Advertisement

Archive for Wednesday, January 27, 2010

Economic incentives aid taxpayers

January 27, 2010

Advertisement

— The deep recession that hung over the nation in 2009 has led to new tax credits and deductions — attempts by Congress to boost consumer spending and get the economy moving again.

These, along with increases in the standard deduction, personal exemption and alternative minimum tax exemption, may bring a little extra cash to some people during these economic hard times.

Lawmakers tried to aid the ailing auto industry by producing a new deduction for sales and excise taxes incurred in the purchase of a new car. That’s on top of the Cash for Clunkers program, which brought hundreds of thousands of people into auto showrooms around the country.

Making Work Pay

To assist the troubled housing market, the first-time homebuyers credit was expanded to include a new, smaller credit for long-time homeowners who buy and move to another residence. The National Association of Realtors estimated that about 4.4 million people already have or will claim the credits before they expire.

And to put a little more money in consumers’ wallets, the Making Work Pay tax credit kicked in last spring. Tax withholding tables were revised downward to give individuals up to $400 and couples up to $800. The result: more take-home pay for about 95 percent of working families.

There’s a catch, though.

People with more than one job, couples in which both spouses work and some Social Security recipients may have received too much of a credit because of the way the program was set up. “It may wind up that they owe taxes or the big refund they expected might not be as big as they thought,” said Barbara Weltman, author of J.K. Lasser’s “1001 Deductions and Tax Breaks 2010” and “Small Business Taxes 2010.”

Taxpayers have a new form, Schedule M, to claim the credit. However, like other changes to tax-rate brackets and personal exemptions, most workers already are seeing its benefits in their take-home pay. Weltman said the form isn’t that complicated. “The shock is going to be whether you owe more than you think,” she said.

The Treasury Department’s inspector general for tax administration estimated that more than 15 million people could be affected. The extra tax bill could be up to $400 for individuals or couples or $250 for Social Security recipients.

So why give people the money in the form of lower withholding if there’s a chance the government will take it back?

“I think at the time we were just more concerned about getting the money into the hands of Americans who needed it the most, and do it quickly,” said Amy McAnarney, executive director of the Tax Institute at H&R Block. “There are always going to be exceptions.”

By the same token, the Internal Revenue Service says some taxpayers whose withholding was at or near zero may not have benefited from the credit during 2009. These people are predominantly low- or moderate-income workers.

McAnarney said it’s important that people review their withholdings for 2010 because the tax credit will still be in effect.

New forms

Schedule M isn’t the only new form for the 2009 tax year.

People who don’t itemize their deductions are entitled to take a standard deduction. For 2009, it’s $11,400 for married couples filing jointly, $5,700 for individuals and $8,350 for heads of households. As in the past, the standard deduction is bigger for people who are blind or 65 or older. If that’s all you’re claiming for your standard deduction, there are no extra forms to file. The IRS predicts that the majority of those claiming the standard deduction will fall into this category.

Tax law changes passed by Congress in 2009 allow some taxpayers to increase their standard deduction even more, by adding to it the property taxes they paid, their sales or excise taxes on the purchase of a new car, or net federal disaster losses. “There’s nothing standard about the standard deduction any more,” Weltman said.

That’s where the new Schedule L comes in. Taxpayers will have to file the new form to claim the higher standard deduction.

“You now have a full-page schedule that you have to figure out for your standard deduction,” said Jeff Schnepper, MSN tax expert. “If you’re not using a computer program, you’re lost — you have no idea.”

What you bought

Homeowners can increase their standard deduction by a maximum $1,000 for joint filers or $500 for individuals if they paid state or local real estate taxes. The home has to be used for personal use. Business properties don’t qualify.

And many people who bought a new car, truck, motorcycle or motor home after Feb. 16, 2009, can add the sales or excise tax they paid to the standard deduction, provided that the vehicle cost less than $49,500. The deduction begins phasing out for individuals with incomes above $125,000 or joint filers earning more than $250,000. If you bought a used car or leased a car, you’re out of luck. The deduction only applies to new vehicle purchases.

Those who itemize deductions also may qualify for the motor vehicle sales tax deduction — provided they meet the income limitations.

The sales tax deduction is separate from Cash for Clunkers, which gave people rebates if they traded in cars for more fuel-efficient ones. The government estimated that nearly 700,000 people turned in gas guzzlers under the program in exchange for rebates of $3,500 or $4,500. If you did get a rebate, it’s not taxable income.

“If you bought a car under the Cash for Clunkers program, now you can also deduct the sales tax,” McAnarney said.

Add to that the credit for certain hybrid models, and 2009 shaped up as a good time to buy a car.

Comments

Use the comment form below to begin a discussion about this content.

Commenting has been disabled for this item.