $3,050 ($6,150 for family coverage).
  5. The maximum amount of qualified long-term care premiums you can include as a medical expense has increased. You can now deduct up to:
    • Age 40 or under – $320
    • Age 41 to 50 – $600
    • Age 51 to 60 – $1,190
    • Age 61 – 70 – $3,180
    • Age 71 or over – $3,980

Home/Residence Related Tax Changes

  1. Certain mortgage debts that were forgiven in 2009. Thanks to the Emergency Economic Stabilization Act of 2008, the exclusion from gross income for forgiven mortgage debts has been deferred by an additional 3 years. See Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), and Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals), for more information.
  2. The First Time Homebuyer Credit has been expanded and extended. The full credit is now available to taxpayers with modified adjusted gross incomes up to $125,000 ($225,000 if married, joint filing). If you make more than that, you may still be eligible for a reduced credit. But there are also a few new restrictions on the credit. It is not available to dependents, if the purchase price of the home is more than $800,000, or if the purchasers was not yet 18 years of age on the date of purchase. Watch this YouTube video from the IRS for more details.
  3. Gains for the sale or exchange of your “main home” are no longer excludable from your income if allocable to periods of non qualified use. See the IRS definition of ‘non qualified use’.

New Rules for Farmers and Fishermen

  1. If you operate both a farming and fishing business, you can combine the income, gains, deductions, and losses from both business to figure out the amount of income eligible for income averaging.
  2. You are now treated as being in a fishing business if you own a fishing boat and your lease payments are based on a share of the catch.
  3. Crew members on fishing boats receiving a share of the catch are now treated as being in the fishing business, even if they are not treated as employees for tax purposes.

Increase in Limit on Long-Term Care and Accelerated Death Benefits Exclusion

The limit on the exclusion for payments made on a per diem or other periodic basis under a long-term care insurance contract increases for 2010 to $290 per day. The limit applies to the total of these payments and any accelerated death benefits made on a per diem or other periodic basis under a life insurance contract because the insured is chronically ill.

Increase in Personal Casualty and Theft Loss Limit

A personal casualty or theft loss must now usually exceed $500 (in addition to the 10% of adjusted gross income limit that generally applies to the net loss) to be allowed.

Itemized Deductions

If your adjusted gross income is above a certain amount, you may lose part of your itemized deductions. This year, that amount has increased to $166,800 ($83,400 if married, filing separately).

New Rules for Children of Divorced or Separated Parents

Several new rules allow the cutodial parent to revoke a release of claim to exemption that was previously released to the noncustodial parent. See Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent for more details. If the divorce or separation agreement went into effect after 1984 and before 2009, the noncustodial parent can still attach certain pages from the decree or agreement instead of a Form 8332. For any decree or agreement after 2008, the noncustodial parent must now attach the Form 8332 (or a similar statement signed by the custodial parent).

Penalty for Failure to File Income Tax Return Increased

If don’t file your return by the due date (excluding any extensions you may have received), you may have to pay a failure-to-file penalty. That penalty applying to returns filed more than 60 days after the due date has increased to $135 or 100% of the unpaid tax, whichever is smaller.

Personal Exemptions

The amount you can deduct for each exemption has increased to $3,650.

Qualified Transportation Fringe Benefits

The monthly exclusion for commuter highway vehicle transportation and transit passes has increased to $120, and the monthly exclusion for qualified parking increased to $230. But beginning March 1, 2009, the monthly exclusion for commuter highway vehicle transportation and transit passes increased to $230.

You may now also be reimbursed for reasonable bicycle commuting expenses, including the purchase of a bicycle and bicycle improvements, repair, and storage. The exclusion for a calendar year is $20 per qualified bicycle for each qualified bicycle commuting month. See this page from the IRS for more details.

Residential Energy Credits

  1. The Nonbusiness Energy Property Credit has been reinstated. You may be able to claim an energy property credit of 30% of the cost of certain energy-efficient property bought or improvements made in 2009. Things like high-efficiency heat pumps, air conditioners, water heaters, and energy-efficient windows may all be eligible for the credit. The credit is limited to $1,500.
  2. Beginning this year, there is no limit on the credit amount for qualified solar electric property costs, solar water heating property costs, wind energy property costs, and geothermal heat pump property costs.

Social Security and Medicare Taxes

The maximum amount of wages subject to the Social Security tax is now $106,800. There is no limit on the amount of wages subject to the Medicare tax.

Retroactively Excluding Military Retirement Pay

If you retire from the armed services based on years of service and are later given a retroactive service-connected disability rating by the VA, your retirement pay for the retroactive period is excluded from income up to the amount of VA disability benefits you would have been entitled to receive.

Standard Deduction Increased

If you don’t itemize your deductions, the standard deduction you can take has been increased. To find out exactly how much you can take, check your tax return instructions booklet.

Standard Mileage Rate

If you use your car for business, you can now deduct 55 cents per mile. If you use your car for medical reasons or as part of a deductible move, you can deduct now 24 cents per mile. And if you use your car for charitable purposes, you can deduct 14 cents per mile (unchanged from last year). For a more detailed look at car expenses and standard mileage rates, see Publication 463, Travel, Entertainment, Gift, and Car Expenses from the IRS.

Unemployment Compensation

You can now exclude up to $2,400 of your unemployment compensation from your gross income.

Wage Threshold for Household Employees

The Social Security and Medicare wage threshold for household employees is $1,700. In other words, if you pay a household employee less than that amount, you do not have to report and pay Social Security and Medicare tax on that employee’s wages.

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