Itemized Deductions on Schedule A

If this is your first time owning a home, then let me be the first to introduce you to Schedule A. Schedule A is the schedule used to report, among other things, taxes and interest you paid during the year on your new home. The reason you probably haven’t seen this form before is because without mortgage interest, most people don’t have enough tax deductions to itemize them. Thus, they end up going with the standard deduction, which is what taxpayers get when they don’t have enough deductions to exceed a certain amount. Itemizing is good because it helps reduce your income—thus a bigger refund. Having mortgage interest is usually the first thing that tips the scales for most filers into having to itemize deductions. In short, if you itemize, it means you are receiving more deductions, effectively saving you money on your taxes. On Schedule A, you need to ensure you include the following tax write-offs:

1. Real estate taxes you paid. If you pay these into escrow via your monthly mortgage payment, then you will see the amount to claim on Form 1098 that your lender sends you at the end of January. If you pay your own property taxes in one big payment, you claim them as a deduction in the year you pay them. So if they were paid in 2010, then claim them on your 2010 tax return.

2. Home mortgage interest and points you paid. Again, your lender mails a Form 1098 to you at the end of January that includes this information. As a new homeowner, be sure you include the points you may have paid on your new mortgage as a deduction. Points is the fee you paid at closing to “buy” your interest rate down. Since you are effectively pre-paying interest, the IRS allows you to consider this as a deduction.

Now that we covered the major homeownership deductions, let’s look at 2 credits that you might be entitled to take.

Home Energy Improvement Credits

If you made energy efficient improvements to your home during the year, you may qualify for certain tax credits. The form you need to complete is Form 5695. Energy efficient improvements include adding insulation, caulking windows, installing energy efficient windows, and replacing your furnace and water heater. These projects can save you up to $1500 on your tax bill. Plus, if you made improvements for geothermal heat pumps, small wind turbines, and solar energy systems, these are additional credits worth up to 30% of the cost of these items..

First-Time Homebuyer Credit

If this is your first home (or first new home in several years), you may qualify for the First-Time Homebuyer Credit. According to the IRS, “you must have bought — or entered into a binding contract to buy — a principal residence on or before April 30, 2010. If you entered into a binding contract by April 30, 2010, you must have closed (gone to settlement) on the home on or before Sept. 30, 2010.”

If you bought a house in 2010 and met those rules, then don’t miss out on this valuable credit worth up to $8000. To get this credit, complete Form 5405, and submit it along with your settlement statement to receive the credit.

Home ownership definitely has its rewards, especially when it comes to increasing your tax refund. But it’s not necessary to sweat the details. Tax software like TurboTax does all the hard work for you by identifying all these tax breaks, putting the numbers on the right form, and then computing just how big your refund will be. Visit our Q&A if you’re looking for information on how to replay the 2008 First-Time Homebuyer Credit.

There are a number of tax benefits scheduled to expire this year, and many require that you take action soon if you want to see a higher refund or a lower tax bill next year. There is always a chance — in fact, I can guarantee — that Congress will make more changes to tax laws before it’s time to file in April 2011. For now, consider taking advantage of some of the credits and deductions that may not be around next year.

Homebuyer Tax Credit

One of the most popular benefits is the updated Homebuyer Tax Credit. If this is your first time buying a home, the government wants to give you up to $8,000. If you’ve lived in your current home for a long time but move to a new house, you could receive up to $6,500.

Unless extended by Congress, you must buy a qualifying house by the end of June this year. There are other restrictions as well, including income limitations. Make sure you’re familiar with all the rules before expecting the credit. Experts aren’t expecting this credit, already extended once, to be extended again. Time is running out, but the decision to buy a house should not be based solely on the existence of a tax credit.

Adoption Credit

Just a few weeks ago, Congress extended tax credits for adoption expenses to 2011, so there is now an extra year for taxpayers to receive some of the expanded benefits that have been put in place recently. Parents who adopt a child can receive a credit of up to $13,170 to help cover expenses spent during the adoption process.

American Opportunity Tax Credit

One new tax law of the 2009 economic stimulus was a new credit to help pay for college expenses such as tuition. The Hope Credit was expanded into the new American Opportunity Tax Credit, increasing the benefit students and parents can receive on their 2009 and 2010 taxes.

