We all waited with bated breath until the end of last year, only to see Congress extend the Busch tax cuts for another two years. Although the legislation passed, it did create some issues that you should be aware of in filing your taxes this year.
Let’s start with property taxes; something most of us have learned to despise. Until last year, if you owned a home you were able to deduct a portion of your state property taxes in the form of an enhancement or an addition to your standard deduction. The deduction was worth between $500-$1,000 depending on whether you were married or single. This provision was not extended, but you can still claim the deduction providing you itemize your deductions. The problem with this new wrinkle is that many Americans do not have a sufficient amount of deductions to make itemizing worth doing.
Given the vast number of workers who lost their job during this last recession, if you were unemployed in 2009, the government granted an exemption in unemployment income up to $2,400 per person. That meant you only had to pay taxes on earned income above that amount. That exclusion has been eliminated as well.
So if you were unemployed at any time last year and collected unemployment compensation you owe taxes on 100% of that income. The problem here is that few of these jobless taxpayers withhold taxes from this income, so now they will need to come up with the cash they owe the IRS.
The first-time home buyer credit and the follow-on homebuyer tax credit on primary residences provided a tax credit ($8,000 for first time buyers and $6,000 for other buyers) but require that you keep your new residence for at least 36 months. That means if you bought and sold that new home you must repay that tax credit to the government this year.
The American Opportunity tax credit was a bit of new legislation that replaced the Hope credit that allows taxpayers earning $80,000 ($160,000) for joint filers) to claim $2,500 tax credit for tuition, fees, books, supplies and equipment required for educational studies paid in 2010. There is some confusion about this tax credit because the government already allows a deduction of up to $4,000 for the same items. You can’t claim both the deduction and the credit.
People become confused between a credit and a deduction. Simply put, a deduction reduces your income while a tax credit reduces your tax bill. If you earned $60,000, for example, and took the $4,000 education deduction that would reduce your adjusted gross income to $54,000. If you were in the 20% tax bracket, then the tax savings for you would be ($4,000 X 20%) or $800. However if you selected the tax credit, your tax bill would be reduced by $2,500, a dollar for dollar tax savings.
Because Congress acted so late in the year, the IRS said that it would need until mid-February to reprogram its systems. As a result, they have advised that those who plan to itemize their deductions wait until after March 1 to file their taxes. Since most of us wait until the very last second (or longer) to file, this delay should not have a major impact on us taxpayers. In any case, the coast is clear for filing your taxes. I bet you just can’t wait.