2009 - 2010 Tax Breaks What is New?Since most of tax legislation enacted changes for tax years beginning in this year, preparing and filing your 2009 tax year would require heightened attention to make sure you don’t miss any of the new and extended deductions and credits to which you’re entitled. Most of the changes for 2009 were directed at stimulating the economy and providing incentives and relief for individuals and businesses. So, it’s important for return preparers to double-check taxpayer materials as they come in. A comprehensive guide to all the changes for 2009 is beyond the scope of this post, but the following highlights are intended to provide a reminder of provisions that could easily be overlooked.

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This post summarizes important tax changes that took effect in your 2009 tax filing and tax changes that may effect your 2010 tax planning. It is adapted from IRS Publication#17 that annually published by the Department of the Treasury of IRS. However, the information given does not cover every item on every situations and it is not intended to replace the law or change its meaning.

 

I also post a set of Tax Rates Table for 2009 Filing and 2010 Planning  you may find useful. Many of the most commonly encountered return items, with changes and inflation-adjusted amounts for 2009 and 2010. Read it [here]

 

 

What’s New for Your 2009 Tax Filing?

Economic recovery payment – Any economic recovery payment you received is not taxable for federal income tax purposes, but it reduces any making work pay credit or government retiree credit.

Making work pay credit – If you have earned income from work, you may be able to take this credit. It is 6.2% of your earned income but cannot be more than $400 ($800 if married filing jointly).

Government retiree credit – You may be able to take this credit if you get a government pension or annuity, but it reduces any making work pay credit.

U.S. Savings Bonds – You can now use your refund to buy up to $5,000 in U.S. Series I savings bonds in multiples of $50. For more information, see Form 8888, Direct Deposit of Refund to More Than One Account.

Cash for clunkers – A $3,500 or $4,500 voucher or payment made for such a voucher under the CARS “cash for clunkers” program to buy or lease a new fuel-efficient automobile is not taxable for federal income tax purposes.

Unemployment compensation – You do not have to pay tax on unemployment compensation up to $2,400 per person for the year. Amounts over $2,400 are still taxable.

American opportunity education credit – The maximum Hope education credit is increased to $2,500. The increased credit has been renamed the American opportunity credit and part of it is refundable.

Deduction for motor vehicle taxes – If you bought a new motor vehicle in 2009 after February 16, you may be able to deduct any state or local sales or excise taxes on the purchase. In states without a sales tax, you may be able to deduct certain other taxes or fees instead.

Take the deduction on Schedule A – (Form 1040) if you are itemizing deductions and are not electing to deduct state and local general sales taxes. If you are not itemizing deductions, these taxes increase your standard deduction as figured on Schedule L (Form 1040A or 1040).

Qualifying child definition revised -The following changes to the definition of a qualifying child apply.

  • Your qualifying child must be younger than you unless the child is permanently and totally disabled.
  • A child cannot be your qualifying child if he or she files a joint return, unless the return was filed only as a claim for refund.
  • If the parents of a child can claim the child as a qualifying child but no parent so claims the child, no one else can claim the child as a qualifying child unless that person’s adjusted gross income (AGI) is higher than the highest AGI of any parent of the child who can claim the child.
  • Your child is a qualifying child for purposes of the child tax credit only if you can and do claim an exemption for him or her.

 

Earned income credit (EIC) – The EIC has increased for people with three or more children and for some married couples filing jointly. You may be able to take the EIC if:

  • Three or more children lived with you and you earned less than $43,279 ($48,279 if married filing jointly);
  • Two children lived with you and you earned less than $40,295 ($45,295 if married filing jointly);
  • One child lived with you and you earned less than $35,463 ($40,463 if married filing jointly); or
  • A child did not live with you and you earned less than $13,440 ($18,440 if married filing jointly).

 

The maximum AGI you can have and still get the credit also has increased. You may be able to take the credit if your AGI is less than the amount in the above list that applies to you. The maximum investment income you can have and still get the credit has increased to $3,100.

Divorced or separated parents – A noncustodial parent claiming an exemption for a child can no longer attach certain pages from a divorce decree or separation agreement instead of Form 8332 if the decree or agreement went into effect after 2008. The noncustodial parent must attach Form 8332 or a similar statement signed by the custodial parent and whose only purpose is to release a claim to exemption.

Tax on child’s investment income -The amount of taxable investment income a child can have without it being subject to tax at the parent’s rate has increased to $1,900.

Personal casualty and theft loss limit – Generally, a personal casualty or theft loss must be more than $500 to be allowed. This is in addition to the 10% of AGI limit that generally applies to the net loss.