For any of the first four years of higher education, students or their parents (if the student is a dependent) can claim $2,500 in 2009 and 2010 to offset the costs. Up to $1,000 of this credit each year is refundable, which means you will receive the credit even if you have no other tax liability. This is a benefit for students who may not have much other income.

Unless Congress changes the rules again, the American Opportunity Tax Credit will expire at the end of the year. It will be superseded by the older Hope Credit, which provides a smaller benefit.

Making Work Pay Credit

Most people are receiving the Making Work Pay Credit without even knowing it. Rather than receiving this credit as part of your annual tax refund, most people have been receiving a small amount extra in their paychecks since April 2009 and will continue receiving this extra amount through the end of the year.

If you do not have regular tax withholding through your job or if you elected not to receive this extra money in your paycheck, you were able to claim the Making Work Pay Credit on your taxes and will be able to again in 2010. This is another tax rule enacted by the 2009 economic stimulus, and it will expire at the end of this year.

Low capital gains tax rates

Since 2008, investors have benefited from low tax rates on investments. For example, taxpayers in the 15% bracket can sell stocks with long-term capital gains without owing any taxes. In 2011, this tax will return to a rate of 10%. At all income levels, taxes on investments will increase. Currently, the dividends from some investments are taxed at these lower rates, but in 2011, dividends will be taxed at the same rates as ordinary income.

Stay tuned for more updates

The tax system is designed to be adjusted when necessary to react with current economic issues. Keep checking the TurboTax Blog for the latest updates when tax laws change, affecting taxpayers and their wallets.

I’m not going to be able to file my taxes in time. What should I do?

If you can’t make that April 15 deadline, you are in good company. The Internal Revenue Service says it received requests for 11 million extensions in 2008, which amounts to about 8% of all tax returns. (I was one of them!) Taxpayers who ask for an extension get an extra six months to file—your new deadline in 2010 will be Oct. 15.

You can get some extra time without any hassle. Simply e-file for a Personal Tax Extension of your federal tax return using TurboTax Easy Extension. You can also file for an extension on the IRS website.

But there a few important things to remember when you request an extension. First, a federal extension does not automatically extend the deadline for your state income tax return. To find the extension guidelines for your state, click on this list of state tax websites compiled by TurboTax.

Also, an extension to file your federal taxes does not give you an extension to pay your actual tax bill. You still have to figure out your taxes and make an estimated payment.

Estimating how much money you’re going to owe can take time, so please do not wait until April 15 to get started. Last year’s tax return could be a good starting point if you haven’t experienced any major life changes. If that is the case, you can probably pay the same amount in taxes for 2009 that you paid in 2008. But if you lost your job, purchased a new home with the first-time homebuyer’s credit, or had a baby,  you’ll need more information to determine your tax bill.

Why is it so important to come up with this ballpark estimate? You will pay a penalty if you underpay your taxes by more than 10 percent. Thankfully, TurboTax takes the guesswork out of calculating your estimated payment.

If you are expecting a refund, file your taxes as soon as possible if to get that payment. You risk losing your refund if you fail to claim it within three years of the return due date.

Here is a rundown of why people file late…or not at all.

What do I do if I can’t afford to pay my taxes?

I posed this question to the IRS, and the No. 1 thing to do—even if you can’t pay all the taxes you owe—is to file your return. “If there is one message to get to consumers, I cannot emphasize enough how important it is to file your return,” says an IRS spokesman.

My advice: File your return as soon as possible, preferably before midnight on April 15. Why? Failure to file your taxes is a federal offense that could have significant legal ramifications. And if that isn’t reason enough, another incentive to file your taxes on time is a financial one. That’s because the IRS can impose a penalty of 5% of the tax you owe for each month you do not file your return. The maximum penalty is 25% of your tax bill.

Try to pay as much of the bill as you can. But if you don’t have the cash, you may be able to work out a payment agreement with the IRS. In the past few years, the IRS says it set up installment agreements for 2 to 3 million returns. It should take less than 10 minutes to figure out if you are eligible for an installment agreement on the IRS website.

You can also call the IRS at 1-800-829-1040 to discuss your payment options.

