A little something for ordinary taxpayers

PERSONAL FINANCE

October 12, 2008|By EILEEN AMBROSE | EILEEN AMBROSE,eileen.ambrose@baltsun.com

The mega-bailout package for Wall Street also contains about $150 billion in tax breaks for the rest of us.

Some are new, but many are tax breaks that had either lapsed or were near expiration and given another year or more of life.

Among them are credits for buying an electric car, deductions for college tuition and changes that will spare millions of families from the alternative minimum tax.

Your broker will have new reporting requirements when securities are sold, but that might end up costing you more in taxes.

"A good thing this year, the legislation was passed in early October rather than late December. The changes can be reflected in the tax forms that are sent out," says Bob D. Scharin, senior tax analyst with Thomson Reuters' Tax & Accounting.

For the past two years, Congress waited until after tax forms were printed by the IRS to change the tax law. Some deductions didn't appear on forms and raised more confusion than usual during the tax season.

Here are some tax breaks to watch for:

Eco-friendly transportation:

If you're a green-minded commuter, you may be able to take advantage of two new transportation tax breaks that start next year.

Buy a plug-in electric car or truck, and you could qualify for a maximum credit of $7,500 to $15,000, depending on the vehicle. The credit starts phasing out after 250,000 plug-ins are sold.

Does your employer offer a cash benefit for biking to work? If so, you won't have to pay taxes on up to $20 a month of those benefits.

Mortgage debt forgiveness : Traditionally, you must pay income taxes on any mortgage debt forgiven by your lender. But Congress temporarily stopped taxing canceled debt going back to 2007 because of the steep rise in foreclosures. This provision is now extended through the end of 2012, an extra three years. That's a sign that lawmakers expect housing troubles to linger for quite a while.

Individuals and joint filers don't have to pay taxes on up to $2 million of canceled debt on a primary residence. The limit for a married taxpayer filing separately is $1 million.

Alternative minimum tax : Congress raised the amount of income exempted from the alternative minimum tax, a tax designed decades ago to snag the rich but that ensnares more middle- and upper-middle-class families these days. The exemption for 2008 is $69,950 for married joint filers and $46,200 for singles.

This is a temporary fix, but it will save more than 20 million taxpayers from paying AMT this coming tax season.

Incentive stock options : You also get AMT relief if you exercised incentive stock options before this year. These options give you the right to buy company stock at a certain price within a period of years. When you exercise that right, you can end up owing AMT on the gain - the difference between what you paid and the market price of the stock at that time - even if you hold onto the shares.

The new law waives any AMT tax you owe from exercising incentive stock options before this year, says Mark Luscombe. Interest and penalties owed on any unpaid AMT stemming from the exercise of these options are also wiped out, he says.

This will help tech workers who got hit many years ago by the AMT when exercising options in startup Internet companies, Luscombe says. Once the tech bubble burst, these workers were left with shares that had little or no value, yet they still owed AMT on a nonexistent profit.

IRA charitable distributions : If you're age 701/2 or older, you can make tax-free withdrawals from an individual retirement account through 2009 if you give the money directly to a charity. You can donate up to $100,000 a year from an IRA. This tax break died out last year.

If you make donations this way, you won't get a charitable deduction on your tax return. But this will reduce your adjusted gross income, and that could make you eligible for other tax breaks.

Real property taxes : If you pay real property taxes but don't file an itemized return, you can claim a larger standard deduction. This tax break has been extended through next year.

This provision allows you to claim up to $500 of real property taxes paid, $1,000 for joint filers, on top of the standard deduction.

Sales tax deduction : For 2008 and 2009, you will have the option of deducting sales taxes on your federal return instead of state and local income taxes. This provision, which expired last year, benefits residents of states that don't have income taxes. But even if you don't live in one of those states, you can still use this to your advantage if you bought a big-ticket item and paid a hefty sales tax.

Education deductions : Two expired education tax breaks have been extended through 2009.

Singles with adjusted gross income of up to $65,000 and joint filers with income up to $130,000 can deduct up to $4,000 in college tuition and fees a year. If you make more than that, but not more than $80,000 if single and $160,000 if filing jointly, you can deduct up to $2,000 in college costs annually.

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