As the holidays approach and the year comes to a close, before you run out and buy gifts for others, make sure you give yourself a gift by wrapping up all the tax breaks you possibly can.
This year has an inordinately large number of tax credits and deductions that won't be around for long. The American Recovery and Reinvestment Act of 2009 (ARRA) has sunset provisions for many of its beneficial tax provisions, so now is the time to act. If these opportunities fit your situation, you should take advantage while you still can. (Always be sure to review all the details in the IRS publications or see your own tax consultant before taking action.)
First Time Homebuyers Tax Credit
This $8,000 tax credit expires quickly as you have to close on a principal residence before Dec. 1, 2009. You may qualify if you haven't owned a home in the past three years and don't exceed the income limitations. This isn't a reason by itself to buy a home, but if you're on the fence and you can get the deal done, it's decision time. (Tax credits can greatly increase the amount of money you get back on your return. Read Give Your Taxes Some Credit.)
Sales Tax Deduction for New Vehicle Purchases
This is not the well-known cash for clunkers program, which expired. Instead, this allows you to deduct state and local sales tax for new cars, light trucks, motor homes and motorcycles purchased from Feb. 17 through the end of this year. It's limited to taxes and fees paid on up to $49,500 of the purchase price, and it has income limitations that start to phase out at $250,000 for those that file jointly and $125,000 for those that file otherwise. Again, this isn't a great reason to go buy a car, but if you're on the fence, it might give you a nudge.
Tax Deduction for Educational Expenses
If you or your children are in higher education this year, a multitude of new tax incentives can help with education expenses. The American Opportunity Credit is worth up to $2,500 of the cost of tuition and related expenses. Even if you don't make enough money to file a return, this tax credit will give you a reason to do so as you can get up to $1,000 back.
Also, the federal government has expanded the existing educational tax credits to make them available to more people and allow more things to be included as qualifying expenses. And if you are paying for school with a 529 plan, the Feds have expanded what the money can be used for to include a computer. While beer is still not a qualifying expense, these new tax rules should help pay for a pint or two. If you are paying for higher education, be sure to review all the options to see which ones would serve you best. (For related reading, check out Choosing The Right Type Of 529 Plan.)
Tax Deduction for Real Estate Taxes
If you don't qualify to itemize deductions on your federal income tax, but you did pay state or local real estate taxes, you may qualify for up to $1,000 if you file jointly ($500 for single taxpayers). The additional deduction amount is equal to the amount of real estate taxes paid.
Health Insurance Subsidy
If you involuntarily lost your job this year, you may qualify for a 65 percent subsidy for COBRA continuation premiums for yourself and your family for up to nine months. You still have to pay 35 percent, but if you qualify, this should help you keep your health insurance. This subsidy phases out at $125,000, or $250,000 for those who file jointly.
Tax Deduction For Unemployment Benefits
Every person who receives unemployment benefits during 2009 can deduct the first $2,400 of those benefits. For a married couple, this applies to each person independently.
No 401(k) Distribution Required
Although not a tax credit, the waiving of the required minimum distribution (RMD) will help some people keep their money invested and avoid paying taxes on it for at least another year. The required minimum distributions for 2009 for IRAs and defined contribution plans, such as the 401(k), allow certain amounts distributed as 2009 required minimum distributions to be rolled over into an IRA or another retirement plan. Of course, if you need the distribution to live on, this waiver isn't going to benefit you. But if you only take the minimum distribution and hate paying taxes on it, this may be just what you are looking for. (If you don't calculate your required minimum distributions accurately, you might have to pay an excise tax. Prevent this situation; read Avoiding RMD Pitfalls.)
It's Time To Act
When giving gifts, many people say that it's the thought that counts. In the case of your 2009 taxes, putting a little thought into taking advantage of these tax changes before they expire may count more than you think. Sure, it's possible that some might be extended. But Uncle Sam doesn't give tax breaks very often, so give yourself a gift this year and, if these make sense for your situation, take advantage of them.