Following a year of economic hardship, a housing slump and record unemployment, most Americans are looking to cut corners and save pennies any way they can – especially when it comes to paying Uncle Sam’s bill.
Staying ahead of the latest tax changes may seem like an impossible tax, but it is possible, and those who don’t keep up on new tax rules could miss out on thousands of dollars of potential savings.
According to Dr. John Yeutter, CPA and associate professor of accounting at Northeastern State University, the American Recovery and Reinvestment Act of 2009 included several changes in the tax code for 2009, most of which create an advantage for citizens.
“[Given the high rate of unemployment] one change made the first $2,400 of unemployment benefits received non-taxable,” said Yeutter. “A second added to the amounts that those who do not itemize deductions can take. Now, in addition to a standard deduction of $5,700 for singles, $11,400 for married couples, the amounts paid for property taxes and sales taxes on a new auto can be added.”
Yeutter said two new tax credits have been developed. These can reduce tax directly or increase the amount of a refund.
“The first is the Making Work Pay credit, which pays 6.2 percent of wages earned, up to $400,” said Yeutter. “The second is a change in the education credit. The American Opportunity credit pays for the cost of tuition, fees, books and supplies – including computers – for those taking undergraduate courses.”
Yeutter said the education credit has changed in two ways: First, it applies beyond the first two years of college, and second, it includes books and supplies, which can often be as expensive – or more so – than tuition.
Most people have heard of the First Time Homebuyer Credit, which offers up to $8,000 back for those who buy a home. According to Dan Caplinger, of TheMotleyFool.com, until last year, people looking to take advantage of this credit had to qualify as a first-time homebuyer, meaning they could not have owned a primary residence in the past three years.
“However, Congress changed the rules to add a credit of up to $6,500 for current homeowners who have lived in their homes for five straight years at some point between 2002 and now,” wrote Caplinger. “Currently, the credit is slated to expire on April 30, with a two-month extension available if you sign a contract by the end of April. So, if you’re thinking about buying a home, you may want to move quickly. In fact, even if you buy a home in 2010, you can use the credit to offset your 2009 taxes – a nice way to save.”
Caplinger also pointed out that tax deductions for charitable donations are experiencing a “time warp.”
The Haitian disaster has motivated many people to give generously, and as a result, those who have made donations have the option of including them as deductions on their 2009 return, even though they may have made them in 2010.
“Usually, there’s no way to turn back the clock on donations,” wrote Caplinger. “But the timing of the disaster coming so close to the beginning of the year – and so soon after many people had already completed their charitable giving – likely motivated the move.”
To take advantage of this deduction, however, donations had to have been made by the end of February.
While many benefits can be found in this year’s tax changes, Yeutter said one disadvantage could be the “kiddie tax.”
The kiddie tax provides that unearned income – like interest – of children is taxed at the parent’s tax rate. This was enacted in 1986 to prevent wealthy parents from shifting income to their children’s lower tax rate. In the beginning, it applied only to children under 14. The age was raised a few years ago to 18, but now, any “child” under age 24 who is a dependent of his parent because they’re in school is subject to this requirement.
“There are some apparent unintended consequences of this increase in age,” said Yeutter.
“Dependents who receive tribal headright payments or unemployment will pay tax on this income at their parent’s rate.”
The final in a two-part series about tax savings will examine what people can do in 2010 to save on next year’s tax bill.