New Tax Law Considerations for 2009 Returns

What's New for 2009?

Amid all the workings of trying to buoy the financial crisis, President Obama and Congress passed two major tax bills in 2009 that made changes to home-buying, education and energy credits among other items.

Extension and Expansion of First-Time Homebuyer Tax Credit

The "Worker, Homeownership and Business Assistance Act," signed by President Obama on Nov. 6th, extended the deadline for the $8,000 First-Time Homebuyer Credit as well as added a new $6,500 credit for certain existing long-time homeowners who purchase a "replacement" principal residence.

The First-Time Homebuyer Credit, which many believed had helped lift the slumping housing market, was set to expire at the end of November, but first-time homebuyers and qualified existing homeowners who purchase a new principal residence now have until April 30, 2010 to enter into a binding agreement to purchase a home and until June 30, 2010 to close on those purchases.

Qualified existing "long-time" homeowners who now may qualify for the new $6,500 credit are defined as homeowners who have owned and lived?in the same principal residence for any five consecutive years during the eight-year period preceding the date of purchase of the replacement home.

The new law also raised the income limitations for qualifying for the credit. The credit now phases out for individual taxpayers with modified adjusted gross income between $125,000-145,000 and $225,000-245,000 for joint filers.

"Making Work Pay" Credit New for 2009

Under the provisions of the "Making Work Pay" credit, a refundable tax credit is available to qualified taxpayers with earned income. The credit is the lesser of 6.2% of an individual�s qualifying earned income or $400 ($800 for joint filers). Note, that to compensate for this potential credit, instead of sending out checks mid-year to taxpayers as had been done in the past, the tax withholding tables were restructured earlier in 2009 to decrease the amount of tax withheld from many paychecks. However, a November report by the Treasury Department on this issue claimed that more than 15 million taxpayers could end up owing additional taxes due to the change in withholding, which may have resulted in some taxpayers having been advanced more of the credit than they will be entitled to receive once they file their tax returns. The IRS, not surprisingly, said the number of people who will be affected will be significantly lower - so I guess we'll see how this plays out.

Part of Unemployment Compensation, up to $2,400, Non-Taxable in 2009

In better news, for those out of work in 2009 and collecting unemployment benefits, up to $2,400 in unemployment compensation will be non-taxable.

Changes and Increases to Hope Education Credit

The Hope Education tax credit has been expanded - for 2009 and 2010 only - to help students and parents with the increasing costs of post-secondary education. The credit, now renamed the "American Opportunity Tax Credit" has been increased to $2,500 (previously $1,500) and also has been extended to include all four years of college (previously only two years). Course materials also were added to qualifying expenses for the credit (previously the only qualifying expense was tuition). AGI phaseouts for the credit also were increased, to $80,000-90,000 for single filers and $160,000-180,000 for joint filers.

Computer, Technology Now Eligible Expenses for Distributions from Qualified Tuition Plans (Section "529" Plans)

In addition, taxpayers may now use funds from qualified tuition plans (Sec. 529 plans) to purchase computer technology, equipment, or Internet access used by a student while at a qualified educational institution.

New Deduction for Taxes, Fees Paid for Purchase of New Motor Vehicle

Purchasers of most new qualifying motor vehicles may be able to deduct state and local sales and excise taxes paid for new cars purchased after Feb. 17, 2009. This benefit is available for both those who itemize or use the standard deduction.

Federal Residential Energy Credit Returns for 2009

The federal Residential Energy Property Credit was reinstated and expanded for 2009 and 2010. After Congress took this credit away for 2008, the tax credit is now back and has been increased from 10 percent to 30 percent of the cost of materials and equipment, with the maximum cap raised to a total of $1,500 for 2009 and 2010. Energy-efficient improvements include insulation materials; exterior windows including skylights, exterior doors, central air conditioners; natural gas, propane or oil water heaters or furnaces; hot water boilers; electric heat pump water heaters; certain metal roofs and stoves; and advanced main air circulating fans.

Restrictions on Exclusion of Gain from Sale of Principal Residence
Now in Effect for 2009

This is more a reminder that beginning Jan. 1, 2009, gain from the sale of a principal residence attributable to periods of "non-qualifying use," meaning periods when the home was not used as a principal residence, such as use as a vacation or rental property, will no longer be excluded from gross income. So this is the first year we could begin seeing taxable gain on certain former principal residences that were sold this year. There are lots of rules and details to this one -- so if you are faced with this situation, please be sure to discuss with us!

Other Extended and Enhanced Tax Breaks

Other benefits that were extended or enhanced for 2009 include:

� Return of 50% bonus depreciation

� Renewal of the annual Alternative Minimum Tax patch

� Enhanced refundable child tax credit

� Increased Earned Income Credit for taxpayer�s with three or more children

Allan T. Lazo | 01/09/2010

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New Tax Law Considerations for 2009 Returns