Changes are nothing new when it comes to taxes. Each year, there's a tweak here, a tweak there and occasionally a punch to the gut.
This year, more of the changes are designed to help taxpayers with an eye toward helping the economy. New laws add a variety of credits and deductions that could put more money in your pocket. But first you have to help yourself by learning what's new. You may want to go to a tax specialist, use software, read a tax guide, consult the Internal Revenue Service's Web site or actually read the 1040 that comes in the mail. We're going to get you started by highlighting some of the major changes.
Change for everyone
Personal exemptions have increased - $3,650 each for the taxpayer and dependents, up $150 from 2008.
The standard deduction has increased: $11,400 for married couples filing jointly, $5,700 for individuals and $8,350 for heads of households.
And tax brackets have been adjusted upward by about 5percent since 2008, said Greg Rosica, tax partner at Ernst & Young and a contributing author to the "Ernst & Young Tax Guide 2010." That means youmight not jump to a higher tax bracket if you earned more.
Change for earned income
Income limits for the earned income tax credit have been raised, and there's a new category - families with three or more children. The Internal Revenue Service says one in six taxpayers claim the credit.
Change for higher incomes
The exemption for the alternative minimum tax has been increased once again, this time to $70,950 for joint returns and $46,700 for individuals. If your income is higher than these amounts, you could be subject to the AMT tax.
Change for the standard deduction
The standard deduction isn't so standard this year. Some taxpayers may be able to increase their standard deduction if they paid property taxes, bought a new car and paid sales or excise taxes on it or were the victim of a federally declared disaster.
You can claim all these things if you itemize as well, but if you opt for including them in the standard deduction, you'll have to fill out Schedule L. Here are the details:
Victims can add their net losses to the standard deduction.
Homeowners can increase their standard by a maximum $1,000 for joint filers or $500 for individuals for state or local real estate taxes paid on their principal residence.
People who bought a new car, truck, motorcycle or motor home (used vehicles don't count) after Feb. 16, 2009, can add the sales or excise tax they paid if the vehicle cost less than $49,500. The deduction begins phasing out for individuals with incomes above $125,000 or joint filers earning more than $250,000.
Change for homebuyers
If you bought a home last year, you may qualify for a tax credit under one of three federal programs - it just depends on when you bought. In each case, the home has to be your main residence, not a vacation home, and it can't cost more than $800,000.
If you bought your first home between April 9, 2008, and June 30, 2009, you got a long-term, interest-free loan that has to be paid back over 15 years. The maximum credit was $7,500.
If you bought between Jan. 1, 2009, and Nov. 30, 2009, you don't have to pay back the credit, which also has a higher maximum, $8,000. Again, you had to be a first-time buyer.
If you buy between Nov.7, 2009, and April 30, 2010, first-timers still get a max of $8,000, but longtime homeowners who buy a new house also qualify for a credit, but at a reduced value - up to $6,500.
To claim the credit, you'll have to fill out form 5405 and submit a copy of your settlement statement, usually Form HUD-1, with the names and signatures of all parties, the property address, the sales price and date of purchase.
To avoid refund delays, the IRS recommends that longtime homeowners who purchase a new home also provide documents to prove they've lived in the house consecutively for five of eight years. These can include mortgage interest statements, or property tax or homeowner's insurance records.
Because of the extra paperwork provided, those who file for the homebuyers credit will not be able to electronically file their returns.
Change for college students
There's new help for students. The American opportunity tax credit offers a bigger maximum credit - $2,500 - than what was available under the Hope credit. Also, it's available to students for the first four years of college; the Hope credit could be used only for the first two years.
On top of that, 40 percent of the credit is refundable - even if that's more than you owe.
To claim the maximum credit, a student had to spend $4,000 on qualifying expenses, such as tuition and fees, the cost of course materials and text books.
The credit begins phasing out for individuals whose modified adjusted gross income is more than $80,000, or $160,000 for married couples filing jointly.
If the opportunity credit doesn't work for you, you may qualify for:
A lifetime learning credit for up to $2,000. It's for undergraduates in their fifth or sixth year of study, students attending school part time and graduate students. The credit phases out for people with higher incomes. This is the one you'll probably qualify for if you had to retrain or learn a new skill.
A tuition deduction of up to $4,000 for eligible tuition and fees for higher education. Again, there are income eligibility limits.
A deduction up to $2,500 for interest paid on student loans. To qualify, your modified adjusted gross income must be less than $75,000. The income limit on a joint return is $150,000.
A business deduction for a work-related class required by your employer. Claim it in the miscellaneous column of your itemized deductions, but to take it, the total of all miscellaneous deductions must exceed 2 percent of your adjusted gross income.
Change for the unemployed
The first $2,400 in unemployment compensation is not taxable, but that's for 2009 only.
If you are paying for continuation of your coverage under COBRA, you can only deduct the premiums if you can take them as part of a medical expense deduction and you itemize your taxes. If your premium cost plus other medical expenses exceed 7.5 percent of your adjusted gross income, that would qualify.
Bad change
There is one possible whammy this year. The Making Work Pay tax credit kicked in last spring. Tax withholding tables were revised downward to give individuals up to $400 and couples up to $800. The result: more take-home pay for about 95 percent of working families.
People with more than one job, couples in which both spouses work and some Social Security recipients may have received too much of a credit because of the way the program was set up. "It may wind up that they owe taxes, or the big refund they expected might not be as big as they thought," said Barbara Weltman, author of J.K. Lasser's "1001 Deductions and Tax Breaks 2010" and "Small Business Taxes 2010."
The credit also requires a new form, Schedule M. Weltman said the form isn't that complicated. "The shock is going to be whether you owe more than you think," she said.
The Treasury Department's inspector general for tax administration estimated that more than 15 million people could be affected. The extra tax bill could be up to $400 for individuals or couples or $250 for Social Security recipients.
Overlooked deductions
In its tax guide, Ernst & Young lists 50 of what it says are the most overlooked deductions. They include:
Accounting fees for tax preparation or IRS audits.
Casualty or theft losses.
Employee moving expenses.
Dues to labor unions.
Long-term care premiums.
The cost of doing charitable work, including driving there.
There also are deductions for removing lead paint, health insurance premiums if self-employed, and alcohol or drug abuse treatment.
Common mistakes
Failing to include your Social Security number or those of your dependents.
Claiming the wrong number of personal exemptions.
Simple math errors.
Picking the wrong filing status.
Final thoughts
Remember, a tax credit directly reduces the taxes you owe. A deduction reduces the income on which your tax liability is based. In some cases, credits are refundable. That means you'll get the money back even if the amount exceeds what you owe in taxes.
Keep records for any income, credit or deduction claimed, for at least three years. Longer still if you own securities, a home or other property.
And, if at the end of the day you find you owe the IRS money or want a bigger refund, you may be able to contribute to an individual retirement account until April 15 and take a deduction on your 2009 taxes.
If you're covered by a plan at work, you may be able to deduct a contribution of $5,000 - $6,000 if you're at least 50 - if your modified adjusted gross income is less than $65,000 if you're filing status is single, or $109,000 if you're married filing jointly.
The Associated Press
