National Society of Accountants reviews highlights of tax breaks that can save money but increase the complexity of tax returns
Did you do anything to save on your taxes last year?
If you bought a home or car, paid college expenses, or installed a high-efficiency heating and air conditioning system, chances are you did.
As the tax filing season roars into high gear, taxpayers are discovering these and many other complicated new tax laws that might save them significant money. One thing is sure: It will take them time to figure it out.
"I can't remember a year when more special tax breaks were passed than in 2009," says John Ams, Executive Vice President of the National Society of Accountants (NSA). "Given the tough economic situation we're in, it's a good thing. But it makes things much more complicated for taxpayers."
NSA members are mostly "Main Street" accountants and tax preparers who help individuals and small businesses wade through the complex tax code and make sure they take advantage of tax breaks for which they qualify. Some of the notable tax breaks include:
American Opportunity Credit - This new credit modifies the existing Hope Credit, making it available to a broader range of taxpayers, including many with higher incomes. For those who owe no tax, 40 percent of the amount of the eligible credit is refundable. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two. Many of those eligible will qualify for the maximum annual credit of $2,500 per student. The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels and can be claimed using Form 8863, attached to Form 1040 or Form 1040A.
Non-Business Energy Property Credit - This credit equals 30 percent of what a homeowner spends on eligible energy-saving improvements, up to a maximum tax credit of $1,500 for the combined 2009 and 2010 tax years. This means that a homeowner can get the maximum credit by spending at least $5,000 on qualifying improvements. Homeowners must make the improvements to an existing principal residence; this tax credit is not available for new construction. The cost of certain high-efficiency heating and air conditioning systems, water heaters, and stoves that burn biomass all qualify, along with labor costs for installing these items. In addition, the cost of energy-efficient windows and skylights, energy-efficient doors, qualifying insulation and certain roofs are also eligible for the credit, though the cost of installing these items does not count.
Residential Energy Efficiency Property Credit - Homeowners going green should check out this tax credit designed to spur investment in alternative energy equipment. The residential energy efficient property credit equals 30 percent of what a homeowner spends on qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property. Qualifying property purchased for new construction or an existing home is eligible for the credit. Generally, labor costs are included when calculating this credit. Also, no cap exists on the amount of credit available except in the case of fuel cell property. Not all energy-efficient improvements qualify for these tax credits; homeowners should check the manufacturer's tax credit certification statement before purchasing or installing any of these improvements. Use Form 5695, Residential Energy Credits, to figure and claim these credits.
New Vehicle Purchase Incentive - New car buyers can deduct the state or local sales or excise taxes paid on new cars, light trucks, motor homes and motorcycles purchased after February 16, 2009, and before January 1, 2010. There is no limit on the number of vehicles that may be purchased, and eligible taxpayers may claim the deduction for taxes paid on multiple purchases. However, the deduction is limited to the tax on up to $49,500 of the purchase price of each qualifying new vehicle. The amount of the deduction is reduced for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers. Itemizers claim the deduction on either Line 5 or Line 7 of Schedule A. Non-itemizers claim the deduction on the new Schedule L, Standard Deduction for Certain Filers.
Tax Credits Increased for Low and Moderate Income Workers - More workers and working families are eligible for the Earned Income Tax Credit (EITC). Expanded benefits are now available for those with three or more qualifying children and married couples. The EITC helps taxpayers whose incomes are below certain income thresholds, which in 2009 rise to:
- $48,279 for families with three or more qualifying children
- $45,295 for those with two or more children
- $40,463 for people with one child
- $18,440 for those with no children
One in six taxpayers can claim the EITC, which, unlike most tax breaks, is refundable, meaning that individuals can get it even if they owe no tax and even if no tax is withheld from their paychecks. In addition, the earned income formula for the additional child tax credit is revised for tax years 2009 and 2010. As a result, more low and moderate income families qualify for the full $1,000 child tax credit. See Form 8812 for more information.
Standard Deduction Increases for Most Taxpayers - Nearly two out of three taxpayers choose to take the standard deduction rather than itemizing deductions such as mortgage interest and charitable contributions. The basic standard deduction is:
- $11,400 for married couples filing a joint return and qualifying widows and widowers, a $500 increase compared with 2008
- $5,700 for singles and married individuals filing separate returns, up $250
- $8,350 for heads of household, up $350
Higher amounts apply to blind people and senior citizens. The standard deduction is often reduced for a taxpayer who qualifies as someone else's dependent.In addition, eligible taxpayers can further increase their standard deduction by any of the following three deductions:
- State or local real estate taxes paid in 2009
- A net disaster loss reported on Form 4684 and
- State or local sales or excise taxes on the purchase of a qualifying new motor vehicle.
Use new Schedule L, Standard Deduction for Certain Filers, to claim these additional deductions.
AMT Exemption Increased for One Year - For tax-year 2009, Congress raised the alternative minimum tax exemption to the following levels:
- $70,950 for a married couple filing a joint return and qualifying widows and widowers, up from $69,950 in 2008
- $35,475 for a married person filing separately, up from $34,975
- $46,700 for singles and heads of household, up from $46,200
Editor's Note: The National Society of Accountants (NSA) offers an online search directory to identify a qualified tax preparer in your area. Visit www.nsacct.org and click on "Find a Professional" or call 800-966-6679.
NSA and its affiliates represent 30,000 members who provide accounting, auditing, tax preparation, financial and estate planning, and management services to approximately 19 million individuals and business clients. Most members are sole practitioners or partners in small- to medium- size accounting firms. NSA protects the public by requiring its members to adhere to a strict code of ethics. For more information, visit www.nsacct.org.
