Seacoast Accountability’s 2009 Tax Highlights for Individuals

First-Time Home Buyer Tax Credit

• Congress Enacts Bigger and Better Home Buyer Tax Credit
• A tax credit of up to $8,000 is now available for qualified first-time home buyers purchasing a principal residence on or after 1/1/2009 and before 12/1/2009
• The new credit does not have to be repaid
• The tax credit is for first-time home buyers only

A first-time homebuyer is described as someone who has not owned a home in three or more years prior to purchase.  This credit applies to principal residences, which include condos, mobile homes, and even house boats. 

As I mentioned, this credit does not have to be repaid.  This is the most significant change from the prior credit.  The 2008 credit was, in essence an interest free loan, where the credit required repayment beginning in 2010 at a rate of $500 per year over a period of 15 years.  If the home is sold before the repayment period was complete, the taxpayer is required to pay off the credit amount out of the proceeds of the home.

Unfortunately, taxpayers who purchased a home during the 2008 period are only able to take advantage of the prior credit.  For taxpayers who purchased a home in early 2009 and filed their tax returns claiming the previous credit, may amend the return to take advantage of the new credit.

A couple of strategies can be employed in the use of this credit:  Prospective homebuyers qualifying for the credit may want to reduce withholding from wages, thereby enabling them to accumulate cash for the purchase of the home.  In addition, if a taxpayer has increased income in 2009 which would limit the amount of the 2009 credit, he may elect to treat the home purchase as occurring at 12/31/08. Those taxpayers would file an amended return to claim the higher credit. 

American Opportunity Tax Credit

• New credit is for up to $2,500
• The measure also does not require community service
• Only approves the credit for two years
• For tax years 2009 and 2010 for the first 4 years of college
• 40% of the credit is refundable
• This tax credit is subject to a phase-out for taxpayers with adjusted gross income in excess of $80,000 ($160,000 for married couples filing jointly)

During President Obama’s campaign, he promised that the first $4,000 of education would be free for most Americans.  One requirement was that the student do 100 hours of community service, during the school year or summer.  I feel the education credit has moved in a positive direction, although short of the mark promised.  After 2010, Obama will have to budget for continuation of the credit.  Congressman Fattah of Pennsylvania, who authored the plan, is fighting to increase the maximum credit to at least $3,000 for the next round.

The new credit replaces what has been historically called the HOPE credit.  It has been increased from a maximum of $1,800 per year to $2,500 per year, per student.  Community services hours are not required at this time, however, feasibility studies are being conducted by the Department of Treasury to determine if the payback of the credit through community service hours is warranted.

Previously, the HOPE credit was only available for students in the first or second year of post secondary education.  Basically, only tuition and expenses required for enrollment were eligible.    The credit wiped out the taxpayer’s tax amount and any excess was “lost”. 

The new American Opportunity Tax Credit, on the other hand, has been expanded to students in the first four years of college and the definition of qualified expenses has been expanded to include fees and course materials.  The other great benefit of the new credit, is that it is partially refundable.  A taxpayer with zero tax liability could still benefit from the credit.

Old Qualifications, New Name

• Yourself, your spouse, or a dependent that you claim
• Only one tax benefit for the same expenses
• For an undergraduate degree or certification
• Enrolled for at least half-time
• No felony drug conviction on record

You have to have paid the tuition.  Payment includes student loans, credit cards, etc.  Scholarships and grants, or any tax benefit savings used to fund the tuition do not qualify expenses. 

In addition to the credit we are currently discussing, there is the Lifetime Learning Credit and a tuition and fees adjustment to income for education expenses.  Expenses cannot be used for more than one tax benefit, and I highly advise consulting with a tax professional to make the most out of the various education tax benefits. 

This credit is intended for degree or certificate students, not for the taxpayer taking continuing education or the occasional course.

Half-time basis is usually determined by the institution.  Given the difference between semesters and quarters, the definition can vary.  The institution will provide the student with a tax form (1098T) at the end of the year, and the form will be checked if the student meets the definition.  Typically, the student must attend on a half-time basis for any part of five months during the tax year.