First-time homebuyer credit – The credit increases to as much as $8,000 ($4,000 if married filing separately) for homes bought after 2008 and before May 1, 2010 (before July 1, 2010, if you entered into a written binding contract before May 1, 2010). You can choose to claim the credit on your 2009 return for a home you bought in 2010 that qualifies for the credit. You generally must repay any credit you claimed on your 2008 return if you sold your home in 2009 or the home stopped being your main home during 2009. 

Alternative minimum tax (AMT) exemption amount increased – The AMT exemption amount is increased to $46,700 ($70,950 if married filing jointly or a qualifying widow(er); $35,475 if married filing separately).

Standard mileage rates – For 2009, the standard mileage rate for the cost of operating your car for business use is 55 cents per mile. For 2009, the standard mileage rate for the cost of operating your car for medical reasons is 24 cents per mile. For 2009, the standard mileage rate for the cost of operating your car for determining moving expenses is 24 cents per mile.

Electric vehicle credits – You may be able to take a credit for:

  • A plug-in electric drive motor vehicle placed in service in 2009;
  • A plug-in electric vehicle bought after February 17, 2009; or
  • Conversion of a vehicle to a plug-in electric drive motor vehicle placed in service after
    February 17, 2009.

 

Credit for nonbusiness energy property – You may be able to take this credit for qualifying energy saving items for your home placed in service in 2009.

Retirement savings plans – The following paragraphs highlight changes that affect individual retirement arrangements (IRAs) and pension plans.

Traditional IRA income limits – You may be able to take an IRA deduction if you were covered by a retirement plan and your modified AGI is less than $65,000 ($109,000, if you are married filing jointly or a qualifying widow(er). If your spouse was covered by a retirement plan, but you were not, you may be able to take an IRA deduction if your modified AGI is less than $176,000.

Roth IRA income limit – You may be able to make a Roth IRA contribution if your modified AGI is less than $120,000 ($176,000, if you are married filing jointly or a qualifying widow(er).

Retirement savings contributions credit – The AGI limit for claiming this credit is increased to $27,750 ($41,625 if head of household; $55,500 if married filing jointly).

Military differential pay – For IRA purposes, your compensation includes any military differential pay you receive from your employer while you are serving on active duty for a period of more than 30 days.

Elective salary deferrals – The maximum amount you can defer under all plans is generally limited to $16,500 ($11,500 if you have only SIMPLE plans; $19,500 for section 403(b) plans if you qualify for the 15-year rule). The catch-up contribution limit for individuals age 50 or older at the end of the year is increased to $5,500 (except for section 401(k)(11) plans and SIMPLE plans, for which this limit remains unchanged).

Temporary waiver of required minimum distribution rules – No minimum distribution is required from your IRA or most defined contribution retirement plans for 2009.

Certain amounts increased – Some tax items that are indexed for inflation increased for 2009.

Standard deduction – The standard deduction for taxpayers who do not itemize deductions on Schedule A (Form 1040) has increased. The amount depends on your filing status.

Exemption amount – You are allowed a $3,650 deduction for each exemption to which you are entitled. However, you will lose part of your exemption amount if you have high income.

Limit on itemized deductions – Some of your itemized deductions may be limited if your adjusted gross income is more than $166,800 ($83,400 if you are married filing separately).

Tax benefits for adoption – The maximum adoption credit and the maximum exclusion from income of benefits under an employer’s adoption assistance program are increased to $12,150.

Education credits income limits increased – The amount of income you can have and still claim an education credit has increased.

Social security and Medicare taxes – The maximum wages subject to social security tax (6.2%) increased to $106,800. All wages are subject to Medicare tax (1.45%).

Limit on exclusion of gain on sale of main home – Generally, gain from the sale of your main home is no longer excludable from income if it is allocable to periods after 2008 when neither you nor your spouse (or your former spouse) used the property as a main home.

Recovery rebate credit expired – This credit has expired and does not apply for 2009.

Mailing your return – If you are filing a paper return, you may be mailing your return to a different address because the IRS has changed the filing location for several areas. If you received an envelope with your tax package, please use it. Otherwise, see Where To File near the end of this publication for a list of IRS addresses.

I also post a set of Tax Rates Table for 2009 Filing and 2010 Planning you may find useful. Many of the most commonly encountered return items, with changes and inflation-adjusted amounts for 2009 and 2010. Read it [here]

 

 

2009 Tax Filing Quick Guides

 

Capital Gains Rates

  • For the 10% and 15% brackets, long-term capital gains rate is zero.
  • For all other brackets, long-term capital gains rate is 15%.
  • Maximum unrecaptured section 1250 gain rate is 25%.
  • Collectibles gain rate is 28%.

 

Self-Employment Tax

  • Self-employment rate: 15.3% (12.4% OASDI tax and 2.9% Medicare tax).
  • Wage base: OASDI tax is computed on the first $106,800 of income. Maximum OASDI tax is $13,243.20.

