Want to Cut Uncle Sam a Smaller Slice of Your Income Pie?
Read about these tax law changes
By Teresa Dixon Murray, The Plain Dealer
February 19, 2010
CLEVELAND, Ohio -- As the nation's 140 million tax filers start working up the energy to take on that 1040, here's a warning:
There were a couple of dozen major changes in tax law last year, including some that require new forms to be filled out in addition to the 1040. If you're not ready for them, they could be easy to miss and cost you big bucks.
These are some of the changes that will determine how big a slice of your income pie Uncle Sam gets to gobble:
Making Work Pay: This tax credit approved early last year caused employers to withhold less tax throughout the year. The federal government's hope was that if you had a few extra bucks a week, you'd be more likely to spend than if you got a big refund. People often use lump sums like refunds to pay down debt or to pump up savings.
But you have to claim the Making Work Pay credit now on a separate form -- Schedule M -- or else you'll pay too much tax or get a smaller refund. The credit amounts to $400 for an individual and $800 for a couple.
If you're using software and think you're covered, guess again. The IRS says it's been rejecting electronically filed returns because Schedule M isn't filled out correctly.
"I think people are going to have a tough time with this," said certified public accountant Howard Kass of Zinner & Co. in Pepper Pike.
The credit starts phasing out for individual filers with modified adjusted gross incomes of $75,000, and goes away at $95,000. For married couples filing jointly, the credit starts phasing out at $150,000 and is eliminated at $190,000.
Therein lies another problem that taxpayers might see if they have a working spouse or more than one job: If your employer changed your withholding and you're actually ineligible for the credit, you'll have to pay that money back now.
First-time homebuyers: The Worker, Homeownership, and Business Assistance Act of 2009 entitles people who bought a home last year to an $8,000 credit -- as long as they haven't owned a home for at least three years and the home is their primary residence.
The tax credit continues this year for contracts signed by April 30, if the deal closes by June 30.
Those claiming this credit must complete Form 5405. Here's the big catch, said Cindy Mitchell, senior tax manager Bober, Markey, Fedorovich & Co. in Akron: Taxpayers who use Form 5405 cannot file electronically, and they must include their HUD-1 settlement statement -- signed by all parties.
Real estate tax: Historically, you had to itemize to claim your property taxes. Now you can still deduct them without itemizing, said Mark Mussig, co-chair of the tax department at SS&G Financial Services in Solon and Akron.
Filers must complete a Schedule L. This is actually the second year taxpayers could claim property taxes this way, but many may have missed it last year.
Mussig said this is a huge advantage for homeowners. "There are an awful lot of people who don't itemize who pay real estate taxes."
Automobile sales tax: If you bought a new car last year, you can deduct the sales and excise taxes paid, and you don't have to itemize, Kass said. You do have to fill out Schedule L.
The deduction is valid on vehicles priced up to $49,500, and applies to cars, light trucks, motor homes and motorcycles purchased from Feb. 17 through Dec. 31, 2009.
The deduction is reduced for individual filer with modified adjusted gross incomes between $125,000 and $135,000, and for joint filers with MAGIs between $250,000 and $260,000. People with higher incomes than that don't qualify.
Required minimum distributions: Because of a change in the law, people didn't have to take required minimum distributions from their IRAs, 401(k)s and other retirement accounts for 2009, Mitchell said. But some people were confused and took it anyway. Many of those people may have put the money back last year, and if they did it by Nov. 30, it won't count as a distribution, she said.
However, don't be surprised if your 1099 doesn't accurately reflect this, Mitchell said.
Excluding unemployment benefits: Filers can exclude the first $2,400 they received from taxable income for the year, Mitchell said. This is on Form 1040, line 19. The rest is taxable.
Business losses: If you have a business loss that created a net operating loss, you can now carry it back up to five years, Mussig said. The provision existing for 2008 but was limited, he said. A bonus: You can pick and choose which year you want to go back to.
Goodbye Hope, hello American Opportunity: This popular college credit has changed. The Hope credit was valid only for the first two years of schooling; the American Opportunity credit is valid for four. It also covers more expenses. The income limits have also increased by 50 percent, to $90,000 for individual filers and $180,000 for joint filers.
Investment fraud losses: Historically, a loss caused by fraudulent advisers had to be taken as a capital loss, limited to $3,000 a year. Now it can be taken as a regular loss to offset any other income.
"There is no limit. It's a huge benefit," Mussig said.
This could apply in cases such as the local investigation involving Fair Finance in Akron, he said.
Such losses can be carried back up to five years, meaning you could be entitled to a refund from past years.
Haiti contributions: Donations made up until March 1 can be deducted from your 2009 taxes, Kass said. In the case of cell phone text messages, as long as the text is sent by March 1, it qualifies.
Energy credit: The tax credit for qualifying improvements to your home for things like new windows still exists. But there's a strict definition of energy-efficient.
"If the package doesn't say that it qualifies, then it doesn't," Kass said.
If your new door or windows or hot water tank was installed by a contractor, then your receipt should indicate whether the purchase qualifies. If it doesn't say, ask.
Alternative minimum tax: Don't to forget to fill out Form 6251. The AMT, affectionately referred to as the "awfully mean tax," still exists, hitting higher-income taxpayers and those with a disproportionate amount of deductions.
The exemption amount has been raised to $46,700 for singles and $70,950 for joint filers. Does AMT affect you? You won't know without running through Form 6251.
Retiree credit: Retirees who received $250 economic recovery payments last year don't have to claim them on their return, Mitchell said. "It's not taxable."
Deductions for paying by credit or debit card: If you pay your tax (including estimated payments) by credit or debit card, you can deduct the card company's processing fee. It's a miscellaneous itemized deduction on Schedule A.
Divorced or separated parents: Starting with tax year 2009, custodial parents are allowed to revoke a release of claim to exemption. The release may have been made on Form 8332 or a similar form.
Failure to file: Don't let all of the changes overwhelm you too much. The IRS, starting at the end of 2008, also substantially increased the penalty for failing to file. The minimum penalty for returns or extensions filed more than 60 days late is the smaller of $135 or 100 percent of the unpaid tax.
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