Federal withholding from your wages was decreased by your employer in April. The reduction was so small that you may not have even noticed it. The purpose of the reduction was to give you a $400 credit by year-end – no separate stimulus checks this year. This program is known as the Making Work Pay Credit.
If you have multiple employers, all of them reduced your withholding and you may end up owing money to the IRS come April 15th because the maximum credit is $400 per person.
If you are single and earn more than $75,000 or married and have a joint income of more than $150,000 you are not eligible for this credit and may end up owing money to the IRS come April 15th because of the reduced withholding.
For those of you who live in California, the situation is even more complicated. First, the state raised the income tax rate retroactive to January 1 and instructed employers to increase your withholding as of April 1. The state took a long time to get new withholding tables to employers and many did not increase the withholding until much later than April. Some have still not implemented the higher withholding. Withholding is scheduled to increase by another 10% on November 1 but no one knows if employers will get the new withholding tables from the state in time to implement the new rates.
If your employer did not increase your withholding properly you may end up owing money to the state come April 15th.
California also reduced the exemption for dependents for 2009 and 2010 from $309 to $99. The exemption is deducted from the amount of taxes owed. For each dependent you have, your tax bill for 2009 and 2010 will be $210 higher. If you always get a big refund, that may not be a problem BUT if you have been receiving small refunds and have dependents, this reduction in the dependent exemption may cause you to owe the state money come April 15th.
If you have concerns about whether either your federal or state withholding is sufficient, give me a call or send me an email.
Special Payments and Credits
In addition to the Making Work Pay Credit, there are two other programs passed by Congress this year intended to put more money in people’s pockets.
Economic Recovery Payments of $250 were sent in May and June to everyone receiving Social Security, SSI, Railroad Retirement or a Veteran’s pension living in the US or a US Territory or Possession no matter what their other income was.
The Government Retiree Credit is available to recipients of government pensions (including pensions from states and local jurisdictions) as long as the work earning the pension was exempt from Social Security. This credit will be available when you file your return for 2009.
These three programs – Making Work Pay Credit, Economic Recovery Payments and Government Retiree Credit – are interconnected. You can’t get all three. The maximum you can get is $400 for a single person or $800 for a couple. There will be a special form that has to be filled out and submitted as part of your tax return for those of you who are eligible for more than one of these programs.
CAUTION FOR RETIREES – If you receive a pension and have taxes withheld from it, your federal withholding may have been reduced on April 1. If you are not eligible for the Making Work Pay Credit or the Government Retiree Credit, you may owe taxes to the IRS come April 15th because not enough was withheld. If you live in California and the amount withheld from your pension was not increased on April 1, you may owe taxes to the state come April 15th.
Required Mandatory Distribution
Those of you who are over 70½ do not have to take a required mandatory distribution from your IRA in 2009.
The first $2400 of unemployment insurance will not be taxable on your federal return. For those of you who are California residents, the state will continue to exempt all of your unemployment from taxation.
There is a new, more generous credit for college costs that replaces the old Hope Credit. It’s good for the first four years of college (the Hope Credit was good for only the first two years) and is $2500 per year. Books and course materials, as well as tuition and fees, can now be claimed. 40% of the credit is refundable (you’ll get it even if you don’t owe taxes) and the threshold for eligibility for the credit has been raised to $90,000 if you’re single and $180,000 if you’re married.
Schools will send you a form reporting tuition and fees paid, but you must capture the book and course material information. Be sure to have everyone for whom you claim a tuition and fees credit keep their receipts when they buy their books.
Additionally, if you pay college expenses from a 529 plan, for 2009 and 2010 you can now use those funds to buy computers, software and internet access. However, you cannot buy software designed for sports, games or hobbies “unless predominantly educational in nature”.
For those of you who claim a standard deduction rather than itemizing your deductions, some extra goodies have been added by Congress. You will again be able to claim your property taxes as an add-on to the standard deduction as you did for 2008. The limit remains $500 for a single person and $1000 for a couple.
You will also be able to claim any sales tax you paid on a new (not used) car, light truck, motor home and/or motorcycle purchased between 2/17/09 and 12/31/09 that cost no more than $49,500. If you purchased multiple eligible vehicles, you can claim the sales tax on each one. Singles with income above $125,000 and couples with income above $250,000 are not eligible for this add-on.
Finally, if you live in a federally-declared disaster area you will be able to claim a casualty loss as part of your standard deduction if you were impacted by the disaster.
Because there are so many add-ons to the standard deduction there is a new form that has to be completed to capture them.
Cash for Clunkers
This program has no impact on your federal taxes. The $3500/$4500 credit you received if you purchased a car under this program is not considered income for federal tax purposes. However, it is unclear how states will treat the credit. There are rumors that some states (and California is one of them) may consider this as income that must be reported on your state income tax return. We won’t know for sure until the end of the year.
Earned Income Credit
For those of you with income low enough to qualify for this program, an additional amount has been added for families with three or more children and the income limits have increased so more families will be eligible.
If you’re among the handful of folks who have been able to get some help from their mortgage company, there may be some tax implications for you. If the principal of your loan has been reduced, you will need to report the amount of the reduction as income and then I will work with you to try and make that income go away on your federal tax return using some special provisions in the tax code. For those of you living in California, there are no special exclusion provisions and you will be taxed on the amount of the reduction in principal. There are rumors the Legislature may try and fix this in one of the special sessions the Governor has called.
If your interest rate has been reduced, the amount of your itemized deductions will go down. That will cause your taxable income to increase and that will mean you pay more in taxes. This could mean you owe money to the IRS and/or your state come April 15th.
You’ve probably heard that the IRS cut a deal with a big Swiss bank to reveal all accounts held by American citizens. This is just part of a major push by the IRS to go after taxpayers for failing to report foreign income. There are special forms to be filled out and submitted with your tax return when you have money deposited in foreign banks or have brokerage accounts in other countries. If you have any questions about whether you have holdings that might need to be reported, please call me right away because there are some very nasty penalties for failing to report.
Estimated Tax Payments
If you live in California and pay estimated tax payments to the state, they want more of your money earlier in 2010. In 2009 you paid 30%, 30%, 20% and 20%. In 2010 you’ll pay 30%, 40%, 0% and 30%. That’s right – 70% of what you anticipate you’ll owe will have to be paid by 6/15/2010. If you have wages or other income that permits withholding of state taxes, you should consider starting/increasing your state withholding from that income and not paying estimated taxes to the state.
Federal energy credits are back and are much more generous for 2009 and 2010. The maximum credit over the two years is $1500 for items such as new heating and air conditioning systems, new hot water heaters, new windows, insulation, and metal or asphalt roofs.
Solar and geothermal credits have no limits – you get back 30% of the cost of the system, including installation, and if the credit total wipes out your tax liability you get to carry it forward into the next year. This program has been extended through 2016 so it might be time to start looking at solar.
CAUTION – All of the equipment must meet certain technical standards to qualify for these credits. Be sure you get something in writing verifying the equipment or system is eligible for the credit before you make a purchase.
As I said initially – LOTS OF CHANGES! Please feel free to call or email me if you have any questions. I’m generally in my office on Monday and Tuesday so that’s the best time to phone me but I do check voicemail daily, so call when it’s convenient for you and I’ll get back to you as soon as I can.