Be aware of the many new incentives offered by the Internal Revenue Service IRS, the first one being the "New Car Purchases Special Tax Break " The IRS announced that taxpayers who purchase a new passenger vehicle this year, 2009 may be entitled to deduct both state and local sales and excise taxes paid on their 2009 tax returns.
This deduction can add incentive to those contemplating a new car purchase. This incentive compiled with the incentives currently offered by many dealers for rebates and purchase credits mixed with low interest rates should make it a very good time to purchase a new car. By utilizing this deduction you will get cash back on your tax return, kind of like a delayed rebate.
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The deduction is limited to the state and local sales and excise taxes paid on up to $49,500 of the purchase price of a qualified new car, light truck, motor home or motorcycle. The amount of the deduction can be phased out. If your adjusted gross income is between $125,000 and $135,000 as an individual filers or between $250,000 and $260,000 for joint filers the deduction can be phased out. The vehicle must be purchased after Feb. 6, 2009, and before Jan. 1, 2010, in order to qualify for the deduction. You may utilize this deduction even if you don't itemize on your return.
If you're unemployed here's a bit of good news. All or part of your unemployment benefits received in 2009 will be tax free, based on a new rule provided by the IRS. It was noted that in the month of march more than 5.5 million people received unemployment benefits. With the rise in unemployment the American Recovery and Reinvestment Act, enacted that the first $2,400 of unemployment insurance is exempt from tax for everyone. Therefore if you are a married couple and you both are unemployed you both get to take the exemption. This change will offer a small tax break to the unemployed. If you are unemployed you have the ability to with hold taxes from your unemployment so there will be no surprises at tax time, however many choose not to , keeping as much cash in their hands as possible. Consider this carefully when making your decision you do not want to end up owing taxes to the IRS at the end of the year.
Another important credit is mortgage debt forgiveness. With all the foreclosures and short sales this credit is one that is truly needed.
What this credit does is. if your mortgage debt is partly or entirely forgiven during tax years 2007 through 2012, you may be able to claim special tax relief and exclude the debt forgiveness as income. What most people do not understand is that when you owe a debt whether it is to a mortgage company, a creditor or a friend if that debt is forgiven or reduced by any amount you must claim that as income on your tax returns unless included in a bankruptcy. If it was a mortgage company or a creditor they would more than likely report it as a loss of income to the IRS and therefore send you a 1099-C form. This form must show the amount of the debt forgiven and the fair market value of the property. This form means income for you, resulting in taxable income.
Based on the Mortgage Forgiveness Debt Relief Act of 2007 you may be able to exclude up to $2 million dollars of debt forgiven on your principal residence, or if married filing separately the exclusion is limited to $1million dollars. This act will allow taxpayers to exclude debt reduced through mortgage restructuring also known as loan modification, as well as mortgage debt forgiven in either a foreclosure or short sale. A short sale is when you sell your house for less than what you owe the bank and the bank agrees to accept the short sale. For example; you owe $225,000.00 on your current mortgage but you are only able to sell your house for 197,000.00. The bank agrees to the sale. You have debt forgiven in the amount of $28,000.00. In years prior to this act that $28,000 would be have to be reported as income on your personal tax returns and you would be expected to pay taxes on the $28,000.00. This act allows you to qualify for the exclusion.
To qualify for this exclusion the debt must have been used to purchase build or substantially improve your principal residence. The loan (debt) must also be secured by that residence. Refinanced loan proceeds used for the purpose of substantially improving your principal residence will also qualify for the exclusion. Proceeds used for other purposes, such as tuition, vacations, business start-ups or credit card consolidations do not qualify for the exclusion.
Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the mortgage relief act or tax-relief.
We also have the First Time Home Buyers Credit. In order to qualify for this credit you must be a first-time home buyer. You can claim a credit of up to $8,000.00, or ($4000.00 if filing married filing separately.) This credit does not have to be repaid, unlike the 2008 home buyer's credit. There is a catch though; the home must remain your home for three years from the purchase date. You are considered a first time home buyer if you never owned a home or have not owned a primary residence in previous three years prior to purchase date.
The amount is based on the purchase price of the home. You can claim a 10% credit based on the purchase price of your home, with $8,000.00 being the maximum credit. If filling married filing separately it is only $4000.00. Let's look at an example: if you purchase a $65,000.00 house and your credit will be $6500.00. You must purchase the home during 2009 but before December 1st, 2009. This first time home-buyers credit will begin to phase out for taxpayers whose modified adjusted gross income exceeds $75,000.00 or $150,000.00 for married taxpayers filing jointly.
The credit is a dollar for dollar credit. If you owe money it will reduce the amount dollar for dollar, if you are getting money back you will get the whole credit dollar amount back. This is a huge incentive to many first time home buyers.
What is really an awesome feature is that you can claim the credit either on this year's tax return (2008) due on April 15th or wait until next year (2009). You get to decide. For those who may have already filed their tax return, you can file an amended return and receive your credit. The IRS is actually encouraging you to use the credit and get the money back as soon as possible. There is no limits as to what the money can be used for, it can be used for home repairs, appliances, or however you, the taxpayer choose to use it.
Lastly, let's look at Private Mortgage Insurance premiums. These premiums may be deducted if you itemize. These premiums include monthly premiums paid for mortgage insurance paid on your primary residence and provided to you by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), or the Rural Housing Service (Rural Housing). The amount is limited based on your adjusted gross income. If your adjusted gross income is more than $100,000 or ($50,000 for married filing separately) your deduction will be limited. No deduction will be allowed if your adjusted gross income is more than $109,000 or $54,500 married filing separately.
If you have paid a lump-sum for the life of the loan the insurance that covers years after initial purchase year, then you must determine the portion of the premium that pays for insurance for each year that it is deducted. This is done by dividing the total premium by the months in of the term of your mortgage (ex 30 years is 360 months), or 84 months, whichever is shorter. Multiply this number by the number of months for the year you are claiming the deduction. Example, premium paid is $3500.00 for a 30 year loan. You would divide $3500.00 by 84 months because it is the shorter of the two, equals $41.66. You closed in February so that would be 11 months. Take $41.66 times eleven months and that would be the amount of the lump sum you could deduct for this year. Remember to deduct this lump sum each year as you will not get a reminder for this. Your monthly payments should be reported on your mortgage interest statement sent to you by your mortgage company, typically reported to you on a 1098 mortgage interest statement.
If your mortgage is paid off and satisfied before the end of your allocation period, you cannot deduct the amounts that are allocated to periods after the mortgage is satisfied. Also note that if you paid a lump-sum premium for insurance provided by FHA, the VA or Rural Housing, also known as a funding fee or guaranty fee, no allocation is necessary, you can figure your deduction based on the full amount of the payment.
These incentives, credits, and rebates are all important new tax issues to be utilized by everyone. Please pass this information on to someone you may know that is collecting unemployment or is purchasing a new house. It is always best to review your own personal tax situation with your tax professional.
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