Top Priority - Health Care Reform
As I write this, Congress is under pressure to finalize a Health Care Reform bill. Their summer recess ends in late August. Whatever the outcome, the cost will be HUGE. We all will feel an impact - in our coverage, its cost, or in our taxes. If costs are passed on to big businesses, we'll still pay in the form of higher prices for goods.
Meanwhile, several important tax issues have been sidelined. We still face a sluggish economy, record unemployment, low home prices, foreign pressures, and more. Expect a flurry of tax changes late in the year. Several laws are set to end this year or next - a number are likely to be extended. Estate tax rules must change, else they expire in December (and that won't happen!).
I can't offer lots of help yet on what to expect for 2010. But, I CAN remind you of several recent changes that affect your 2009 tax bill. You still have a few months for choices that can put some dollars back in your pocket.
So Many New Laws!
We face a host of new tax laws for 2009 and 2010. It's been more than 20 years since we had so many new rules all at once. Worse, most are only temporary, which adds to the confusion. All of us need to be more alert to keep records, or we'll miss out on saving some money.
Here's a quick listing of new rules. Not a lot of explanation here. You'll need to call me if you need more details. And guess what? In some cases I'll be forced to tell you IRS has not yet written clear rules on the items! Congress writes the laws, but IRS is hard-pressed to keep up with the details!
IRS usually devotes a page or two each year to law changes in the tax form instruction packet. This year in June they released Publication 553. It has changes for 2008 and 2009. It's a whopping 38 pages!
Sales Tax On Cars.
Buy a new car after February 16, 2009? If so, the sales tax is deductible - even if you can't itemize your deductions. Only for 2009. And, only for cars under $49,500. Even two cars, if the total cost is under $49,500. It's lost as income ranges from $125K to $135K ($250K - $260K for couples). It's not affected by the Alternative Minimum Tax. IRS says states with no sales tax sometimes charge other fees based on a car's value - they would be deductible in the same way. No official guidance yet.
The first $2,400 you collect won't be taxed. Tills is for 2009 only.
The deduction for dependents usually goes to the custodial parent. This parent can "waive" the deduction to the other parent year by year. ow IRS insists non-custodial parent must attach the signed waiver form to their tax return, even if the divorce decree allows the deduction.
Making Work Pay Credit.
Anyone earning over $6,450 at work gets $400 knocked off the tax bill. It's up to $800 for a couple. New tables for tax withholding in April give you the $400 in your pay. For most folks this means nothing much. But, you get too much if you have multiple jobs, both spouses work, or other income pushes you over the limit for the credit. It phases out as income passes $75K ($150K for couples). What's the problem? Your return might show less credit than what you already collected - you'll pay the excess back at tax time. You may need to change your withholding at work.
Several tax benefits may apply if you suffered loss in a Federally-declared disaster. You can find a listing of qualified disasters at www.fema.gov.
Alternative Minimum Tax.
This "tax on the wealthy" is a mess. The measure of "wealthy" is from 1983, and was never revised. We've seen a series of one-year inflation adjustments for several years now. There is such a "fix" in place for 2009, but no word yet on 2010. Unless Congress rewrites this monster, an extra 24 million folks will face the tax in 2010.
From IRA to Charity.
If you are over 70Y2, you can have your IRA custodian make charitable gifts directly from the IRA. Your income drops without needing to itemize deductions. This' a tax-wise move. but it expires at year.
Real Estate Tax.
2009 the last year you may deduct the first $500 of real estate you pay, even if you cannot itemize deductions.
For 2009 and 2010 we still have low rates on long-term gains. Few experts expect to see these low rates in the future.
You may choose to deduct up to $4,000 of tuition and fees. (The deduction is set to expire this year.) Or, take one of two tax credits, if more valuable.
Lifetime Learning Credit gives a tax break of 15% of what you spent. The HOPE Credit has been revised. For 2009 and 2010 it applies to the first 4 years of college (it covered only 2 years in the past). Also new - add the cost of books and supplies, not just tuition and fees. It is a cash rebate of the first $1,000 spent, plus 25% of the next $1,000. Even better, up to 40% of the credit it is refunded even if you have no tax. There is still a phaseout for higher income folks.
