Tax Credit of Up
to $8,000 for First-Time Homebuyers
If you purchased a
primary residence in 2009 before December 1, 2009 and are a
“first-time” homebuyer, you can qualify for a tax credit equal to 10
percent of up to $80,000 of the purchase price. To be eligible, you
must not have owned a residence in the United States in the previous
three years. The credit phases out between $150,000 and $170,000 of
Adjusted Gross Income for joint filers, and $75,000 to $95,000 for
The credit is
refundable to the extent it exceeds your regular tax liability,
which means that if it more than offsets your tax liability, you’ll
get a refund check. But it does not offset the Alternative Minimum
You can even elect
to claim the credit for a 2009 home purchase on your 2008 tax
return. (If you filed for 2008 before buying, but before the
December 1, 2009 deadline, you can claim your credit by filing an
amended return using
Form 1040X. Doing so will guarantee you a refund check.) Unlike
the credit for 2008 purchases, the credit for 2009 purchases doesn’t
have to be paid back over 15 years. But you will have to repay the
credit if you sell the house within three years of the date you
For 2009 and 2010,
Congress gave workers a credit of 6.2 percent of their earned
income, capped at $400 for single filers and $800 for joint filers.
For single filers, the credit starts phasing out at $75,000 of
Adjusted Gross Income and dries up at $95,000. The phaseout zone for
couples is $150,000-$190,000. Employees will get the credit in
advance via lower income tax withholding in each paycheck, not as a
rebate check. Self-employeds can reduce their quarterly estimated
payments to get an advance benefit from the credit. The exact amount
of the payroll tax credit for the year will be calculated on the
filers’ tax returns. Recipients of Social Security benefits,
Railroad Retirement benefits, Supplemental Security Income or
veteran disability pensions will get a one-time $250 check instead
for 2009. Federal retirees who don’t receive any Social Security
will also get a $250 check.
Deduction for New Vehicles
Buyers of new
vehicles can deduct the sales tax paid on the purchase, even if they
don’t claim sales taxes as itemized deductions. They can add the tax
they pay to their standard deduction. This break applies to new
cars, motor homes, light trucks and motorcycles purchased after
February 16, 2009 and before January 1, 2010. Sales tax paid on the
first $49,500 of cost qualifies. The benefit begins phasing out for
married couples with AGI over $250,000 and singles with Adjusted
Gross Income over $125,000. It is completely gone for single filers
with Adjusted Gross Income of $135,000 or more, or joint filers with
AGI of at least $260,000.
Itemizers who elect
to deduct state sales taxes in lieu of state income taxes get no
benefit from this change, since the auto sales tax is already
included in the sales tax deduction. Itemizers who deduct state
income taxes will get a separate deduction for auto sales taxes;
non-itemizers will add the sales tax amount to their standard
Thanks to higher
inflation in the past year, the 10 percent, 15 percent, 25 percent,
28 percent, 33 percent and 35 percent tax brackets all kick in at
approximately 5 percent higher levels of income than in 2008.
For 2009, the
standard deduction for married filing a joint return rises to
$11,400, up by $450 from 2008. Joint filers can also add in up to
$1,000 of property taxes paid.
For single filers,
the amount increases to $5,700 in 2009, up by $250 over 2008.
Singles can also deduct up to $500 of real estate tax payments.
Heads of household
can claim $8,350 in 2009, a jump of $350 from 2008.
pay real estate taxes can claim even larger standard deductions.
Non-itemizers can also add any casualty losses that occurred in
presidentially-declared disaster areas.
Itemized Deductions and Personal Exemptions for High-Income
As noted earlier,
itemized deductions and personal exemptions are phased out as your
income rises. In 2009, the reductions are a bit less painful. The
cutback in itemized deductions occurs once your Adjusted Gross
Income exceeds $166,800, regardless of your filing status. Your
itemized deductions are reduced by 1 percent of the amount by which
your AGI exceeds $166,800, but you can never lose more than 80
percent of your itemized deductions. Also, your medical expenses,
investment interest deduction, deductible gambling losses and any
casualty and theft losses are not subject to the cut. Personal
exemptions are reduced by 2 percent for each $2,500 of Adjusted
Gross Income over $250,200 for married filing jointly, $208,500 for
heads of households and $166,800 for singles, but the reduction
cannot exceed $1,217 per exemption.
The maximum amount
of equipment placed in service in 2009 that businesses can expense
stays at $250,000. And the annual investment limit remains $800,000.
Thus, you won't begin to lose the benefit of expensing until you
place more than $800,000 of assets in service in 2009.
Starting in 2009,
firms can pay for $230 a month of parking tax-free for employees, up
$10 per month from 2008. The cap on tax-free transit passes is now
$230 a month as well, the same as for parking. The limit had been
$115 a month in 2008.
