Here's a guest post from Free Money Finance reader Kevin McCoy.
Think the recently passed bailout legislation didn’t affect you? Think again. There are several income tax-related provisions that could save you some money if you know how to prepare.
There are actually three sections to the bailout legislation. The “Emergency Economic Stabilization Act of 2008” deals with the terms for financial institutions to receive bailout help. Next, the “Energy Improvement and Extension Act” acts as a one year extension of various energy related provisions. Finally, the “Alternative Minimum Tax and Extenders Tax Relief Act” has many deduction extensions, AMT relief, etc. This discussion will deal with the latter 2 acts.
Provisions for Homeowners:
1) IRS-speak - Exclusion of debt relief on qualified principle residence extended through 2012.
In English - in a nutshell, this is a bailout for homeowners that lose their home via short sale, foreclosure, etc. Previously, the homeowner would have paid tax on the debt forgiven.
2) IRS-speak - Additional $500 (single)/$1000 (married, filing joint) standard deduction for real estate taxes paid.
In English - If you don’t itemize deductions, you can still deduct the lesser of $500/$1,000 or actual real estate tax paid along with your regular standard deduction.
Alternative Minimum Tax (AMT) provisions:
The AMT is increasingly hitting middle class taxpayers, in addition to the high income earners it was originally designed to bite. The most common items that would subject someone to AMT are: a high number of personal exemptions (lots of kids), high state and local income taxes/sales taxes, exercise of incentive stock options, including others. These provisions add some relief.
1) IRS-speak - Higher Alternative Minimum Taxable Income (AMTI) exemption amounts - $69,950 for married, filing joint (vs. $45,000 in 2007); $46,200 for single ($33,750) and $34,975 for married, filing single ($22,500).
In English – basically, if your AMTI (adjusted gross income with some adjustments) is lower than these amounts, you won’t be subject to AMT.
2) IRS-speak – Non-refundable credits can now offset AMT
In English – Several “regular tax” credits were previously not allowed to be used against AMT, but now are allowed. They include the dependent care, elderly & disabled, child, home mortgage interest, Hope & Lifetime Learning, retirement savings, non-business energy, residential energy efficient property, among others.
Other Individual provisions (extended through 2009):
1) IRS-speak – IRA transfers to charities excluded from income
In English – Individuals can donate up to $100,000 using an IRA withdrawal and not be taxed on the withdrawal (however, the deduction cannot be taken on Schedule A).
2) Elective state and local sales tax deduction extended for 2009 – good for those who live in no state income tax states such as Texas, Florida, Washington, etc. or those who buy big ticket items and pay substantial sales tax (cars, boats, etc.)
3) Qualified tuition and fees deduction – up to $4,000 (with limits of course)
4) $250 educator’s expense deduction – teachers can deduct up to $250 of their supplies expense as an adjustment to income (the balance can be taken on Schedule A as a miscellaneous deduction).
Energy related provisions:
1) $500 max residential energy credit reinstated for 2009 and expanded – applies to qualified energy efficiency improvements (windows, doors, insulation, some metal roofs) and residential energy property expenditures (certain HVAC systems and water heaters)
2) Residential alternative energy credit extended through 2016 – applies to solar, wind, geothermal expenditures. Taxpayers can generally receive a credit for 30% of the expenses up to $2,000. For 2009, there is no $2,000 cap on the solar portion.
Note: There are several other energy related tax credits geared more towards businesses that probably don’t apply to most people.
In summary, the above represent the most common tax provisions of the new bailout legislation. There are many, many other provisions that could affect you, so please consult your tax advisor or read up on the full bills here:
Please feel free to pose questions in the comments and I’ll do my best to check back and answer.
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