Each year tax filers miss thousands of dollars in available refunds or in lower tax liability, because of not claiming available credits and deductions. The Obama Stimulus Package has brought a significant number of changes for the upcoming filing year. New forms are required to take some of the new credits and deductions adding to the complexity of filing a tax return.
The Internal Revenue Service (IRS) has released information on their webpage www.irs.gov outlining the changes resulting from the 2009 American Recovery and Reinvestment Act. The two most important changes for tax filers are the addition of Schedule L ‘Standard Deduction for Certain Filers’ and Schedule M ‘Making Work Pay and Government Retiree Credits’. Schedule L is a new form used to calculate the standard deduction for filers that claim property taxes, new motor vehicle taxes or a net disaster loss.
Last year for the 2008 filing season the IRS permitted filers that did not itemize their deductions on Schedule A to add to the standard deduction the amount of property tax paid up to $500 for single filers and up to $1,000 for married couples. The IRS now is allowing taxpayers to add not only property taxes, but also sales taxes and excise tax (including certain fees in states that do not have a sales tax) on the purchase of qualified motor vehicles. Taxes paid on vehicle purchases before February 17, 2009, are not eligible for this special deduction.
Per the IRS webpage, www.irs.gov the deduction is limited to eligible taxes and fees paid on the first $49,500 of the purchase price on the vehicle. The deduction phases out for taxpayers with modified adjusted gross income of more than $125,000 for Single filers and $250,000 for Married Filing Joint filers.
The new vehicle deduction is available to taxpayers who claim the standard deduction, as well as taxpayers who itemize deductions on Schedule A of Form 1040. The new deduction can be used to increase the amount of the standard deduction or it can be taken as an itemized deduction, if the taxpayer is not electing to take the state and local general sales tax deduction.
Schedule M is used to calculate the making work pay credit. This is a refundable tax credit of up to $400 for working individuals ($800 for married couples filing jointly). Per Schedule M instructions, this credit is calculated at a rate of 6.2 percent of earned income. It is phased out for taxpayers with a modified adjusted gross income in excess of $75,000 for single individuals and $150,000 for married couples. To be eligible for the credit, taxpayers must have a valid social security number.
Most wage earners have already benefited from the credit with a larger paycheck, because of the changes made to the federal income tax withholding tables in early 2009. The amount of the credit, however, must still be claimed on the taxpayer’s 2009 return.
Individuals having more than one job and not adjusting their withholding when the new tax tables were released in April may find a smaller refund than usual. Each taxpayer gets only one $400 credit. Therefore, those with more than one job received an extra $400 through their withholding for each job. The IRS did attempt to publicize this information and advise people to adjust their withholding accordingly. IRS ‘Publication 919 How Do I Adjust My Tax Withholding?’ will help taxpayers understand how the changes apply to their individual situation so their withholding can be adjusted to reflect the accurate amount.
Schedule M calculations also encompass the ‘Economic Recovery Payment’ of $250 that was paid in 2009 to recipients of certain benefits administered by the Social Security Administration, Department of Veterans Affairs, and the Railroad Retirement Board. Eligible individuals received the payment automatically; they did not have to apply for the payment. Any economic recovery payment received during 2009 is not taxable, but it does reduce any making work pay tax credit.
Per IRS Publication 919, another big change for the 2009 filing year is that taxpayers can exclude up to $2,400 of unemployment compensation received in 2009 from gross income. Other changes include: the amount of taxable investment income a child can have without being subject to tax at the parent’s rate has increased to $1,900; the minimum amount of earned income needed to claim the additional child tax credit is reduced to $3,000; changes to the definition of ‘qualifying child’ have been made; a new rule allowing the custodial parent to revoke an election to release the exemption to claim a child of divorced parents; and the maximum amount available under the Earned Income Credit has increased.
It is important for filers to be aware of these changes. There is a significant amount of additional savings through these added deductions and credits. If the task of preparing the tax return seems daunting then make sure to consult a tax professional. All taxpayers should claim these benefits to get the most from the recent tax law changes.