We saw many tax changes in 2009.  While some will carry over into 2010, some will expire at the end of this year.  Once January 1 gets here it’s too late to reduce your 2009 tax bill, so take advantage of these tax breaks now.

RMDs Suspended for 2009

One of the biggest changes for 2009 was the suspension of the rules requiring individuals over age 70 ½ to make withdrawals from certain retirement accounts.  This suspension applies to 2009 only, so seniors will have to resume taking their required minimum distributions in 2010.

First Time Homebuyer Tax Credit

In an effort to stimulate the housing market, a “first-time” homebuyer was established back in July 2008, but new legislation in 2009 gave the credit new life.  The first credit was actually a loan (up to $7,500) that had to be paid back over 15 years; this credit applied to first-time homebuyers who purchased homes between April 9, 2008 and July 1, 2009.

In February 2009, the American Recovery and Reinvestment Act of 2009 extended the credit through November 30, 2009 and increased the amount to $8,000.  Even better, taxpayers who qualified for this credit did not have to pay it back, unlike the first credit.

The Worker, Homeownership, and Business Assistance Act of 2009, signed by President Obama signed on November 6, made even more changes to the credit including:

• Higher income limits apply, allowing more people to qualify for the credit.  Under the new legislation, the credit is reduced if your modified adjusted gross income (MAGI) is more than $125,000 ($225,000 if you are married filing a joint return).  The credit is phased out completely if your income is greater than $145,000 ($245,000 for married filing jointly).
• Homes purchased before May 1, 2010 qualify for the credit
• Homes purchased for more than $800,000 don’t qualify for the credit
• The definition of first-time homebuyer was expanded to allow people who have had their current home for more than 5 consecutive years to qualify for the credit.

Energy Credits

While the energy credits aren’t new in 2009, the American Recovery and Reinvestment Act of 2009 (ARRA) extended the credits to encourage the use of efficient energy sources.  The biggest change was to increase the lifetime tax credit for energy efficient home improvements to $1,500 (from $500).  The separate cap for windows ($200) was also removed, although the lifetime cap still applies.

Cash for Clunkers

To stimulate the auto industry, the Cash for Clunkers program provided cash vouchers for consumers who traded in older, less fuel efficient cars for new cars (with better fuel economy).  This program ended on August 24, 2009 when it ran out of funds.

Help With COBRA Premiums

People who lost or lose their jobs between September 1, 2008 and January 1, 2010 may get help paying their COBRA premiums.  A new government subsidy was established to help pay up to 65% of the COBRA premiums paid by eligible individuals for up to nine months.  This subsidy is phased out for people with higher incomes.

Related Posts:

• Tax Carnival 46 – Inauguration Day
• More About Obama’s Proposed ‘Paycheck Bonus’
• Obama’s Proposed Tax Cuts Total $300 Billion

The 46th Tax Carnival is posted.  And since today is Inauguration Day, Kay Bell (keeper of the Tax Carnival) has chosen the inaugural process as the theme.

Here are a few articles you’ll find in this week’s tax carnival:

Pragmaticsage has some advice in Choosing a tax preparer: Do you need a CPA?

Robert D Flach, THE WANDERING TAX PRO of the Web, tells us WHAT NOT TO DO! when searching for a tax pro.

David Weliver says the Retirement Saver’s Tax Credit is a Great Benefit for Low Income Taxpayers, posted at Money Under 30.

FMF from at Free Money Finance lays out The 11 Most Overlooked Tax Deductions.

And finally, our own submission… Kristine McKinley looks at some specific “other” earnings in Are Prizes and Awards Taxable? It’s posted at Ebiz Tax Tips.

Thanks to Kay at Don’t Mess With Taxes for another great tax carnival!

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One of the tax cuts I talked about in ‘Obama’s Proposed Tax Cuts Total $300 Billion’ was the payroll tax cut for low to mid-income workers.

Since this is the tax break that will affect most American’s I wanted to share some more details on what is being called Obama’s paycheck bonus (the official name, right now anyway, is the ‘Make Work Pay Credit’.

The details are still being hammered out, but basically it looks like the tax plan will include a payroll tax break that will mean anywhere from $83 to $166 extra per paycheck for workers, during the first quarter of the year.

By reducing payroll taxes, Obama is getting money into the hands of the greatest number of people as quickly as possible.  The hope is that taxpayers will spend this money to help boost the economy.

This tax credit will essentially work out to be $500 a year for individuals and $1,000 for couples, with the full credit being limited to those making $75,000 or less ($150,000 or less for married couples).  People who earn between $75,000 and $85,000 will get a partial credit (the phaseout range for couples is $150,000 to $170,000).

In addition, this will be a refundable tax credit, which means you don’t have to actually owe any tax liability to receive the credit.  This means that lower income families who typically qualify for the child tax credit or earned income credit (and thus may not have any tax liability after the credits are calculated) will still receive the payroll tax credit.

Breaking the numbers down, workers who get paid every two weeks can expect to receive an extra $19.23 per paycheck.  However, it depends on the timing of the tax break.  The tax credit could be implemented during the first quarter of the year (instead of being spread out over the entire year), which would mean larger paychecks during the first part of the year (then normal paychecks once the full credit is received).  According to economists, the earlier American’s receive the credit, the greater the potential impact on the economy, so this it’s very possible we’ll see this tax credit early in 2009.

Remember, this is just a proposal right now, so expect changes before this tax package is finalized.

Related Posts:

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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

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.

