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Video: Tax Filing Season 2010:
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Video:
Education Tax Credit — Claim It (Students):
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Education Tax Credit — Claim It (Parents):
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Energy Tax Credits — Claim It:
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FS-2010-4, January 2010
In 2009, numerous new and expanded deductions and credits came into being for
a broad cross-section of taxpayers: College tax benefits for parents and
students; energy credits for homeowners who are going green; and even tax breaks
for home buyers and car buyers.
Following is a summary of these and other key changes taxpayers will find
when they start preparing their 2009 federal income tax returns.
Note: See Fact Sheet
2010-6 for more information on the first-time homebuyer credit and Fact Sheet 2010-7 for details
on the making work pay credit.
American Opportunity
Credit Helps Pay for First Four Years of
College
More parents and students can use a federal education credit to offset part
of the cost of college under the new American Opportunity Credit.
This credit modifies the existing Hope credit for tax years 2009 and 2010,
making it available to a broader range of taxpayers. Income guidelines are
expanded and required course materials are added to the list of qualified
expenses. Many of those eligible will qualify for the maximum annual credit of
$2,500 per student.
In many cases, the American Opportunity Credit offers greater tax savings
than existing education tax breaks. Here are some of its key features:
- Tuition, related fees and required course materials, such as books,
generally qualify. In the past, books usually were not eligible for
education-related credits and deductions.
- The credit is equal to 100 percent of the first $2,000 spent and 25 percent
of the next $2,000. That means the full $2,500 credit may be available to a
taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
- The full credit is available for taxpayers whose modified adjusted gross
income (MAGI) is $80,000 or less ($160,000 or less for filers of a joint
return). The credit is reduced or eliminated for taxpayers with incomes above
these levels. These income limits are higher than under the existing Hope and
lifetime learning credits.
- Forty percent of the American opportunity credit is refundable. This means
that even people who owe no tax can get an annual payment of the credit of up to
$1,000 for each eligible student. Existing education-related credits and
deductions do not provide a benefit to people who owe no tax. The refundable
portion of the credit is not available to any student whose investment income is
taxed, or may be taxed, at the parent’s rate, commonly referred to as the kiddie
tax. See Publication
929, Tax Rules for Children and Dependents, for details.
Though most taxpayers who pay for post-secondary education qualify for the
American Opportunity Credit, some do not. The limitations include a married
person filing a separate return, regardless of income, joint filers whose MAGI
is $180,000 or more and, finally, single taxpayers, heads of household and some
widows and widowers whose MAGI is $90,000 or more.
There are some post-secondary education expenses that do not qualify for the
American Opportunity Credit. They include expenses paid for a student who, as of
the beginning of the tax year, has already completed the first four years of
college. That’s because the credit is only allowed for the first four years of a
post-secondary education.
Students with more than four years of post-secondary education still qualify
for the lifetime learning credit and the tuition and fees deduction.
For details on these and other education-related tax benefits, see Publication 970, Tax
Benefits for Education.
Many Energy Improvements Qualify for Expanded Tax Credits
People who weatherize their homes or purchase alternative energy equipment
may qualify for either of two expanded home energy tax
credits: the non-business energy property credit and the residential energy
efficient property credit.
Non-business Energy Property Credit: This credit equals 30 percent of
what a homeowner spends on eligible energy-saving improvements, up to a maximum
tax credit of $1,500 for the combined 2009 and 2010 tax years. This means that a
homeowner can get the maximum credit by spending at least $5,000 on qualifying
improvements. Homeowners must make the improvements to an existing principal
residence; this tax credit is not available for new construction. Due to limits
based on tax liability, other credits claimed by a particular taxpayer and other
factors, actual tax savings will vary. The cost of certain high-efficiency
heating and air conditioning systems, water heaters and stoves that burn biomass
all qualify, along with labor costs for installing these items. In addition, the
cost of energy-efficient windows and skylights, energy-efficient doors,
qualifying insulation and certain roofs are also eligible for the credit, though
the cost of installing these items does not count.
Residential Energy Efficient Property Credit: Homeowners going green
should also check out a second tax credit designed to spur investment in
alternative energy equipment. The residential energy efficient property credit,
equals 30 percent of what a homeowner spends on qualifying property such as
solar electric systems, solar hot water heaters, geothermal heat pumps, wind
turbines, and fuel cell property. Qualifying property purchased for new
construction or an existing home is eligible for the credit. Generally, labor
costs are included when calculating this credit. Also, no cap exists on the
amount of credit available except in the case of fuel cell property.
Not all energy-efficient improvements qualify for these tax credits. For that
reason, homeowners should check the manufacturer’s tax credit certification
statement before purchasing or installing any of these improvements. The
certification statement can usually be found on the manufacturer’s Web site or
the product packaging. Normally, a homeowner can rely on this certification. The
IRS cautions that the manufacturer’s certification is different from the
Department of Energy’s Energy Star label, and not all Energy Star labeled
products qualify for the tax credits. Use Form
5695, Residential Energy Credits, to figure and claim these credits.
(NOTE: The 2009 Form 5695 is expected to be available by Jan. 15, 2010.)
