Tax relief to snag before year ends

Personal finance

It's not too late to take advantage of some of the credits Congress has made available for this tax period

November 15, 2009|By Eileen Ambrose eileen.ambrose@baltsun.com

You have about six weeks left to make moves to cut your tax bill in the spring.

Besides the usual tax strategies, such as making charitable donations before year's end, you might be able to take advantage of one of the many temporary tax breaks Congress created to stimulate the economy.

One of them, the popular first-time homebuyer credit, was recently extended so you have more time to get it. But it's unclear whether others will survive.

Congress isn't expected to pass any major tax legislation before year's end, although it will likely make a short-term fix to the estate tax so it doesn't disappear next year as scheduled. Legislators are expected to keep the current limits, which allow one to shelter up to $3.5 million in estate taxes, for another year.

So, as you think about the coming tax season, here are some tax breaks to keep in mind:

Homebuyer credit The $8,000 first-time homebuyer credit recently was extended and expanded.

Now, even if you're not buying your first house, you might qualify for a credit worth up to $6,500 if you're purchasing a principal residence after Nov. 6. To qualify, you must have owned a house for five consecutive years during the eight years before buying the new one.

Income limits to qualify for the credit have been raised, but again for purchases made after Nov. 6. The full credit is available if modified adjusted gross income is up to $125,000 for singles and $225,000 for married joint filers. It then starts phasing out. You also have more time to buy. The house must be under contract by April 30, and the deal must close by the end of June.

Sales tax deduction "It's still not too late to buy, even if the 'cash for clunkers' program is over," says Barbara Weltman, author of "1001 Deductions & Tax Breaks." "You can still buy a car in 2009 and get to write off the sales tax on the car."

This deduction applies to new vehicles purchased from Feb. 17 to the end of this year. And you can deduct the sales and excise taxes paid on the first $49,500 of the purchase.

The deduction begins to phase out once adjusted gross income reaches $125,000 for singles; $250,000 for joint filers.

Required distributions relief The market plunge last year put older investors required to take distributions from retirement accounts in a hard spot. They faced having to pull money out when the account value had dropped. Congress cut them some slack for this year only. Those older than 70 1/2 don't have to take required distributions this year from traditional individual retirement accounts or other retirement plans.

And if you took distributions this year because you were unaware of the tax relief or discovered later that you really didn't need the money this year, you have until Nov. 30 to put the money back into an IRA or retirement account to avoid paying taxes on the withdrawal, says Mark Luscombe, principal analyst with CCH, a provider of tax information.

Energy credits For this year and next, deduct up to 30 percent of the cost of energy improvements to your main residence, such as adding energy-efficient windows, doors, insulation furnaces, air conditioners, heat pumps and water heaters.

The amount of credit, though, can't exceed $1,500 for the combined two-year period.

Add solar panels, solar water heaters and geothermal heat pump now and through 2016, and deduct 30 percent of the cost without any dollar limit.

Check out dsireusa.org for the various state and local energy tax breaks.

Education breaks The new American Opportunity credit, good for this year and next, is a more generous version of the old Hope Scholarship credit. The Opportunity credit is worth up to $2,500 in higher-education costs - tuition, fees, books or required materials - paid in any one of the first four years of school. The credit essentially covers the first $2,000 spent on college costs, and 25 percent of the next $2,000 spent.

The credit begins to phase out once income reaches $80,000 for singles; $160,000 for married joint filers.

Credits basically reduce your bottom-line tax bill dollar-for-dollar.

But 40 percent of the Opportunity credit is refundable, meaning you can get as much as $1,000 back in the form of a refund if you don't owe any taxes.

Also, you can tap a 529 college savings account to pay for computer equipment for students this year and next without paying taxes, Weltman says.

Tax breaks for the unemployed Don't forget, you don't have to pay income taxes on the first $2,400 of unemployment benefits received this year.

Also, if you've been laid off any time between Sept. 1, 2008, and the end of this year, you could qualify for a nine-month federal subsidy that pays 65 percent of the so-called COBRA premiums to remain covered under your old employer's health insurance plan.

You won't get the subsidy if you voluntarily quit your job or can get coverage under Medicare or a spouse's workplace plan. The subsidy starts phasing out when adjusted gross income hits $125,000 for singles and $250,000 for married joint filers.

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