Don't Miss The Sweet Spots
Sunday, February 15, 2009
Filing your federal taxes could put a few extra bucks in your pocket this year, especially if you pay close attention to the fine print.
Burlin Prater, for example, wasn't buying his first home when he bought in Centreville in December, so he didn't expect to qualify for a new $7,500 tax credit available to first-time buyers. But the fine print said he was eligible because it had been more than three years since he owned a home, so technically he was a first-timer again.
Prater, who works as a supervisor for two employers, UPS and a construction company that installs water mains, plans to spread that windfall around a bit, once he gets his refund. "It will go into the home," he said. "There are things we want to change, like shutters and a new front door."
His tax preparer, David Sillaman of Liberty Tax Service in Manassas, explained that the credit has to be repaid over 15 years. "It's really an interest-free loan," he said. "But that's a fantastic deal." He said he was surprised that eight clients he has seen this year are eligible to claim the tax credit.
The first-time-home-buyer credit is one of the changes made to the tax laws last year to try to jolt the economy back to life. No doubt, taxpayers appreciate the easier burden, but the changes are adding an extra layer of trickiness to the complicated job of filling out returns.
Some new tax breaks have qualifying dates that don't follow the calendar year. The home buyer credit applies only to purchases between April 9, 2008, and June 30 of this year. And many have income restrictions. For example, the home buyer credit is phased out at modified-adjusted incomes of $150,000 for married couples or $95,000 for singles.
Here are some changes that may affect your 2008 return, which must be filed by midnight, Wednesday, April 15.
The "kiddie tax," which taxes a child's investment income beyond $1,800 at the parent's tax rate, now covers some children until they turn 24. "People used to try to pay for college by transferring appreciated assets to their children to pay college expenses," said Mark Luscombe, principal tax analyst at CCH, a tax publisher in Riverwoods, Ill. The children could then sell those assets and pay far less tax than their parents would have owed. "Now that no longer works," Luscombe said. The rule applies to children who are enrolled in college or a trade school and who are still dependent on their parents for most of their financial support.
Low-income households will pay zero tax on capital gains from assets they've owned at least a year. To qualify, your wages must place you in the bottom two income tax brackets, which cover taxable incomes up to $65,100 for married couples filing joint returns, or $32,550 for singles. Previously, people in these brackets had to pay a 5 percent tax on such long-term capital gains. Most higher-earning taxpayers will continue to pay a 15 percent tax on capital gains.
Luscombe said he thinks this change explains why the kiddie tax was extended to older offspring. Parents would have had even more incentive to shift investments over to kids who would pay zero tax on the gains. "Taxpayers really like the concept of a zero percent tax rate," he noted.
Standard deduction plus
Nearly two-thirds of taxpayers claim the standard deduction instead of itemizing, according to the IRS. This year those using the standard deduction can claim an extra amount for state and local property taxes. Married couples filing jointly can claim up to $1,000 extra; singles can claim $500. This will benefit people such as retirees who have paid off their mortgages and don't have enough deductions aside from their property taxes to make itemizing worthwhile.
Taxpayers also can claim an extra amount on top of their standard deduction to account for losses suffered from a federally declared disaster.
Forgiven mortgage debt
If you lost your home to foreclosure or a short sale (with the lender agreeing to accept sales proceeds that are short of what's owed on the mortgage), that unpaid debt is technically considered income to you. For the tax years 2007 through 2012, the government is waiving any tax liability on that phantom income. The lender will send you -- and the IRS -- a copy of Form 1099-C, "Cancellation of Debt," reporting that forgiven debt as income. To make sure you are not taxed on the amount, you will have to file Form 982, "Reduction of Tax Attributes Due to Discharge of Indebtedness." (Forms can be downloaded free from http:/
This year-old change to the tax laws will affect more people this year, thanks to soaring foreclosure rates. Forgiven debt on vacation homes and rental properties is still taxable as if it were income.
Recovery rebate credit
Remember how last year's economic stimulus payment arrived in your mailbox without you even requesting it? The credits were as high as $1,200 for married couples, $600 for singles and $300 for children, and you were automatically eligible if your income met the program's limits. To get the stimulus checks in hand quickly, the IRS did the math for you, looking back to your 2007 reported income to estimate whether you would be eligible for all or part of the credit.
Now that you know how much you actually earned in 2008, it's time to tidy up that math with this year's tax return. If you got less than the full credit last year, you may qualify for the remainder now. Generally that will happen if your income in 2008 was lower than in 2007, or if you added another child to your household, who qualifies for a $300 credit.
This is already causing confusion with 2008 returns. The IRS reported that about 15 percent of people who filed in January made a mistake regarding the recovery rebate credit. To do it right, you will need to fill out a worksheet that comes with your tax return to calculate the dollar amount of rebate credit (if any) you are due. To fill out the worksheet correctly, you will you need to know exactly how much you received last year. If you didn't hang on to the paperwork that came with the check, you can ask the IRS how much you received by calling 866-234-2942, or by using the "How Much Was My Stimulus Payment?" tool on http:/
You do not have to pay tax on your economic stimulus payment, nor do you have to give any back if the IRS sent out a check that was too big in light of your actual 2008 income.