April 15 Is Over, but Tax Decisions Occur Year-Round

It's over.

The red-flag April 15 tax-filing deadline has passed. But the truth is that throughout the year, you have to make decisions that affect your tax situation.

So it's not over. I hate to tell you, but it's already time to start considering what moves this year will have an impact on your tax return next year.

If you are thinking about making a purchase, it's smart to see whether there are tax breaks associated with the buy. For example, here's a question I received in a recent online chat: "I'm considering installing a new furnace and heat pump to take advantage of the 2009 tax incentive. What are the tax implications?"

First I need to point out that you should never make a financial decision based solely on the tax implications. Certainly, you should consider how the move will affect your tax liability. But it shouldn't drive your decision.

As for installing qualified energy-efficiency products in your principal residence, the American Recovery and Reinvestment Act of 2009 extended the tax credits available for such purchases. The credits for energy-efficient appliances and products were increased from 10 percent of cost to 30 percent, with a new maximum credit of $1,500. The credits are available for products installed Jan. 1, 2009, through Dec. 31, 2010.

So if you were planning to upgrade your furnace and heat pump, you might as well take advantage of the tax break, which isn't slated to last too long. I should add that a credit is much more valuable than a deduction. A tax credit reduces dollar-for-dollar the taxes you owe. A deduction only eliminates a percentage of the tax that is owed.

Here's another online question: "I am considering rolling my student loan into my mortgage refinance to take advantage of the lower interest rate. I plan on continuing to pay my student loan at the same rate (not stretching it out over 30 years). Are there any tax implications for this? I assume not, since both are tax-deductible. Are there any other considerations?"

Let's look at the difference in the interest deduction for a mortgage vs. a student loan.

Generally, the personal interest you pay is not deductible on your tax return. However, there is an exception for interest on student loans.

For 2009, the student loan interest deduction up to $2,500 is eliminated if your modified adjusted gross income is $150,000 or more (if filing a joint return). For all other filing statuses you can't take the deduction if your modified AGI is $75,000 or more.

That $2,500 deduction is a nice break. But the deduction for mortgage interest is probably the most coveted tax deduction available. Still, there are some limitations. You can only deduct the interest on the first $1 million ($500,000 if married filing separately) in home loans on a first and second home.