Tax Credit for
For 2009 and 2010,
the Hope credit is replaced by a new credit of up to $2,500 per
student a year for four years of college, not just the first two
years. It now also covers the cost of books, and begins to phase out
at $80,000 of Adjusted Gross Income for single filers and $160,000
for joint filers. If the credit is more than your income tax
liability, 40 percent of it is refundable. Also, the full credit is
allowed against the Alternative Minimum Tax.
Child Tax Credit
If the credit
exceeds the filer’s tax liability, all or part of the credit will be
refunded if the filer earns more than $3,000 in 2009 and 2010, down
from $12,550 in earnings previously.
Tax Credit (EITC)
For families with
three or more children, the maximum Earned Income Tax Credit for
2009 and 2010 rises by $628.50. And the phaseout of the credit for
joint filers starts at higher income levels in 2009 and 2010,
allowing more of them to claim the credit.
Limits for Deductible IRAs and for Roth IRAs
If you are covered
by a retirement plan at work, you can take a full IRA deduction in
2009 if your modified Adjusted Gross Income is less than $89,000
(married filing jointly) or $55,000 (single or head of household). A
partial deduction is allowed until your Adjusted Gross Income
reaches $109,000 if you are married filing jointly, or $75,000 if
you are single or a head of household. Also, the opportunity to
contribute to a Roth IRA is now phased out as your modified Adjusted
Gross Income rises between $166,000 and $176,000 if you are married
filing jointly, or $105,000 to $120,000 if you are single or a head
Contribution Limit for 401(k) Plans
employee contribution rises to $16,500 from $15,500 in 2009 for
these and similar workplace retirement plans, including 403(b)s and
the federal Thrift Savings Plan. Workers age 50 and older in 2009
can put in an additional $5,500 this year, also a $500 increase from
2007. Thus, their maximum contribution is $22,000.
In 2009, the
federal estate tax exemption rises to $3,500,000 from its 2008 level
Gift Tax Exemption
For 2009, you can
give up any individual up to $13,000 without owing any gift tax—a
$1,000 increase over 2008.
the Alternative Minimum Tax (AMT)
For 2009, the
exemption levels rise to $70,950 for married filing jointly, $46,700
for singles and heads of household, and $35,475 for married couples
filing separately. Otherwise, more than 20 million filers would have
been added to the AMT rolls. Congress is likely to act again to
prevent this from happening for the 2010 tax year. Also, interest on
private-activity bonds issued in 2009 and 2010 is exempt from the
Alternative Minimum Tax.
Residential Energy-Efficient Property
The credit for 30
percent of the cost of installing solar water heating equipment,
solar electric equipment, geothermal heat pumps or small wind
turbines in your primary residence or a second home is no longer
limited to $2,000 after 2008. But the credit for fuel cell property
still cannot exceed $500 per half-kilowatt capacity.
Energy-Saving Home Improvements
The old 10 percent
tax credit of the cost of energy-saving home improvements is
increased to 30 percent for 2009 and 2010, up to a maximum of $1,500
in the two-year period. It applies to qualified skylights, windows,
outside doors, biomass fuel stoves and high-efficiency furnaces,
water heaters and central air conditioners. In addition, the dollar
limits on the particular type of improvement, such as a $200 cap on
the credit for windows, are repealed.
Second Home to a Primary Home
If you convert a
second home into a principal residence after 2008, you may not be
able to exclude all of your gain. A portion of the gain on a
subsequent sale of the home will be ineligible for the home-sale
exclusion of up to $500,000, even if the seller meets the two-year
ownership-and-use tests. The portion of the profit that’s subject to
tax is based on the ratio of the time after 2008 when the house was
a second home or a rental unit, to the total time you owned it. So
if you have owned a vacation home for 18 years and make it your main
residence in 2011 for two years before selling it, only 10 percent
of the gain (two years of nonqualified second home use divided by 20
years of total ownership) is taxed. The rest qualifies for the
home-sale exclusion of up to $500,000.
The $8,500 income
threshold needed to qualify to claim the child tax credit if it
exceeds your regular income tax bill decreases to $3,000 for 2009.
Exclusion for Unemployment Benefits
For 2009, the first
$2,400 of unemployment benefits you receive is tax-free.
Beginning in 2009,
529 College Savings Plans can be tapped tax-free to pay for a
computer or Internet access.
Relief for Owners of Small Businesses
If an individual’s
Adjusted Gross Income for 2008 was less than $500,000 and more than
half of the gross income was from a business with fewer than 500
workers, the estimated income taxes for 2009 estimated tax payments
can be based on the lesser of 90 percent of tax liability for 2008
or 2009. The usual estimated tax benchmarks of 100 percent or 110
percent of tax liability do not apply.
We greatly appreciate feedback on
any of our software products. Please send an e-mail to
email@example.com with any feedback or comments
about any of our products or services.