Kiddie Tax

  • Parent’s highest rate applies to child’s unearned income over $1,900

Personal Exemption

  • $3,650
  • AGI phaseout thresholds: $166,800 (single), $250,200 (married filing jointly and surviving spouse), $125,100 (married filing separately) and $208,500 (head of household).
  • Personal exemption is reduced 2% for each $2,500 AGI exceeds threshold, limited to 1/3 of amount taxpayer would otherwise lose.

Standard Deduction

  • Single taxpayers: $5,700
  • Joint filers and surviving spouses: $11,400
  • Married taxpayers filing separately: $5,700 ($0 if spouse itemizes)
  • Heads of household: $8,350

 

Additional standard deduction for 65+ and blind taxpayers:

  • Single taxpayers: $1,400
  • Married filers and surviving spouses: $1,100
  • Heads of household: $1,400
  • Plus up to $500 ($1,000 for married filing jointly) standard deduction for state and local real property taxes.
  • Standard deduction for individuals who are dependents cannot exceed the greater of $950 or $300 plus the individual’s earned income.

Itemized Deductions

If a taxpayer’s AGI exceeds $166,800 ($83,400 for married taxpayers filing separately), itemized deductions are reduced by 3% of the excess of AGI over $166,800 ($83,400 for married taxpayers filing separately) or 80% of the itemized deductions otherwise allowable, whichever is less.
Standard Mileage Rate

  • Business standard mileage rate: 55¢ per mile
  • Medical transportation standard mileage rate: 24¢
  • Charitable standard mileage rate: 14¢
  • For business autos for which the business standard mileage rate is used, depreciation is considered to have been allowed at 21¢ per mile.

Tax Credits

  • First-time homebuyer: $8,000 ($4,000 for married taxpayers filing separately); $6,500 ($3,250 for married taxpayers filing separately) for homeowners who have lived in current residence five consecutive years in the past eight. Extended to June 30, 2010 (for binding contracts in place before May 1, 2010). Phases out for AGI between $125,000 and $145,000 ($225,000 and $245,000 AGI for joint filers).
  • Child: $1,000 per qualifying child under 17. Refundable to the extent of 15% of the taxpayer’s earned income in excess of $3,000; beginning in 2009 qualifying child must also be the taxpayer’s dependent.
    Phases out starting with modified AGI above $75,000 ($110,000 for joint filers, $55,000 for married filing separately).
  • Making work pay: Lesser of 6.2% of individual’s earned income or $400 ($800 for married taxpayers filing jointly). Phased out at a 2% rate for individuals whose modified AGI exceeds $75,000 ($150,000 for married taxpayers filing jointly). Reduced by the one-time economic recovery payments of $250 provided by the Veterans Administration, Railroad Retirement Board and Social Security Administration.
  • Adoption expense: $12,150 maximum.
  • Child and dependent care: 35% of employment-related expenses (up to $3,000 in expenses for one qualifying individual, or $6,000 for two or more qualifying individuals); credit decreases by 1% for each $2,000 of AGI over $15,000, down to 20%.
  • American opportunity: $2,500 per year (100% of the first $2,000 of qualifying expenses and 25% of the next $2,000), with 40% of the credit refundable. Phases out for taxpayers with AGIs between $80,000 and $90,000 ($160,000 and $180,000 for married taxpayers filing jointly).
  • Lifetime learning: 20% of up to $10,000 of qualified expenses. Phases out between $50,000 and $60,000 AGI for single filers, $100,000 to $120,000 for married taxpayers filing jointly.
  • Section 25C nonbusiness energy property: 30% of sum of qualified energy-efficiency improvements and residential energy property expenditures, up to $1,500 maximum aggregate credits for 2009 and 2010.
  • Section 25D residential energy-efficient property credit: 30% of amount paid for qualifying property (for qualified fuel cell property maximum credit of $500 for each 0.5 kilowatt of capacity).

 

Section 179 and Bonus Depreciation

  • Section 179 deduction: $250,000, with $800,000 threshold limit
  • Section 168(k) bonus depreciation: Additional 50% first-year depreciation for qualifying property

Retirement Plan Limits

  • Maximum 401(k) plan elective deferral: $16,500
  • Additional catch-up contributions for age 50+: $5,500
  • Defined benefit plan maximum benefit: $195,000 (May be reduced based on participant’s age, average compensation or length of plan participation.)
  • Defined contribution plan contribution limit: $49,000 or 100% of compensation, whichever is less
  • IRA contribution limit: $5,000 (plus $1,000 catch-up)
  • IRA phaseout: AGI from $89,000 to $109,000 (married taxpayers filing jointly); $55,000 to $65,000 (single taxpayers, heads of household); $0 to $10,000 (married taxpayers filing separately); $166,000 to $176,000 (nonactive participant whose spouse is active plan participant)
  • Roth IRA contribution limit: $5,000 (plus $1,000 catch-up)
  • Roth IRA phaseout: $166,000 to $176,000 (married taxpayers filing jointly); $105,000 to $120,000 (single taxpayers, heads of household); $0 to $10,000 (married taxpayers filing separately).
  • SEP minimum required compensation: $550
  • SEP discriminatory contribution test amount: $245,000