Filers who pay the IRS via an automatic installment plan typically owe less than $25,000. Also, if you are interested in a payment plan, you should be in good standing with the IRS, and you should expect to pay off your bill within five years.

Installment agreements can be costly, so think before you leap. The IRS charges a one-time fee of $105 for setting up the installment plan, or $52 if you have the payments debited directly from your bank account. The interest rate fluctuates, based on the amount you owe. For a sense of how these payment plans work with sample scenarios, look at this IRS page.

If I haven’t closed on my new home yet, can I still claim the first-time homebuyer credit?

Yes. You still have time to get that credit, but you need to act fast. The Worker, Homeownership and Business Assistance Act of 2009, signed into law on Nov. 6, 2009, has been extended. According to the IRS, “an eligible taxpayer must buy, or enter into a binding contract to buy, a principal residence on or before April 30, 2010 and close on the home by June 30, 2010.” No wonder you are seeing more “For Sale” signs around town.

So who is eligible? You qualify as a first-time buyer if you have not owned a primary residence during the three years up to the date of purchase. You must also meet certain income restrictions: The credit begins to phase out for taxpayers whose adjusted gross income is more than $75,000, or $150,000 for joint filers. If you qualify, you may be eligible for a maximum tax credit of $8,000.

If you don’t fit the criteria for the first-time homebuyer credit, you could be eligible for a long-time resident credit of up to $6,500. Buyers must have owned and used the same home as a principal or primary residence for at least five consecutive years of the eight-year period ending on the date of purchase of a new home as a primary residence. In addition, you must buy your new home before May 1, 2010. Or, if you sign a binding contract on or before April 30, 2010, you must purchase or close on the new home on or before June 30, 2010, according to the IRS website.

There is a significant amount of documentation required if you want to receive either of these credits, which is why the IRS doesn’t let you e-file.

The homebuyer credit is a hot topic for 2009. The IRS offers extensive information about the ins and outs of the homebuying credit on its website.

If I was unemployed for part of 2009, is any of my income tax free?

Unemployment benefits are taxable, but you don’t have to pay taxes on the first $2,400 you receive. If you and your spouse are out of work, you can both exclude that first $2,400 in benefits. You should have received a Form 1099-G reporting what you’ve been paid.

If you end up with a big tax bill from your unemployment benefits, consider changing your withholding status for 2010. Fill out Form W-4V to have 10 percent of your benefits withheld for federal income taxes.

There are a bunch of education tax breaks available. What’s the difference and which one should I take?

I hear this question a lot. In fact, I recently got it from a listener on National Public Radio’s All Things Considered. While a tax deduction of up to $4,000 can be claimed for qualified tuition and fees, tax credits usually result in bigger tax savings.

For many people, the American Opportunity Credit will provide the most bang on a tax return because it offers the largest tax break ($2500 for qualified tuition and expenses). It is an expansion of the Hope credit, and it is tied to the economic stimulus package. The income cap for the American Opportunity Credit is higher than other credits, too. The credit can be claimed for tuition and certain fees you pay for higher education in 2009 and 2010. Books and required course materials count as a qualifying expense. Plus, the credit can be claimed for four post-secondary education years instead of two.

If you have brushed up on your career skills, use the Lifetime Learning Credit. It provides a credit of up to $2,000 to cover qualified education expenses, such as job training. And it is applicable for you, your spouse or your offspring. The credit is based on your income—joint filers can’t claim it if their income exceeds $120,000.

If you want to delve into the nuances of the various education-related incentives, this Q&A from the IRS does a terrific job of explaining the differences. I also like this education tip sheet.

Finally, to figure out which educational tax break makes the most sense for you, use TurboTax to compare the impact on your tax return.

Is there anything I can still do to lower my tax bill?

One of the best options to lower your tax bill is to maximize your 2009 retirement savings. For 2009, you can stash up to $5,000 in an IRA ($6,000 for those over age 50). But there are income hurdles to be aware of. You can also buy a new house (above) or contribute to Haiti and Chile relief (below).

I made donations to support relief in Haiti and Chile this year. Can I deduct it on my 2009 taxes?

