The first item I’m going to talk about is the above-the-line sales tax deduction. If you purchased a new vehicle in 2009 you are entitled to a deduction for the state and if any, local sales tax paid on the new vehicle. There are two limits on this deduction: if you bought the car here in PA, the sales tax deduction cannot exceed $2,970 which is the full 6% sales tax on a vehicle with a purchase price of $49,500. If the vehicle costs more than that amount, you will be limited to the $2,970 for your deduction. The second limitation is that the deduction will start to be phased out at AGI exceeding $125,000 or $250,000 for joint filers.
The next slide discusses the sale of a principal residence. As some of you may know, the IRS allows you to exclude gain on the sale of your primary residence up to $500,000 on a joint return and $250,000 for single filers. One requirement for this exclusion is that you must have owned and occupied the home as your principal residence for at least 2 of the last 5 years preceding the sale. If you have only met a portion of this 2-year requirement then the exclusion amount of the gain is reduced on a pro-rata basis.
The first-time homebuyer credit has been one of the more popular credits in 2009. Lots of people have been talking about this credit because it is a fairly large credit and there have been several modifications to this credit since it was originally instituted by the Housing and Economic Recovery Act of 2008. I’m going to focus on the expanded provisions of this credit that were adopted on November 6, 2009 when the Worker, Homeownership & Business Assistance Act of 2009 was signed. Under the provisions of this Act an ………… (read slide bullet 2) to be considered as a first-time homebuyer you cannot have owned a primary residence in the last 3 years. The amount of this credit is 10% of the purchase price of the home however, there is a maximum set at $8,000.
For any home purchases made after November 6, 2009 there has been an increase to the amount of MAGI that a taxpayer can have and still receive the full $8,000 credit. For single filers the amount is $125,000 and $225,000 for joint returns. And, if your MAGI falls between $125,000 and $145,000 for single and $225,000 and $245,000 for joint you will still be eligible to receive a reduced credit amount. For qualifying home purchases made in 2010 you can claim this credit on either your 2009 tax return or wait and claim the credit when you file your 2010 return.
There is also a new provision to this credit that was not available prior to November 6, 2009. If you are not a first-time homebuyer but qualify as what is referred to as a long-time resident you may be able to receive a credit up to $6,500. A long-time resident is someone who has owned and used the same house for 5 consecutive years of the last 8 years and the home must have been used as your primary residence. So, if you purchased a home in 2009 or are considering purchasing a home in the near future you will want to take a close look at this credit and determine if you might qualify. Form for this credit is 5405
I’m sure many of you have heard people talking more and more about going “green” and trying to become more energy efficient both within your homes and your businesses. There are some energy credits available to individuals for qualifying home improvements and equipment. If you have purchased or are planning to purchase new doors, windows, insulation systems, furnaces, hot water heaters for your personal residence be sure to ask the salesperson if these items qualify as energy efficient. There should be a manufacturer’s certification with the product you are purchasing – you will need this to be able to claim the energy credit on your return. Be careful because the energy star labels used to be an indication that the product qualified but after May 31, 2009 these labels will no longer automatically qualify the product as eligible.
There are no income limits for this credit – meaning you can claim them regardless of your AGI. The credit is equal to 30% of the amount paid with a limit of $1,500 over both 2009 and 2010. This means that if you claim a credit of $1,000 on your 2009 tax return then you will only have $500 of energy credit available on your 2010 return, regardless of the purchases you might make in that next year. I also wanted to mention, there are additional energy credits available for more significant purchases that qualify as energy efficient. If you are looking to purchase a geothermal heat pump, solar water heating equipment or wind energy equipment there is a credit of 30% of the amount paid and again there are no income limits on these credits.
If you are looking to set up a college savings fund – the Section 529 plan is a great way to get started. This plan is administered by the PA State Treasury Department and there are 2 types of plans in PA. The first is the Guaranteed Savings Plan – which is tied to the rate of college tuition inflation. With this plan you are essentially prepaying for college education. You are buying the credits are today’s price. The second is the Investment Plan – which allows for pure investments to use later for tuition. This plan allows you to contribute funds to pay for college at some point in the future. The hope here is that the investment return is greater than the increase in tuition costs. You can use these funds to pay for most college expenses including….. The only requirement is that you must be 18 years old and a PA resident at the time of enrollment in this plan.
Some of the benefits of the plan are: It allows tax-deferred growth of your contributions. When computing your PA taxable income you can deduct up to $13,000 of contributions per beneficiary. Also, any withdrawals that Are made for qualified education expenses are tax-free both for federal and PA purposes. There are also gift, estate and inheritance tax benefits to using this type of plan. Keep in mind, if amounts in 529 plan do not cover the full cost of education expense a parent , grandparent, aunt, uncle can directly pay tuition of a student in excess of the annual gifting limits without tax consequence on this additional payment
Read slide – Qualified expenses DO NOT include room and board charges
Read slide – One thing to be aware of with this credit is that it’s a non-refundable credit, so if you have no tax liability, which may be the case for a student claiming himself on a tax return then there will be no benefit for this credit.
Also related to education expenses there is an above-the-line deduction available. The maximum deduction allowed is $4,000. If you are claiming any of the other education credits I just mentioned then you are not able to take this deduction in addition to that. You cannot claim this deduction for expenses that have been paid with tax-free scholarships, fellowships, grants or any type of educations savings account fund. If you are using a 529 plan, you can only take a deduction for the amounts that are purely a return of your contributions to this plan.
There is a deduction available for interest paid on student loans. This is also an above-the-line deduction. The maximum deduction of $2,500 is reduced when MAGI exceeds $60,000 Single and $120,000 for joint filers and is complete eliminated when MAGI is $75,000 for single and $150,000 for joint returns.
Presented by: Stephen H. Klunk, CPA Colette M. Brownson, Tax Advisor Stambaugh Ness PC January 19, 2010 Brighten Your Future… with Tax Tips and Retirement Planning