If for some reason, the student’s record precludes them from taking advantage of this credit, they may want to look at the other education benefits previously discussed.  Due to the variety of education benefits available, exploration of all three options is highly advised.  Consult a tax professional if you are taking advantage of a tax advantage Education Savings Account or Qualified Tuition Plan. 

Payments to Social Security Recipients

Nearly 55 million people who receive Social Security and SSI benefits will get a special one-time payment of $250. They should receive the one-time payment by late May 2009.

The payments will be automatic, so people receiving benefits do not need to take any action. In April, Social Security will send an advance notice with further information to each person who is eligible for the one-time payment.

Government workers who do not receive Social Security benefits will get a one-time $250 tax credit instead.

The legislation also provides for a one-time payment to recipients of Department of Veterans Affairs (VA) and Railroad Retirement Board (RRB) benefits. However, if a person receives Social Security or SSI benefits and also receives VA or RRB benefits, he or she will only receive one $250  payment.

You must have been eligible to receive benefits for November and December 2008 or January 2009.  In other words if you became eligible after January 2009 to receive SS benefits, you will not receive the payment.  The funds will be delivered the same way you currently receive benefits (direct deposit or paper check).

Note that $250 payment is tax free to the recipients.

Make Work Pay Credit

• Cuts in withholding at the employer level
• Will provide up to $400 per individual worker
• Phase out for individual taxpayers with AGI in excess of $75,000 (up to $95,000) or $150,000 for married couples filing jointly (up to 195,000)

As of April 1, many taxpayers will see an extra few dollars in their paychecks as a result of the Making Work Pay Credit.   There are, however, potential problems in that there could be an “over withholding” for some taxpayers.  Chief among them are college students and others who may be claimed as a dependent on someone else’s return. If you are claimed as a dependent on someone else’s return, you do not qualify for the Making Work Pay Credit.

Additionally, married taxpayers where both work, or taxpayers who work more than one job, may want to review their withholdings.  Remember, your employer is merely reading from a tax table and doesn’t know all of these other factors. The bottom line is that if any special circumstances apply to you, be aware of how much is being withheld from your check. Assuming that you’re not phased out, to receive $400 over the next nine months, each taxpayer should receive about $11 extra per week. If you feel that your withholding is more than it should be – and you’re concerned – make an adjustment on your form W-4 or talk to your tax professional.

If you do not have taxes withheld by an employer during the year because you are self-employed or because your withholding level is too low for the credit to apply, you can claim the credit on your 2009 tax return. This is a refundable credit, so if you qualify and you do not receive the entire amount, you can have any additional credit refunded to you at tax time, in 2010.

If you don’t work, you don’t get the credit.  As previously discussed, there is a $250 payment provided for retirees and the disabled.  The number of children will not affect this credit.

Other 2009 Tax Benefits

• Exclusion of up to $2,400 in unemployment compensation received in 2009
• Energy Efficient Home Improvement Credits are back for 2009 and 2010
• New Car Sales Tax Deduction
• Much, much more……

Once upon a time, you weren’t taxed on unemployment benefits-this year you can exclude up to $2,400.

During 2008, only wind or solar powered items could receive a credit.  For 2009 and 2010, homeowners are again able to deduct the cost of windows, insulation, doors, energy efficient hot water heaters and other items that typically qualified for the credit back in 2007.  The credit has increased from 10% to 30% of the amount paid, up to a maximum of $1,500 for all items purchased during the two year period.

If you’re thinking of taking advantage of lagging car sales, you can also get a tax break at the same time.   You can deduct the sales/excise tax on the first $49,500 of the sales price of a new car, light truck, motorcycle, or RV bought between 2/17 and the end of the year.  To get the full deduction, your income cannot exceed $125,000 ($250,000 for married couples).  You can get the deduction even if you can’t itemize.

The earned income credit, alternative child tax credit, transit benefits, and several other incentives for small businesses have been changed by the American Recovery and Reinvestment Act of 2009.  Call Kathy at Seacoast Accountability (603) 834-1271 if you need more information.