Yes, assuming you made those donations before March 1 to help Haiti and Feb. 26 for Chile. But pay very careful attention to the news. Pending legislation, which already passed the House of Representatives, is now awaiting approval in the Senate. (It is considered to be a slam dunk, but Congress has been a little tied up with healthcare reform.) There is a good chance Congress will extend the deadline for charitable contributions to Haiti and Chile through April 15. And if that happens, you should be able to use the deduction for 2009 returns.

If I need to amend my tax return, does that need to be done by April 15?

If you sent in your tax return already and realized you forgot to claim something, you can amend your return. (It happens to the best of us: Last year we forgot to include our 529 savings plan contributions on our 2008 tax return.)

Use Form 1040X (PDF), Amended U.S. Individual Income Tax Return, to correct a previously filed Form 1040 (PDF), Form 1040A (PDF),Form 1040EZ (PDF), Form 1040NR (PDF), or Form 1040NR-EZ (PDF). If you used TurboTax to file your return you can follow these instructions to amend your return. To avoid any penalties and interest, you need to file Form 1040X and pay the tax by April 15 of the following year.

If you are filing for an additional refund, the IRS advises you to wait until you have received your original refund.

Homebuyers Credit

Amid the real estate bust, the First-time Homebuyers Credit gets a lot of buzz because it is tied to stimulating the economy. Many taxpayers may not be aware that it has been extended and expanded to include repeat homebuyers.

If you are a first-time homebuyer, the maximum credit amount you can receive is $8,000. You fit the bill if you have not owned a primary residence during the three years up to the date of purchase. In addition, there are income restrictions. The credit begins to phase out for taxpayers whose adjusted gross income is more than $75,000, or $150,000 for joint filers.

For Colin Kelly, a first-time buyer who was profiled in the New York Times, the credit means the difference between living with furniture found on the street and a real adult home. Kelly used the proceeds from his $8,000 credit to furnish his New York City apartment.

The long-time resident credit of up to $6,500 is much more obscure. To qualify, buyers must have owned and used the same home as a principal or primary residence for at least five consecutive years of the eight-year period ending on the date of purchase of a new home as a primary residence.

Keep in mind that there is lots of documentation involved if you want to receive these credits, which is why the IRS doesn’t let you e-file.

Energy Efficient Credits

It pays to be green. In fact, greening your home offers some great tax breaks.  Did you replace any windows?  Did you install a new air-conditioning system? Taxpayers who made energy-efficient improvements to their home may get a credit worth 30% of the cost, typically up to %1,500. Spend $1,000 on a draft-free door, for example, and receive $300 off your tax bill. Solar and geothermal improvements are even more lucrative. For a detailed breakdown of energy-related credits, check out this EnergyStar fact sheet.

Earned Income Tax Credit

The Earned Income Tax Credit (EITC) was designed to put more money into the pockets of working taxpayers. Yet millions of lower-income people miss out on reaping its benefits every year. In 2008, 24 million taxpayers claimed more than $48 billion in credits, which works out to an average of $2,000 per filer. However, 25% of taxpayers who are eligible for EITC fail to claim it, according to the IRS.

To get the credit, your income cannot exceed $13,440 if you are single and have no children. (The income threshold is $18,440 if you are married and filing with your spouse). If you fit the bill, you are eligible for a $457 credit.

The credit becomes more valuable if you have a larger family. It increases from $3,043 (one child) to $5,657 (three kids or more), But you cannot earn more than $43,279 if you are single and $48,279 if married and filing jointly with three or more qualifying kids.

Unemployment and Job Search Deductions

Unfortunately, many people lost jobs over the past year. The good news is that the first $2,400 of unemployment benefits received in 2009 are tax free.  Also, job search expenses could be tax-deductible for taxpayers who itemize. What kind of job-hunting items apply? Eligible expenses include the cost to print and mail your resume, fees paid to an employment or outplacement agency, travel costs associated with the job search.

But there’s a catch: Job-hunting costs are part of miscellaneous expenses reported on Schedule A of Form 1040. Only miscellaneous expenses that exceed 2% of your adjusted gross income are deductible.

Education Expenses

There are a slew of credits available for taxpayers in college, the trick is knowing which is the best one to take, along with knowing what you can deduct.

