This is a list of the highlights from the new “stimulus bill.” Some of these items are touched below.
Improved Education Credits & Tuition and Fees Deduction
The Hope Credit has been expanded! Third and Fourth year students are now eligible. The maximum annual credit increased to $2,500 and up to 40% of the credit maybe refundable.
The Lifetime Learning Credit maximum is still $2,000.
The above the line deduction for higher-education expenses is extended through 2010.
These deductions and credits are subject to AGI limitations and we will evaluate your situation to determine which option is best.
The energy tax credit is back for 2009 and 2010! $1,500 is the maximum credit for home improvements. Home Builders should review rules to qualify for this credit.
Not all energy star rated items will qualify for the credit.
New Vehicle Sales Tax Deduction
Eligible vehicles must be purchased after Feb. 16, 2009, and before Jan. 1, 2010. The special deduction is available regardless of whether a taxpayer itemizes deductions on their return.
Taxpayers can defer $16,500 under elective salary deferral plans for 2009 ($11,500 for SIMPLE plans). The catch-up contribution limit for taxpayers 50 or older is $5,500 ($2,500 for SIMPLE plans).
The Energy Policy Act of 2005 replaced the clean-fuel burning deduction with a tax credit. A tax credit is subtracted directly from the total amount of federal tax owed, thus reducing or even eliminating the taxpayer's tax obligation. The tax credit for hybrid vehicles applies to vehicles purchased or placed in service on or after January 1, 2006. These credits will end for vehicles place in service after December 31, 2010.
Verify that a credit is still available for your make/model before you purchase the car.
Cancellation of Mortgage Debt Relief
For tax years 2007 through 2012, if a taxpayer has debt forgiven or cancelled on the personal residence due to loan modification or foreclosure, they may qualify for relief of the tax on that debt forgiveness. Usually, if debt is reduced or forgiven it must be included as income and subject to income tax. The Mortgage Forgiveness Debt Relief Act of 2007 allows exclusion of income as a result of reduced debts owed.
Kiddie tax now applies to parents with children up to the age of 18 or age 23 (if a full-time student) with investment income over $1,900 in 2009. The first $950 is exempt and the next $950 taxed at the child’s tax rate.
A Health Savings Account (HSA) is a tax-advantaged medical savings account available to taxpayers who are enrolled in a High Deductible Health Plan (HDHP). This savings account is set up exclusively for paying the qualified medical expenses of the account beneficiary or their spouse and/or dependents. Taxpayer contributions are deductible from AGI. Contributions made by an employer are excluded from income and not subject to employment taxes. In 2009, the contribution limit is $3,000 for self-only and $5,950 for family coverage (if age 55 or older you are allowed a “catch-up” contribution of $1,000). For 2009, contributions must be made by April 15, 2010.
Mortgage insurance premiums will be deductible through 2010 as an itemized deduction. This is another relief provision for homeowners. The three requirements are (1) the insurance must be in connection with the home acquisition debt, (2) the contract must have been issued after 2006, and (3) the premiums must be paid during the year.
Additional Standard Deduction Amount for Property Taxes
In 2008 and 2009, taxpayers that do not itemize but pay real estate taxes can claim an additional amount on top of their standard deduction. The amount is limited to the lesser of actual taxes paid or $500 for individuals/ $1,000 for married filing joint.
Car Donations
Beginning in 2005, the rules for car donations changed, making such donations less attractive. Previously, taxpayers could deduct the fair market value of cars donated to a charity. However, if the charity sells the car, a taxpayer's deduction is equal to the proceeds received by the charity. If the charity does not sell the car and instead uses the car in furthering its charitable purpose, the taxpayer may be entitled to deduct the vehicle's fair market value if certain conditions are met.
Tax-Free IRA Distributions to Charity
Eligible IRA owners can make a tax-free transfer from their IRA to a qualified charitable organization through 2009.
Eligible out-of-pocket expenses paid for classroom materials can be deducted as an above the line adjustment up to $250 for 2008 and 2009. Amounts above that limit may be deducted but are subject to a floor of 2% of AGI.
Commercial Activity Tax (CAT Tax) has been phased in to offset revenue lost from other tax cuts. The rate increased to .26%, effective April 1, 2009.
Annual CAT Tax returns are now due May 10th. Quarterly filers due dates are the tenth (10th) day of the second month following each tax period (Feb. 10, May 10, Aug. 10, and Nov. 10).
Qualified Production Activities Income Deduction
The Code Section 199 qualified production activities deduction went into effect in 2005 and can benefit many businesses. It provides a percentage deduction for the lesser of: (1) a taxpayer's qualified production activities income for the tax year, or (2) taxable income (or, for an individual, adjusted gross income), determined without regard to Code Section 199, for the tax year. The rate for 2008 and 2009 is 6% and then will increase to 9% in 2010 and thereafter.
