In an earlier post, I asked ‘How Will Obama’s Tax Plan Affect Self Employed Americans?’.  Well, more details are emerging as Obama proposes $300 Billion in tax cuts.

Presidential Elect Obama is working with Congress on a tax cut proposal that would make up about 40% of a $775 billion economic stimulus package.

Cuts would be aimed at both individuals and businesses.  At the moment, these are just proposals, but here’s what’s being discussed so far:

• The largest piece of the tax relief package is a payroll tax break of $500 for individuals and $1,000 for couples aimed at low- and moderate-income workers.  I’m wondering if this will also apply to self employed people, but am unsure of the answer so far.
• Relief for businesses include a provision that would allow companies to write off huge losses incurred last year, as well as any losses from 2009, to retroactively reduce tax bills dating back five years.  While businesses would have been able to claim most of the tax write-offs on future tax returns anyway, the proposal accelerates those write-offs to make them available in the current tax season.  This will help companies who are experiencing cash flow problems due to credit being unavailable.
• The Obama plan also proposes to increase the Section 179 deduction up to $250,000 in 2009 and 2010. Currently, the limit is $175,000.  This probably won’t help most small businesses, but those that are expanding or need new equipment will benefit.
• Finally, businesses that create jobs here in the US or avoid future layoffs would receive a tax credit.  Hopefully this will reduce the amount that unemployment is expected to rise in 2009.

While I like the idea of the payroll tax credit, it really needs to apply to self employed people as well.  I’ve heard rumors that self employed people may get to reduce their 1st quarter estimated tax payment, and will confirm or deny as soon as more details become available.

Remember these are just proposals right now.  There will be lots of debate and changes before the final bill is approved.

Related Posts:

• More About Obama’s Proposed ‘Paycheck Bonus’
• Savers Credit Helps Low to Middle Income Taxpayers Save for Retirement
• Year End Tax Tips

As I was entering the HGTV Dream Home Giveaway (the only sweepstakes that I enter regularly, can’t help it, these homes are so beautiful!), I wondered how I would pay the taxes if I actually won.

According to the IRS, awards, prizes, contest winnings and gambling proceeds (including lotteries) are taxable income which must be reported on Form 1040.  Which means if I am lucky enough to win the gorgeous HGTV Dream Home in Sonoma California, then I have to come up with the money to pay taxes on the value of the home and other prizes included.  Bummer, huh?

If you win a cash prize, such as gambling winnings or the lottery, sure it’s a bummer to pay the taxes, but at least you have the cash to do so.

When you win a non-cash prize, such as a vacation, a new car, or a house (such as in the case of the HGTV Dream Home Giveaway), then paying the taxes is an even bigger challenge because you have to come up with the cash to do so.

For many people it’s difficult to come up with the cash needed to pay for a non-cash prize and as a result they have to sell the prize just to pay the taxes.  This has been true for every winner of the HGTV Dream Home so far (this is the 11th year they have held this giveaway).  The value of the homes given away are usually in excess of $1 million, so you can see why someone would have difficulty paying the taxes without selling the house.  Unfortunately, I would be in the same boat, but I sure would enjoy vacationing in the house before I sell it!

Bottom line, if you are lucky enough to win a prize or award, whether it’s cash or non-cash, just be aware that you will have to include the value of that award in your taxable income, and you will have to come up with the cash to pay those taxes.  Prizes and awards are reported as Miscellaneous Income on line 21 of Form 1040; the taxes will depend on what tax bracket you fall into.  If the prize or award is substantial it could push you into a higher tax bracket (for example a senior citizen who’s only income is Social Security is usually in the lowest tax bracket, but a $50,000 jackpot at the casino could push her into the 15% tax bracket and cause some of her Social Security to be taxable).

One final note: if you have gambling winnings, you are allowed to deduct losses up to the amount of your winnings as a miscellaneous deduction on Schedule A – Itemized Deductions.

Related Posts:

• Year End Tax Tips
• W-2s and 1099s Due Monday!
• Tax Carnival 46 – Inauguration Day

The IRS adjusts key tax numbers each year, including personal exemptions and the standard deduction amounts.  These are cost of living adjustments required by law.

The effect of these adjustments is that the tax brackets widen (so you can earn more income before you jump into the next tax bracket).

Here are a few of the changes in effect for 2009:

• The personal and dependency exemption, available to most taxpayers, increased $150 to $3,650.
  
• The new standard deduction is $11,400 for married couples filing a joint return (up $500), $5,700 for singles and married individuals
  filing separately (up $250) and $8,350 for heads of household (up $350). Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions (itemized deductions include mortgage interest, charitable contributions and state and local taxes).
• Tax-bracket thresholds increased for each filing status. For a married couple filing a joint return, for example, the taxable-income
  threshold separating the 15-percent bracket from the 25-percent bracket is $67,900, up from $65,100 in 2008.
• The maximum earned income tax credit for low and moderate income workers and working families with two or more children is $5,028, up from $4,824. The income limit for the credit for joint return filers with two or more children is $43,415, up from $41,646.

The amount you can contribute to retirement plans also increases for 2009:

• The amount you can contribute to your 401K or 457 plan is increasing $1,000 to $16,500
• The limitation for Simple IRA accounts is increased from $10,500 to $11,500
• The limitation for IRAs and Roth IRAs is the same as 2008: $5,000, plus a $1,000 catch up contributions for taxpayers age 50 and over

For other changes, including the income limitation for taxpayers who qualify for the retirement savings credit, please visit the IRS website.

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• Savers Credit Helps Low to Middle Income Taxpayers Save for Retirement
• Max Out Your Retirement Plan (Year-End Tax Tips)
• W-2s and 1099s Due Monday!

Not many people are aware of the saver’s credit, which helps offset part of the first $2,000 that taxpayers contribute to IRAs , Roth IRAs, 401K and other retirement plans.  This credit is also known as the retirement savings contributions credit.

The saver’s credit is available in addition to other tax deductions and credits that a person may qualify for, so taxpayers who take a deduction for contributions made to IRAs, 401Ks and other tax-deferred retirement accounts, and who also qualify for the saver’s credit, essentially get a double tax break.

You still have time to make contributions to your retirement accounts and get the saver’s credit, if you qualify.  The deadline for setting up or adding money to IRAs and still get credit for 2008 is April 15, 2009.  But if you’re planning on contributing to your 401K or other employer sponsored plan, you need to get your contributions in by the end of the year.

The following people qualify for the saver’s credit:

• Married couples filing jointly with incomes below $53,000 ($55,500 in 2009),
• Taxpayers filing as head of household, with income below $39,750 ($41,625 in 2009), and
• Single taxpayers (including married individuals who file separately) with incomes up to $26,500 in 2008 (or $27,750 in 2009)

While these income limits may seem low, if you are starting a new business, are unemployed or underemployed in any given tax year, this tax credit provides incentive to continue saving for your retirement by giving you some of your contributions back in the form of a credit.

The saver’s credit is a refundable tax credit which means it can increase your refund or reduce any tax you owe.  The maximum saver’s credit is $1,000 ($2,000 for married couples), but most people qualify for much less, depending on how much you save in your retirement account, your income, and other deductions and credits.

To claim the saver’s credit, file Form 8880 and attach it to your tax return (Form 1040).  This credit was made a permanent part of the tax code in 2006, and is adjusted annually to keep up with inflation.

For more information about the saver’s tax credit, please visit the IRS website at www.irs.gov.

Related Posts:

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