Another change is for Section 529 college savings plans. Money taken from these plans is tax-free if spent for college education - tuition, fees, books, room & board. For 2009 and 2010 you can also use the money for computers and software.
The hybrid car credits are rapidly running out. No more credits for Toyota or Honda vehicles. Reduced credits in _009 for Ford hybrids depend on purchase date. To see a list of mod 1 , go to www.irs.gov and arch "alternative motor vehicle credit". For 2009 the credits apply even if you pay the Alternative Minimum Tax. There are also generous credits for a very few of the new electric plug-in vehicles.
The liberal depreciation rules were extended to 2009. A small business may elect to write off up to $250,000 of new equipment instead of depreciating. Elect depreciation on a 2009 item, and you can write off 50% up front, taking the balance over time. The normal first-year "cap" on a new car is $8,000 higher for 2009. All these choices need careful study because of the future impact. It's a sort of "Pay me now, or pay me later".
If you lost your home in a foreclosure you might be able to ignore the cancelled debt. Relief applies only for loans that were used to buy or build the home. If you have refinanced in the meantime, you may be hit with a large tax on the forgiven debt.
There are other ways you might gain relief from cancelled debts, but they are too complex to discuss here. This might even apply to a rental property. Call me if you need help.
There are dozens of other tax items that are adjusted for inflation each year:
- Standard Deductions and dependent allowances
- Income limits for making your IRA contribution deductible
- Amounts you can contribute to your pension at work
- Business driving gets 55¢ per mile this year
- Income phaseout ranges for all sorts of credits and deductions
Keep Good Records.
2009 and 2010 will be challenges for you and for me. Keeping track of all the law changes is one thing. Being able to find your information is another. Please set aside a place to keep any information that affects your taxes. It will be tough to dig this out at tax time unless you make the effort now. Yes, it's a chore, but remember that you'll be paid for the effort!
Withholding Trap for Pensioners
Recent Change in Withholding Tables Helps Workers, but Pension Recipients Are in Store For a Shock!
The new Making Work Pay Credit for 2009 and 2010 gives a tax break of $400 to most workers. To speed things up, IRS was told to revise withholding tables giving the benefit before tax returns are filed.
Pension recipients don't get the credit, but their withholding is calculated from the same tables! Your withholding declined in April, but your tax bill is likely to be similar to last year's.
The change in your withholding depends on how you filled out Form W-4P. Mark "single" and withholding drops $400. Mark "married" and it drops $600 (the table for workers can't know whether the other spouse works). Same tax bill, but withholding dropped. Not good!
Government retirees are affected to a lesser extent. They don't get $400, but qualify for a $250 credit when they file, and thus have a smaller withholding shock.
IRS realized the problem within weeks. They sent notices to pension custodians with methods to correct the change. Problem - not all custodians did the same thing. Some increased withholding within a month. Some sent a confusing letter with a new Form W-4P. Some did nothing at all!
What To Do.
First, we must know what your custodian did. Check the withholding on a recent check. Compare it with withholding in January, February, or March. You may see little or no difference. If so, no problem. More likely is that withholding is now lower than you have come to expect. You need to make a decision.
Comfortable? If the change won't cause a problem next April 15, don't do anything.
Not comfortable? It's time to contact the custodian.
They'll send you a new Form W -4 P. If you want to use the typical "married plus allowances" or "single plus allowances" method, you'll need help. Call me, or call the custodian.
This problem applies in 2010, too. But, in 2011 we return to "normal". Will you remember to change the withholding in 2011? There's an alternative. Form W-4P has a line allowing a fixed amount withheld. You could choose anything at all - $75 a month, $207 a month, anything. Check last year's withholding. Round it up a few dollars, divide by 12 months, and use this number. When tables return to "normal" in 2011 there's nothing to do. Please let me know of any change - I can help you "track" this to avoid surprises in later years.
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