President Obama signed his new mother-of-all stimulus bills into law on Feb. 17.
Opinions of the bill aside, there’s more than $300 billion in tax incentives.
None of them are going to make you rich and many of them are just adding more complexity to the already convoluted tax code because of their short-term expiration dates and sparse explanations.
But, you have to take what you can get. And thanks to the tax pros I talked to, we found some great ways to let you put even more money back in your pocket.
So pour some coffee (or a stiff drink) and read on. This week we’ll tackle the making work pay credit, the home-buyers’ credit and the auto sales tax deduction.
Next week, all the other stuff!
Making Work Pay You Back.
The scoop: This is called a “making work pay” credit because you have to be working, a.k.a. paying into the Social Security system, to qualify for it, says Mark Luscombe, principal federal tax analyst with CCH, a tax service.
The credit can be as much as $400 for a single person, or $800 for joint return filers, as long as you’re an employee or self-employed. The amount of the credit starts to decrease when your income exceeds $75,000 as a single and $150,000 for joint filers. And it’s completely gone once a single person’s income hits $95,000 or $190,000 for the joints.
The upshot is, as long as you’re within the income limitations, you can receive the credit even if you don’t owe income taxes.
Now, thankfully, you’re not going to get a check in the mail for that amount. Instead, you’ll see a small increase in your paycheck. Basically, your federal tax withholding will slightly decrease. The IRS withholding tables were already updated to reflect this new credit and employers must start using them no later than April 1.
Essentially, the $400 will be divided over no less than nine months in 2009. So presuming your company starts by April 1 and you qualify, you can expect to take home an extra $44 a month [$89 for a married couple filing jointly].
In 2010, that $400 will be divided over the whole year, so your monthly amount will drop to around $33 [$66] per month. [The credit is gone by 2011.]
Now it may not sound like much, but consider this: To see a $400 increase in your paycheck, you’d need to go ask your boss for a $500 raise, says Clint Stretch, director of tax policy at Deloitte Tax, a subsidiary of Deloitte & Touche USA.
And good luck with that.
The loophole: If qualify and have two jobs, you most likely will receive more than $400 [$800]. Trust me, this is not a gift. Presume you’ll have to pay if back on your 2009 tax return, says Bob Scharin, Senior Tax Analyst for the Tax & Accounting business of Thomson Reuters.
So be sure to adjust your withholdings at one of your jobs to prevent that from happening.
Calling all First-time Buyers -- Buy a Home Before the Holidays!
The scoop: The first-time homebuyer credit was [very] slightly increased.
The original credit was capped at $7,500 and had to be repaid over 15 years. Under the new stimulus bill, the credit jumps to $8,000 and doesn’t have to be paid back unless you sell the home or stop using it as your principal residence over the next three years. If that happens, you’ll owe the full amount in the year you move out, says Scharin.
But big note!!! You have to buy your first home in the first 11 months of 2009. That’s right. The credit is only good for home purchases from Jan 1, 2009 thru November 30, 2009. So if you buy your first home in December, no credit for you. But if you host your first Thanksgiving, it’s yours.
Assuming you meet the income limitations, of course. The amount of the credit starts to decrease when single home buyers’ income exceeds $75,000 and joint filers’ income hits $150,000. It disappears when a single person’s income hits $95,000 and the married income hits $170,000
The loophole: If you bought your first home in 2009 but your situation could really use the credit on your 2008 tax return, you can make an election to do so on your Form 1040.
The amount drops back to the original $7,500 but the repayment requirement goes away, notes Luscombe. “That’s the way it’s written. I don’t know if that’s what Congress intended, says Luscombe. But that’s what happens when you rush to get a bill to the table.
So run some numbers and see which year and credit amount offers you more of a tax savings.
Buy a Car, Deduct the Sales Tax.
The scoop: In an effort to boost auto sales, you can now deduct the sales tax paid on a new car.
This deduction only applies to sales tax on the first $49,500 of the purchase price.
And the credit only lasts until the end of the year. So any car purchases made from Feb. 17 -- the day President Obama signed the bill -- through year’s end. (So you can buy a car for December, just not a house. Go figure.)
The good news is you can take this deduction whether you claim the standard deduction or itemize your deductions.
The deduction phases out, however, when your income exceeds $125,000 for singles and $250,000 on a joint return. It disappears when a single’s income hits $135,000 and $260,000 on a joint return.
The loophole: If you’re buying a high-end car, you may be better off without this deduction.
Here’s why.
You currently have the option of deducting either the total state income taxes you paid or the total state sales tax you paid on your Schedule A -- Itemized Deductions. You can't deduct both.
So that means you tally all the sales tax you pay in 2009, including clothes, furniture, even that engagement ring if you finally decide to pull the trigger!
If it exceeds your state tax paid, you’d most likely opt to deduct your sales tax instead.
Enter the auto sales tax deduction, totally separate from the above sales tax deduction.
Obviously, you can’t include your auto-sales tax in both.
But remember, you’re limited to a $49,500 with the new auto deduction. Well what if you buy a car for $54,500? Instead of losing the sales tax on that additional $5,000, consider including all of it in your overall Schedule A total sales tax deduction.
Whew! Did you finish your drink?! This is complicated stuff. So go pour yourself another!
And be sure to tune in next week as we continue to breakdown the other tax incentives in the stimulus bill -- like the energy credits, the COBRA premium provision, the new education credit and more!
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