EDITOR'S NOTE: This article was published in the February 2010 issue of Kiplinger's Retirement Report. To subscribe, click here.
The bear market may be over, but that doesn't mean you're feeling flush. So where can you find some extra bucks? Try your tax returns.
You can cut your tax bill to the core by taking all of the breaks that you deserve. Congress approved numerous changes to the tax code last year. The first $2,400 of unemployment compensation even gets a bye from the IRS.
If you don't qualify for new breaks, plenty of old ones can trim your tax tab. Many are easy to overlook, such as the extra standard deduction for seniors, a property-tax write-off for nonitemizers and deductions of Medicare premiums.
The benefits of the standard deduction. No longer have mortgage interest to itemize? There are more reasons than ever to claim a standard deduction rather than face the hassle of itemizing. For one thing, the standard deduction is higher for the 2009 tax year. Also, Congress offers several additions to the standard deduction -- all figured on Schedule L.
For 2009, the standard deduction for single filers increases to $5,700. For married couples filing a joint return, the standard deduction rises to $11,400, and heads of households can claim $8,350. If you're 65 and older, married couples filing jointly get an additional $1,100 each, and singles get $1,400. So, if both husband and wife are 65 or older, the standard deduction on a joint return is $13,600.
As in 2008, homeowners who don't itemize can add $500 ($1,000 if married and filing jointly) to their standard deduction amount if they paid at least that much in real estate taxes. And if you bought a new car, light truck, motorcycle or motor home in 2009 between February 16 and December 31, you can add the sales tax paid to your standard deduction amount. Tax on the first $49,500 of the cost qualifies.
The write-off for sales taxes phases out for taxpayers with modified adjusted gross income between $125,000 and $135,000 ($250,000 to $260,000 for joint filers). The deduction applies for each car you buy. Taxpayers in states without a sales tax can deduct fees or other taxes assessed by the state or local government on the vehicle.
For 2009, taxpayers who don't itemize can add casualty losses to their standard deduction amount if the loss occurred in a federally designated disaster area. The loss starts as the lesser of the adjusted basis or the decrease in the fair market value of the property, says Mark Luscombe, principal tax analyst at CCH, a provider of tax information. You must subtract $500 to arrive at the deductible amount.
Say you bought a house for $100,000 20 years ago and the house was worth $500,000 in 2009. A hurricane inflicted $200,000 in damage not covered by insurance. You could claim a loss of the $100,000 basis (the original cost) minus $500, Luscombe says.
The downside of Making Work Pay. The adjusted withholding tables used to deliver the Making Work Pay tax credit during 2009 could cause pocketbook pain now. Some taxpayers "may be in for an unpleasant surprise of owing money or getting a smaller refund than they anticipated," says Bob Scharin, senior tax analyst for Thomson Reuters, a business and tax information publisher.
For 2009 and 2010, the tax credit is worth 6.2% of earned income, up to a top credit of $400 for individuals and $800 for married couples. The credit begins to phase out at $75,000 for individuals and at $150,000 for couples. Employers distributed the credit during 2009 by withholding less in taxes from paychecks. You'll need to claim the credit (using Schedule M) on your 2009 return to reduce your tax bill in line with the reduced withholding.
But 15.4 million taxpayers could unexpectedly owe taxes for 2009 because of the credit, according to the Treasury Inspector General for Tax Administration. That's because the revised withholding tables didn't take certain circumstances under consideration. If you hold two part-time jobs, for instance, each employer reduced withholding, effectively delivering two credits. And pensioners, who are not eligible for the credit, may have had less tax withheld from retirement benefits than they should have. Also, working Social Security beneficiaries who received the one-time $250 stimulus payment are not eligible for the full credit.
Home sweet tax break. If you bought a new home late last year or sign a binding contract for one by April 30, you could be eligible for a new federal tax credit. Congress has expanded the definition of first-time buyer to include longtime residents who have owned and lived in the same principal residence for five of the eight years leading up to the purchase of a new home. The credit, available for purchases after November 6, 2009, is equal to 10% of the purchase price of the new home, up to $6,500.