Credits, Deductions, Oh My! Summary of Recent Income Tax Changes

by Evan

I was doing research on the recent changes in income taxes for one of the planners at my office, and I came across one of the coolest sites summarizing the changes (that is if you can describe any kind of tax stuff as “cool”).   I am only going to highlight those income tax changes in 2008 and 2009, if you want to check out the income tax changes for years 2010 through 2017 then check the full article found HERE. 

It should be emphasized that you should at least know the income tax changes highlighted below, regardless of whether you are a CPA or not.

Income Tax Changes in Tax Year 2008

  • Tax Credit of Up to $7,500 for First-time home buyers – There are obviously requirements and strings associated with this one.  The big one is that this is not just a straight credit, but rather acts more like an interest free loan whereby every year for 15 years you have to pay back $500/yr.  Interestingly, I was having lunch with a buddy of mine the other day who decided not to take this credit because he didn’t want to owe the government the $500/yr payback.  I was SHOCKED – he turned down an interest free loan from the government.  I urged him to amend his tax return.
  • Higher Income Limits for Deductible IRAs and for Roth IRAs – Regardless if you are covered by a retirement plan at work you can take a full IRA deduction from if your  (married filing jointly) income is under $85,000 (partial up to $105,000); if you are single it is under $53K (partial up to $73,000).  Whether you are legally allowed to contribute to a Rorth IRA is now at $159,000 and phases out at $169,000 (or $101,000 to $116,000 if you are single).
  • Tax Brackets are up about 2% from 2007; Personal Exemption is at $3,500 (up $100 from 2007); Higher standard deduction; You can take property tax (up to $1,000) even if you don’t itemize; Increased 179 Business Deductions (from $125K to $250K HUGE increase).
  • Kiddie Taxes are stricter – Ages associated with kiddie tax were raised

Income Tax Changes for 2009

  • Tax Credit of Up to $8,000 for First-Time Homebuyers – If you close on a place between Jan 1, 2009 and Dec 1, 2009 and meet other restrictions you can get up to $8,000.  Unlike the one above you do not have to pay back this credit!  There are other restrictions associated with eligibility, but if you are closing on a place make sure you know this one!
  • Payroll Tax Credit – According to Kiplinger, “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.”  Like most of these credits and deductions there are phase outs.  For married filers the phase out starts at $150K and is completely gone at $190K (for single filers it is $75K to $95K).   For most of us W-2 Employees we will see the money right up front in the paycheck, which is kind of cool!  For self-employed people like the wife she can reduce her quarterly estimated payments…I will have to talk to the Wife about this.
  • Sales Tax Deduction for New Vehicles – People who actually buy a car this year can claim the sales taxes regardless if they actually itemize!  The vehicle has to be purchased after February 16, 2009.  I’d be so pissed if I bought the vehicle on Feb 15!  This benefit is phased out after a couple’s income hits $250K, and applies only to the tax associated with the first $49,500 of the car price.
  • Indexed Tax Brackets will be pushed up 5%; Personal Exemptions will increase to $3,650 ( up by $150); Standard deduction will increase $450 to $11,400.  Section 179 Expense Deduction stays at $250K.
  • Higher Income Limits for Deductible IRAs and for Roth IRAs – Even if you are covered by a retirement plan at work you can take a full deduction if your income is under $89K (or $55K if single).  Partial deduction is allowed but is capped at $109K ($75K if single).
  • Increased Contribution Limit for 401(k) Plans – Maximum employee contribution increases to $16,500 for 2009 (up from $15,500 in 2008).  If you are 50 or older you can put an additional $5,500.
  • Converting a Second Home to a Primary Home – This is a huge change! I had even wrote a whole blog post highlighting these rules.  Well Kiplinger informs us…

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.

  • Partial Exclusion for Unemployment Benefits – In 2009, the first $2,400 of unemployment benefits you receive is tax-free.
  • College Savings Plans –  Beginning in 2009, 529 College Savings Plans can be tapped tax-free to pay for a computer or Internet access.

This is not an Exhaustive List of Recent Income Tax Changes

I just wanted to highlighted some of the major changes (major in my opinion at least).  If you want the exhaustive list check out Kiplinger’s Article.

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