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• Max Out Your Retirement Plan (Year-End Tax Tips)
• Tax Carnival 46 – Inauguration Day

It’s hard to believe we’re almost at the end of the year already.  As I write this, there are only a few weeks left in 2008.

Most people probably aren’t thinking about taxes yet, but the time to do tax planning is before the year ends.  Once December 31 has passed, there’s very little you can do to help reduce your 2008 taxes.

The first step in tax planning is to determine where you are for the year.  Pull out last year’s tax return for a reference.  You also need your most current profit and loss statement, so if your books aren’t up to date, now’s the time to get caught up.

Compare your income and expenses to last year’s tax return.  Is your income up?  Do you have the same amount of deductions as last year?  If your income is up, or if your expenses were down, you may owe more taxes than you did last year.

If you are a small business owner you should be very familiar with estimated tax payments.  Have you paid in enough taxes to avoid the under-payment penalty?  The general rule of thumb is that if you expect to owe a balance due of $1,000 or more, after all of your payments (from withholding, tax credits, etc.), then you need to make estimated tax payments.

Once you have compared your current year income and deductions to last year’s tax return, where do you stand?  Do you have more taxable income this year?  If you do, then you can defer income or accelerate expenses to reduce your taxable income for the year.  Just remember, these strategies will likely increase your taxable income for the following year; your tax plan should be long-term, not just for the current year only.

Defer Income:  One way to reduce your current year taxes is to defer income.  If you are a small business owner, you have more control over this than wage earners do.  If you have accounts that you expect to bill in the last week or two of December, consider delaying your invoicing until the last few days of December or even the first few days of January.  Cash basis taxpayers report income when it’s received, so if you invoice a customer on December 28, and you don’t receive payment until January 2nd, then the income will be reported on the next year’s tax return instead of the current year.

Accelerate expenses:  Another way to reduce your taxes is to pay expenses ahead of time.  If you can see that your income is higher this year and you want to minimize your taxes, determine which expenses you can pre-pay before the end of the year to reduce your taxable income.  Some examples include your rent, insurance, utilities, or other invoices you receive at the end of the year that aren’t due until after December 31.  Also, consider stocking up on supplies, inventory, or other items you’ll need to purchase soon anyway.  Do you have any plans to upgrade your equipment or computers?  Consider doing those before the end of the year as well.

Another way to minimize your taxes is to fund your retirement account.  As a small business owner, you have a number of options including traditional IRAs, SEP IRAs, Simple IRAs, or 401K plans.  Determine which plan is best for you and fund it before the due date (this is the one strategy that doesn’t have to be done before the end of the year).

This is just a basic guideline for year-end tax planning.  To determine the strategies best for you and your small business, discuss year-end tax planning with your tax professional.  But don’t wait too long… the year will be over before you know it!

Resources:

Tax Planning & Estimates
The New Biz Tax Consultation

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On July 30, 2008, President Bush signed H.R. 3221, the Housing and Economic Recovery Act of 2008 (the “Act”).

The Housing Act is intended to revamp the housing finance industry, encourage home ownership and help prevent foreclosures. Below is a summary of some of the tax provisions in the bill that will affect current and future home owners:

* The Hope for Homeowners Program: The Act creates a new Federal Housing Authority (FHA) program designed to help borrowers in danger of losing their homes to foreclosure. Eligible homeowners may be able to pay off their original (foreclosing) lenders with a fixed-rate, 30-year-term mortgage for up to 90 percent of the appraised value of the property. Eligible homeowners are those who originated their loans before January 1, 2008, spend more than 31 percent of their monthly income on their mortgage, and are currently in danger of foreclosure. Borrowers would have to share future equity with the FHA. The program is completely voluntary; banks may elect not to participate. The program begins on October 1, 2008 and ends in September of 2011.

* Temporary mortgage foreclosure protection for military members: The Act provides mortgage foreclosure protection for members of the U.S. Armed Services by temporarily increasing (through December 31, 2008) the maximum loan guarantee for VA loans. The period a lender must wait before initiating foreclosure proceedings after a service member returns from service is extended from 90 days to 9 months. Increases in mortgage interest rates above 6 percent are suspended during the period of service and for one year after a service member ends service. This provision will sunset on January 1, 2011.

* Temporary tax “credit” for first-time homebuyers: First-time homebuyers of a principal residence purchased after April 8, 2008 and before July 1, 2009 may take a refundable tax credit of 10 percent (up to a maximum of $7,500; $3,750 for married persons filing separate returns) of the purchase price of the property. The credit is phased out for individual taxpayers with adjusted gross incomes (AGIs) ranging from $75,000 to $95,000 ($150,000 to $170,000 if married filing jointly). However, taxpayers must repay the credit taken over 15 years in equal installments as a surcharge on their annual income tax return.

* Temporary standard property tax deduction for taxpayers who don’t itemize their deductions: For 2008 only, taxpayers who do not itemize their deductions will be allowed to take a real property tax standard deduction (in addition to the standard deduction) of up to $1,000 if married filing jointly ($500 for all other filers).

* Reduced homesale exclusion for nonqualified use: For sales and exchanges of a principal residence after December 31, 2008, the $250,000 ($500,000 if married filing jointly) homesale exclusion won’t apply to the extent the gain is allocated to periods (not including any period before January 1, 2009) during which the property is not used as the principal residence of the taxpayer or the taxpayer’s spouse.

These are just a few of the provisions in the new act. For more information, please visit ‘Housing Rescue Bill…’

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