New year means new tax breaks
Things to know before filing 2009 income taxes
December 31, 2008
It's that time of year, when the celebration of Christmas is over and most people begin looking forward to the new year. But the beginning of each new year brings something that many people dread — filing income taxes.
This coming year, there will be a few changes and updates for Hoosiers and, Jim Taylor of Taylor Accounting Service in Marengo said, some of those changes can save taxpayers a few bucks.
"They have increased the renter's income tax deduction from $2,500 to $3,000," Taylor said. "And the First-Time Home Buyer Tax Credit is really interesting. A first-time home buyer can get a $7,500 tax credit on a home bought after April 9, 2008, and before July 1, 2009. This tax credit can be claimed on the person's federal income tax return."
The $7,500 tax credit is actually like an interest-free loan from the government. First-time home buyers purchasing any kind of home — new or resale — are eligible. To receive the credit, a person must claim the credit on their federal income tax return. No other application forms are required. No pre-approval is necessary; however, prospective home buyers will want to be sure they qualify for the credit under the income limits and first-time home buyer tests. Any home is eligible provided it will be used as a principal residence and the buyer has not owned a home in the previous three years. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (including mobile homes) and houseboats. The credit is not available for individual taxpayers with a modified adjusted gross income of more than $95,000 and for married taxpayers filing joint returns with an adjusted gross income of more than $150,000. Those taxpayers earning more than the allowed limit may be eligible for a partial tax credit.
A tax credit is different than a tax deduction. A tax credit is a dollar-for-dollar reduction in what the taxpayer owes, which means that a taxpayer who owes $7,500 in income taxes and who receives a $7,500 tax credit would owe nothing to the IRS. A tax deduction is subtracted from the amount of income that is taxed.
The First-Time Home Buyer Tax Credit must be repaid, without interest, over 15 years, or if the taxpayer sells the home — if there is capital gain (profit) from the sale. A home buyer claiming the $7,500 credit would repay the credit at $500 per year. If the home is sold and if there is no profit made from the sale, then the remaining credit payback would be forgiven.
"If you live in the home after you buy it, you have to pay the whole $7,500 back, at $500 a year for 15 years." Taylor said. "But if you sell it and don't make a profit, you don't have to pay it back at all. That's a little strange, because if you buy a home, get the $7,500 credit, then sell it to, say, your girlfriend for the same amount, you've made $7,500 that you don't have to pay back."
The intention of Congress was to provide as large a financial resource as possible for home buyers in the same year that they purchase their home. In addition, they hoped the credit would maximize the stimulus for the housing market and the economy, help stabilize home prices and increase home sales. By requiring the credit to be repaid, the effect on the Federal Treasury would be reduced.
"There's also a new law that allows an employee who rides a bicycle to work to receive a tax-free reimbursement of up to $20 a month from their employer and they don't have to claim it as income. This is for the upkeep of the bicycle, tires, parts and whatever. Of course, here in Crawford County, I don't expect very many will be taking advantage of this one."
Taylor's office will begin processing taxes for both individuals and businesses on Jan. 2. Any single person whose income exceeds $1,000 must file a tax return. Any married couple earning over $2,000 must also file a return.
"If you're filing a short form, you'll need to bring us your earning statements and the Social Security numbers and birth dates of all dependents," Taylor said. "If you itemize and file the longer form, we will need a list of expenses and contributions, Social Security numbers and birth dates of dependents. We'll also need the amount of sales tax that was paid on big-ticket items such as boats and vehicles."
Many expenses are deductible that people often forget, including medical bills, state and excise tax, mortgage interest, charity donations, union dues, special clothing and items needed for a person's job and hospitalization insurance (except for the amount a person's employer pays). Property taxes are also deductible, and a line has been added on the new tax forms just for property taxes.