Gift and Estate Tax Exclusions

  • Per-donee gift tax exclusion: $13,000
  • Estate tax exemption: $3.5 million
  • Gift tax lifetime exemption: $1 million

AMT Exemption

  • $70,950 for married taxpayers filing jointly
  • $46,700 for single taxpayers and heads of household
  • $35,475 for married taxpayers filing separately

Unemployment Compensation

  • $2,400 is excluded from gross income.
  •  

    I also post a set of Tax Rates Table for 2009 Filing and 2010 Planning you may find useful. Many of the most commonly encountered return items, with changes and inflation-adjusted amounts for 2009. Read it [here].

     

     

    What’s New for Your 2010 Tax Planning? 

    This section summarizes the important changes that take effect in 2010 that could affect your estimated tax payments for 2010.

    Earned income credit (EIC) -You may be able to take the EIC if:

    • Three or more children lived with you and you earned less than $43,352 ($48,362 if married filing jointly);
    • Two children lived with you and you earned less than $40,363 ($45,373 if married filing jointly);
    • One child lived with you and you earned less than $35,535 ($40,545 if married filing jointly); or
    • A child did not live with you and you earned less than $13,460 ($18,470 if married filing jointly).

    The maximum AGI you can have and still get the credit also has increased. You may be able to take the credit if your AGI is less than the amount in the above list that applies to you. The maximum investment income you can have and still get the credit is still $3,100.

    Decrease in personal casualty and theft loss limit -Each personal casualty or theft loss is limited to the excess of the loss over $100 (instead of $500). This is in addition to the 10% of AGI limit that generally applies to the net loss.

    Disaster losses – The special rules that were in effect in 2008 and 2009 for losses of personal use property attributable to federally declared disasters do not apply to
    losses occurring in 2010 and later years.

    Alternative minimum tax (AMT) exemption amount decreased – The AMT exemption amount is scheduled to decrease to $33,750 ($45,000 if married filing jointly or a qualifying widow(er); $22,500 if married filing separately).

    Recapture of first-time homebuyer credit – If you claimed the first-time homebuyer credit for a home you bought in 2008, you must begin repaying the credit in 2010.

    IRA deduction expanded – You may be able to take an IRA deduction if you were covered by a retirement plan and your 2010 modified AGI is less than $66,000 ($109,000 if married filing jointly or qualifying widow(er)). If your spouse was covered by a retirement plan, but you were not, you may be able to take an IRA deduction if your 2010 modified AGI is less than $177,000.

    Roth IRA income limit – You may be able to make a Roth IRA contribution if your modified AGI is less than $120,000 ($177,000 if you are married filing jointly).

    Conversions to Roth IRAs – Beginning in 2010, the modified AGI and filing status requirements for conversions to Roth IRAs are eliminated. Also, for any conversions in 2010, any amounts that would be included as income will be included in income in equal amounts in 2011 and 2012. You can choose to include the entire amount in income in 2010.

    Expiring tax benefits – The following benefits are scheduled to expire and will not be available for 2010.

    • Deduction for educator expenses in figuring AGI.
    • Tuition and fees deduction in figuring AGI.
    • Increased standard deduction for real estate taxes or net disaster loss.
    • Itemized deduction or increased standard deduction for state or local sales or excise taxes on the purchase of a new motor vehicle.
    • Deduction for state and local sales taxes.
    • The exclusion from income of up to $2,400 in unemployment compensation.
    • The exclusion from income of qualified charitable distributions made from IRA accounts.
    • Government retiree credit.
    • District of Columbia first-time homebuyer credit (for homes purchased after 2009).
    • Extra $3,000 IRA deduction for employees of bankrupt companies.
    • Certain tax benefits for Midwestern disaster areas, including the additional exemption amount if you provided housing for a person displaced by the Midwestern storms, tornadoes, or flooding.

     

    Personal exemption and itemized deduction phaseouts ended – For 2010, taxpayers with
    AGI above a certain amount will no longer lose part of their deduction for personal exemptions and itemized deductions.

    I also post a set of Tax Rates Table for 2009 Filing and 2010 Planning you may find useful. Many of the most commonly encountered return items, with changes and inflation-adjusted amounts for 2009. Read it [here]