A 2009 Year-end Tax Wrap Up

2009 was a year that saw a number of changes in our tax laws.  Some of these changes are permanent, others are in effect only for a limited period of time.  I will discuss here some of the more important ones, but this is by no means an exhaustive list.

If you bought a new vehicle between February 18, 2009 and December 31, 2009, you can deduct the sales tax paid even if you don’t itemize your deductions.  It must be a new vehicle, and the tax deduction is limited to taxes on the first $49,500 of cost of the vehicle.  Passenger automobiles and light trucks qualify if under 8,500 pounds gross vehicle weight; motor homes have no weight limit; and motorcycles that do not weigh more than 8,500 pounds all qualify.  You may also deduct $500 ($1,000 married filing jointly) of property taxes on your residence if you do not itemize.  A new form Schedule L is available for those taking the standard deduction, but with adjustments such as these two items.

The first-time homebuyer credit has been extended and expanded.  A first-time homebuyer is eligible for a credit of up to $8,000 on homes under contract before May 1, 2010 and closed by June 30, 2010.   Income limits are $225,000 for taxpayers filing jointly; for others, it is $125,000.  Due to widespread fraud, a copy of the closing statement must be attached to the return.

If you have a traditional IRA, 2010 might be a good year to convert it to a Roth IRA.  Qualified withdrawals from a Roth are tax free.  However, taxpayers whose income exceeded $100,000 have been prohibited from converting to a Roth IRA.  Beginning in 2010, that limit is permanently removed.  When a traditional IRA is converted to a Roth, you must pay taxes on the amount converted.  However, for 2010 conversions, the tax may be paid in 2011 and 2012.

If you end up owing taxes on your 2009 return, you might want to examine your withholding.  In 2009 and 2010 taxpayers are eligible for the Making Work Pay Credit, which is equal to 6.2% of your earned income, limited to $400.  However, withholding tables were adjusted to reflect this credit, so if you are not eligible for the full credit, or your withholding was adjusted for a greater amount than the credit, you may end up with a smaller refund or having to pay.

The Hope Education Credit has been renamed and expanded.  It is now the American Opportunity Credit.  It is a credit of up to $2,500 for qualified education expenses paid but is not limited to students in the first two years of college.

I would remind you that you must have a receipt for a charitable contribution of any amount.  The old $250 law has been repealed.  For contributions of property you must get an acknowledgement of the donation from the charitable organization, but it is your responsibility to place a value on the contribution.  Programs such as “It’s Deductible” and “Deduction Pro” can be very helpful in determining the correct amount to deduct.  If your non-cash contributions are over $500 you must complete Form 8283.  Mileage driven for charitable organizations is deductible at 14 cents per mile, this amount is unchanged for 2010.  You can also deduct any out-of-pocket expenditures on behalf of a charitable organization, but you cannot deduct the value of your time.  I would also add that contributions made to charitable organizations that are designated for specific individuals or purposes may not be deductible.

With so many people experiencing economic difficulties it is not uncommon for someone to help out by paying the mortgage payment or property taxes for a friend or relative.  I would remind you that, in order to deduct mortgage interest or property taxes, you must be legally liable for the amount and you must make the payments.  If both criteria are not met, you cannot take a deduction.

Mileage rates for 2009 are 55 cents per mile for business, 24 cents for moving or medical miles, and 14 cents for charitable mileage.  In 2010 the business rate drops to 50 cents, the moving and mileage rate to 16.5 cents, and the charitable rate is unchanged.

A couple of other items are not changes for 2009, but are some things to consider in your tax planning.  If you are offered disability insurance through your employer and your employer pays the premium any benefits you receive will be fully taxable.  However, if you pay the premium any benefits are tax-free.

I would also remind you that the IRS does not correspond with taxpayers via e-mail, so if you get an e-mail that purports to be from the IRS, delete it immediately, as it is spam.

Finally, a few tips about paid preparers.  First, if you pay to have your return prepared, be certain the preparer signs as paid preparer.  To fail to do so is illegal, and you cannot raise the defense that your prepare did not complete your return properly if it is not signed.  Secondly, I would also advise you to have your return prepared by a CPA or Enrolled Agent.  These two categories of preparers, along with attorneys and actuaries  are the only individuals allowed to practice before the IRS.  This means that preparers in these categories may represent you in an IRS audit situation.  Otherwise, you are on you own.  Third, keep in mind that the preparer is not an auditor of your return.  If there has a question about the validity of an item you submit, your preparer should make reasonable inquiries about that item.  But ultimately, whatever goes on your return is your responsibility.

In closing, I feel somewhat like Bob Erickson.  Annually, at the IRS Nationwide Tax Forums, Bob’s assignment is to give an overview of changes in the tax law for the current year.  Once he confessed that his recurring nightmare was that some year would arrive and he would have nothing to talk about.  Then, he said, he woke up and realized that would never happen.  This is where we are now.  It does not appear that any more changes will be enacted for 2009.  But Congress has a whole year ahead to make changes that will require us to keep  busy staying abreast of what’s new.  Change will happen.