Few things are more irritating during tax season than the belated realization that you paid more in taxes than you had to. Yet thousands of taxpayers fall prey to this every year, by failing to claim deductions they were eligible for. Never was this more prevalent than in 2009, when several recent or brand new deductions came into existence – and were ignored by scores of taxpayers. These include credits or exemptions for everything from housing to energy efficiency and education loans. In total, these deductions could spell the difference between thousands of dollars in your pocket or Uncle Sam’s – your call. Today, BillShrink will analyze 12 tax breaks you didn’t take advantage of in 2009, while there’s still time to do something about it!
$8,000 to New Home Buyers
As Walletpop.com explains, those who purchased their first principal residence (not a vacation or rental property) during 2009 are eligible to utilize an $8,000 tax credit on your 2009 federal income tax return. The credit, enacted with the aim of stimulating activity in a decimated housing market, is a vast improvement from a taxpayer’s standpoint over what it replaced. Prior to the First Time Homebuyer’s credit, a $7,500 credit was available to the same individuals, but was eventually required to be repaid. In other words, tax author Kay Bell concludes, it “was a bait and switch” tactic foisted onto first-time homebuyers by the IRS. Fortunately, the new credit is an outright exemption with no expectation of repayment.
Making Work Pay Credit
A new payroll tax credit (called Making Work Pay) was established in 2009 in the amount of $400 for individuals and $800 for couples filing jointly. Beginning in April 2009, employees began having less money withheld from their paychecks to reflect the amount of their credit. The justification for this credit was essentially populism. That is, roughly 95% of working families are eligible to claim it and will directly benefit from the money exempted from taxation. Fortunately, this credit is automatically put into place at the payroll level, and you would actually have to adjust your withholdings manually to avoid taking it (not that you ever would.)
Unemployment Income Exemption
Another credit that took effect in 2009 exempted from income taxes the first $2,400 of an individual’s unemployment benefits. It was a timely credit, given the recession and how many more people are consequently on the unemployment rolls. Be careful however, as Uncle Sam is not known for pointing out such deductions if you do not explicitly declare them. If you have received unemployment benefits in any amount during 2009, be sure the allowable $2,400 (or however much you received prior to that amount) is accounted for on your return, so that there is no doubt you can deduct it from your total income at filing time.
New Car Deductions
In an attempt to stimulate America’s stagnant auto industry, buyers of new cars were extended some serious tax relief from Uncle Sam last year. Anyone who bought a new car from February 17, 2009 through December 31, 2009 is eligible to deduct the state and local taxes of the transaction (up to $49,500 of the purchase price) from their federal income taxes. Admittedly, this credit does not solve the arguably larger problem of getting financing to buy a car in the first place, but it is certainly a write-off that no new car buyer should ignore this April. If you have not yet done so, gather your receipts and paperwork to determine the applicable taxes that you paid in 2009 so that you can ensure that they are written off on your federal return.
Student Loan Interest Deduction
If you paid interest on any student loans during 2009, you are permitted to deduct up to $2,500 of what you paid on your federal income tax return. As About.com explains, your lender will send you a Form 1098-E stating the amount of interest you paid last year. You, in turn, must then report that amount on Form 1040, Line 33 or Form 1050A, Line 18. Unfortunately, this deduction is restricted to certain income limits. If you earn over $70,000 per year (or $145,000 as a married couple filing jointly) you may not deduct any of your student loan interest whatsoever. If your income is between $55,000 and $70,000 (or $115,000-$140,000 married), the amount of your allowable deduction will be prorated.
Residential Energy Property Credit
EnergyStar.gov spells out several energy saving home improvements that entitle homeowners to substantial federal income tax deductions. The installation of new, Energy Star-approved biomass stoves, HVAC systems, insulation, roofs, non-solar water heaters, windows and doors equate to a 30% tax credit up to $1,500 of the costs of installation. The credit is good until December 31, 2010, and applies only to principal or secondary residences of the individual claiming the credit. New constructions and rentals do not qualify for the credit. The two energy-related credits below, however, do apply to newly constructed homes!
Another portfolio of tax incentives is available to those who install alternative energy sources into their principal or secondary residences. According to EnergyStar.gov, those who install approved geothermal heat pumps, small, residential wind turbines and/or solar energy systems are eligible to deduct 30% of the cost with no upper limit. In theory, you could spend a million dollars on such systems and deduct $300,000 from your federal income taxes. While that is taking it to the extreme, the potential deduction here is huge nonetheless and should be taken into account by anyone with the ability to utilize it. New construction homes do qualify, while rentals still do not.
A separate deduction unto itself is reserved for individuals who go so far as to install residential fuel cells or microturbine systems in their personal residences. Those who install such systems are eligible to deduct 30% of the cost, up to $500 per .5 kW of the power capacity. Admittedly, most people probably do not have the resources to make such a dramatic change in how they power their homes, but for those who can, it would be difficult to find a deduction better suited to their circumstances with the potential to save more money.
American Opportunity Tax Credit
As the New York Times reported in November 2009, Congress “expanded and renamed the Hope Credit so that more taxpayers qualify for it.” Now called the American Opportunity Tax Credit, the break offers qualifying taxpayers the ability to deduct the first $2,000 spent on tuition and books, as well as 25% of the next $2,000 spent on the same expenditures. The credit is now applicable to the entire first four years of undergrad school, rather than two, as before. Taxpayers who make less than $80,000 per year (and couples filing jointly who make less than $160,000) can utilize the credit, which can be claimed during tax years 2009 and 2010.
Low-Speed Electric Vehicles
The New York Times also reveals a $2,500 tax credit available to buyers of “certain low-speed plug-in electric vehicles” such as the one pictured above, as well as “two or three-wheel vehicles” in 2009. The credit is good for 10% of the vehicle’s cost – again, up to $2,500 – and applies only to purchases made between February 17, 2009 and Jan 1, 2010. If you have purchased any such vehicle (perhaps for convenient transportation within a large workplace or recreational area) this is yet another way to reduce your taxable income before April 17 rolls around. As always, we suggest that you check with a tax professional to make sure that your low-speed electric vehicle is what the IRS had in mind for this particular deduction.
Still another credit available to car buyers, the Times reveals, goes to the buyers of plug-in and hybrid vehicles “designed for highway use” and bought during 2009. This credit is good for anywhere between $2,500 and $15,000 “depending on battery capacity and gross vehicle weight rating.” According to Erik Lammert, a tax researcher with the National Association of Tax Professionals, vehicles purchased in 2010 will be eligible for a maximum credit of $7,500. Therefore, if you bought a qualifying vehicle in 2009, there will literally never be a more lucrative time to utilize this tax credit, at least given the laws currently on the books. Of course, be sure to check with a tax professional if you are unsure about whether (and for how much) of a credit your hybrid entitles you to.
Lifetime Learning Credit
While the American Opportunity credit offers tax relief to college students directly, the Lifetime Learning Credit extends relief further. According to MoneyZine.com, the Lifetime Learning Credit is a tax credit for $2,000 of eligible student expenses that you can deduct if you personally, your spouse, or one of your dependents (say, an adult child) has incurred qualifying expenses. Those expenses include tuition itself, books, lab supplies, and equipment. Admittedly, the rules for qualifying are a bit complicated. For one thing, you are only allowed to take the credit on “expenses paid for an academic period that begins in the fall through the first three months of the following year” – that is, the expenses follow a “typical academic calendar year.” A full credit may be claimed by those who earn “less than $48,000 or $96,000 if you file a joint return.” Qualifying institutions include non-profits, private and public institutions, trade schools or “any other kind of post-secondary educational institution.”