Looking for a Break?

Expanded deductions and new tax credits for a broader cross-section of taxpayers are among the changes to watch for when you file your 2009 income tax return. Families with college students, new home and car buyers and homeowners who made energy upgrades to their property are among the groups targeted for tax relief this year.

Many of the new reductions and credits were created by the American Recovery & Reinvestment Act of 2009, ARRA, the stimulus package passed by Congress last February.

Here are some of the most noteworthy credits, but you’ll have to do your homework to collect on them. Documentation requirements can be complicated and some parameters changed mid-year 2009. Consult irs.gov for more specifics or check with your tax advisor to stay on top of the ever-changing rules and regs.

Education Credits

A new American Opportunity Tax Credit, worth up to $2,500, is applicable to “qualified tuition and related expenses.” This represents a $700 increase over the former Hope Credit and includes books, supplies and equipment required for a course of study. It also gives relief to more families in higher income brackets.

Taxpayers with a modified adjusted gross income of $80,000 or less—$160,000 or less for joint filers—qualify for the full credit. Because 40 percent of the credit is refundable, even those who owe no tax can get up to $1,000 of the credit for each eligible student as cash back, according to the IRS.

In addition to the Opportunity Credit, another temporary change allows monies set aside for college or post-secondary training in 529 saving plans to be spent on computer technology, both hardware and software, if that technology will be used for educational purposes.

Credits for Employees

Unlike some of the other tax credits, which are realized at filing time, the Making Work Pay Tax Credit came to employees a little at a time last year in their paychecks.

Beginning April 1, 2009, employers were required to withhold less income tax from their employees last year (about $400 less per single employee). This credit will continue throughout 2010.

If you’re on a really tight budget, you’ve probably already noticed that your take home pay is slightly lower this year than it was last year from April through December. That’s because the Making Work Pay Credit is being divided over a 12-month period in 2010 (as opposed to a nine-month period in 2009.)

Certain employees (those with two jobs, for example) need to be especially proactive and make sure that only one employer gives them this credit in the same tax year. Otherwise, come filing time, the overcredited employee could have an unexpected tax bill to pay. Ouch!

In addition to the Making Work Pay Credit, ARRA provided a temporary increase in the Earned Income Tax Credit, EITC, for people who work but earn modest incomes. This year, married couples filing jointly with three or more children can earn up to $48,279 and still qualify for an EITC.

Credits for Home Buyers

First-time buyers who didn’t own a home for the previous three years are eligible for a tax credit of up to $8,000. The deadline for that credit has been extended to include home purchases that close by June 30, 2010. The credit does not have to be repaid as long as you continue to live in your new house for three years.

This credit has been expanded to include other home buyers (not just first-timers) as well. If you bought a replacement home after Nov. 6, 2009 (or agree to buy one by April 30, 2010 and purchase it by June 30) you may be eligible for a home buyers credit of up to $6,500. The home you buy must be a primary residence and you must have lived in your former home for five of the last eight years to qualify.

Energy Credits

If you’re not moving, you could still qualify for tax credits on home improvements that make your existing property more energy efficient.

Products like insulation, certain new exterior windows or energy-efficient heating and air conditioning systems could do more than just add to the value of your home. You could get a 30 percent energy tax credit to help offset their cost. The maximum credit limit is $1,500 for improvements placed in service in 2009 and 2010, and purchases must meet specific energy-saving standards.

Many solar hot water heaters, geothermal heat pumps, plug-in electric cars and car conversion kits qualify for the 30 percent credit with even higher limits. But standards have been raised since the last time energy tax credits were given in 2007, and some products that qualify for EnergyStar ratings do not qualify for a tax credit. Again, do your homework before you buy.

Deductions for New Car Buyers

Whether or not you itemize, you may take a deduction for state and local sales and excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles. The deduction is available on new vehicles purchased from Feb. 17 through Dec. 31, 2009.

And one final note: Buyers who received a “cash for clunkers” payment last year do not have to pay income tax on the $3,500 or $4,500 they received. The CARS Act expressly provided that the “cash for clunkers” credit is not income for the consumer.