New Vehicle Purchase Incentive
New car buyers can deduct
the state or local sales or excise taxes paid on the purchase of new cars, light
trucks, motor homes and motorcycles. There is no limit on the number of
vehicles that may be purchased, and eligible taxpayers may claim the deduction
for taxes paid on multiple purchases. However, the deduction is limited to the
tax on up to $49,500 of the purchase price of each qualifying new vehicle.
Qualifying new vehicles must be purchased, not leased, after Feb. 16, 2009, and
before Jan. 1, 2010.
Taxpayers who buy a new vehicle may deduct state or local fees or taxes that
are similar to a sales tax whether or not their state imposes a sales tax. To
qualify, the fees or taxes must be assessed on the purchase of the vehicle and
must be based on the vehicle’s sales price or as a per-unit fee.
The amount of the deduction is reduced for taxpayers whose modified adjusted
gross income is between $125,000 and $135,000 for individual filers and between
$250,000 and $260,000 for joint filers. This deduction is available regardless
of whether a taxpayer itemizes deductions on Schedule A. Itemizers claim the
deduction on either Line 5 or Line 7 of Schedule A. See the Schedule A
instructions for details. Non-itemizers claim the deduction on new Schedule L,
Standard Deduction for Certain Filers.
Tax Credits Increased for Low and Moderate Income Workers
More workers and working families are eligible for the Earned Income Tax Credit. In
particular, expanded benefits are now available for those with three or more
qualifying children and married couples. The EITC helps taxpayers whose incomes
are below certain income thresholds, which in 2009 rise to:
- $48,279 for families with three or more qualifying children
- $45,295 for those with two or more children
- $40,463 for people with one child
- $18,440 for those with no children
One in six taxpayers can claim the EITC, which, unlike most tax breaks, is
refundable, meaning that individuals can get it even if they owe no tax and even
if no tax is withheld from their paychecks.
In addition, the earned income formula for the additional child tax credit is
revised for tax years 2009 and 2010. As a result, more low and moderate income
families qualify for the full $1,000 child tax credit. See Form 8812 for more
information.
Standard Deduction Increases for Most Taxpayers
Nearly two out of three taxpayers choose to take the standard deduction
rather than itemizing deductions such as mortgage interest and charitable
contributions. The basic standard deduction is:
- $11,400 for married couples filing a joint return and qualifying widows and
widowers, a $500 increase compared with 2008
- $5,700 for singles and married individuals filing separate returns, up $250
- $8,350 for heads of household, up $350.
Higher amounts apply to blind people and senior citizens. The standard
deduction is often reduced for a taxpayer who qualifies as someone else’s
dependent.
In addition, eligible taxpayers can further increase their standard deduction
by any of the following three deductions:
- State or local real estate taxes paid in 2009
- A net disaster loss reported on Form 4684 and
- State or local sales or excise taxes on the purchase of a qualifying new
motor vehicle.
Use new Schedule L, Standard Deduction for Certain Filers, to claim these
additional deductions.
AMT Exemption Increased for One Year
For tax-year 2009, Congress raised the alternative minimum tax exemption to
the following levels:
- $70,950 for a married couple filing a joint return and qualifying widows and
widowers, up from $69,950 in 2008
- $35,475 for a married person filing separately, up from $34,975
- $46,700 for singles and heads of household, up from $46,200
Under current law, these exemption amounts will drop to $45,000, $22,500 and
$33,750, respectively, in 2010. Form 6251
and the AMT calculator provide more information.
Other Changes
The standard mileage rate for business use of a car, van, pick-up or panel
truck is 55 cents for each mile driven. The standard mileage rate for the cost
of operating a vehicle for medical reasons or as part of a deductible move is 24
cents per mile. The rate for using a car to provide services to charitable
organizations is set by law and remains at 14 cents a mile.
The value of each personal and dependency exemption is $3,650, up $150 from
2008. Most taxpayers can take personal exemptions for themselves and an
additional exemption for each eligible dependent. This is one of more than three
dozen individual and business tax provisions that are adjusted each year to keep
pace with inflation. A complete rundown of these changes can be found in 2009 Inflation Adjustments Widen
Tax Brackets, Change Tax Benefits.
The amount of taxable investment income a child can have without it being
taxed at the parent's rate is $1,900, up $100 from 2008. For details, see Form 8615.
There are several modifications to the definition of a qualifying child. For
example, the child must be younger than the taxpayer, unless the child is
totally and permanently disabled. These changes affect who can claim various tax
benefits including the dependency exemption, child tax credit, credit for child
and dependent care expenses, head of household filing status and the EITC. See
the instructions for Forms 1040 or 1040a for more information.
A new rule applies to the noncustodial parent in situations where a couple is
divorced or legally separated after 2008. To claim a child as a dependent, the
noncustodial parent must attach Form 8332 or a similar statement to his or her
tax return. For pre-2009 divorces and separations, the noncustodial spouse still
has the option of attaching certain pages from the divorce decree or separation
agreement, instead of Form 8332. See Form 8332 for further details.
A $3,500 or $4,500 voucher or payment made for such a voucher under the CARS
“cash for clunkers” program is not taxable to the consumer buying or leasing a
new car.
Unemployment benefits up to $2,400 received in 2009 are tax free for
unemployed workers. Every person who receives unemployment benefits can exclude
the first $2,400 of these benefits on their return. Unemployment benefit amounts
over $2,400 are taxed.
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