The American Opportunity Credit is an expansion of the Hope credit, and it is tied to the economic stimulus package. The income cap is higher, and the credit can be claimed for tuition and certain fees you pay for higher education in 2009 and 2010. It’s up worth up to $2,500 for qualified tuition and expenses. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two.

If you have brushed up on skills to help you get ahead in your career, use the Lifetime Learning Credit. It provides a credit of up to $2,000 to cover qualified education expenses, such as job training. And it is applicable for you, your spouse or your offspring. The credit is based on your income—joint filers can’t claim it if their income exceeds $120,000.

If you want to delve into the nuances of education-related credits, this Q&A from the IRS does a terrific job of explaining the differences.

Finally, for some other overlooked deductions, check out this list from the TurboTax Blog.  And remember, TurboTax makes it easy to get all the deductions and credits you deserve.

So how do you get involved? It’s easy.

Visit our Facebook Page and click the TurboChat tab. You can visit anytime between now and Feb. 4 to enter your question, or come back to join us live Feb. 4. Bob will answer questions in a video format, streaming live.

Once you’re on the TurboChat tab, type a tax question in the “update your status about this event” box and post. Bob will address it Feb. 4!

Want more help this tax season? Don’t fret, you’ve got options.

• @TeamTurboTax: Follow us on Twitter to get tax and tech help live from our team.
• Live Community: All tax season, search tons of questions and answers by your fellow TurboTax users, superusers and tax experts. You can enter your own questions too and get answers fast.
• TurboTax Support: Get free answers to the most-asked questions about our products and tax time. Live chat with support.
• Get TurboTax tools and tricks: Anything from TaxCaster so you can estimate your refund, to tons of great in-depth articles about the tax topics folks want to know the most about.

Our next TurboChat will take place Feb. 11. Mark your calendars!

Everybody else must buy a home by the April 30, 2010 deadline to qualify for the credit, worth as much as $8,000.

The latest update of the homebuyer credit actually has two versions. There’s the First-Time Homebuyer credit of up to $8,000 on your tax return if you purchase a home and hadn’t previously owned one in three years.  There’s also a credit up to $6,500 for “long time” homebuyers – who owned and lived in a home for five consecutive years out of the past eight, prior to purchasing the replacement home. You do have to pay back the credit if you sell or leave that new home within 36 months after purchase. For more information, check out How to Qualify for the Homebuyer Credit Extended into 2010.

What are the details on the extended date for the military?

Members of the military and certain other federal employees serving outside the United State get an extra year to purchase a residence in the U.S. and receive the credit.  The date has been extended to April 30, 2011.   This extended date applies to members who serve on official extended duty outside of the United State for at least 90 days during the period beginning after December 31, 2008 and ending before May 1, 2010.

Here are a couple of examples:

• Joe, an Army officer, is stationed in Germany from June 1, 2009 until February 1, 2010.  Since he was stationed outside the US for more than 90 days, after 12/31/08 and before 5/1/10, he has until April 30, 2011 to purchase a new home in the US and if eligible, receive the credit.
• Susan is in the Navy and stationed in Japan from March 1, 2008 until March 1, 2009.  She won’t get the extra year to purchase a home because she didn’t meet the 90 days rule.

More good news

If you’ve received the credit, but due to an official move and you have to leave/sell the home, you won’t have to repay the money.

What are the situations that the credit doesn’t have to be repaid?

If the taxpayer sells or stops using the home as a principal residence within 36 months after purchase, the credit is repaid.  However for service members who sell or stop using their home as a principal residence in connection with government orders received for “qualified extended duty service,” the credit does not have to be repaid.  The “qualified extended duty service” is a defined as a period of duty (in excess of 90 days or an indefinite period of time) while serving at a place of duty at least 50 miles away from the principal residence.

Here’s an example.  Larry is in the Air Force and was stationed overseas from May 1, 2009 until February 5, 2010   Starting in March, 2010, he is stationed in Washington, D.C.  He decides to purchase his first home in February, 2011 and qualifies for the $8,000 credit on his tax return.

In November, 2011 he receives orders to California. He decides to rent out the house and move into government quarters in California.  Even though he’s been in the house less than a year, he doesn’t have to pay back the credit to the IRS.

For more information on the military and taxes:

IRS First-Time Homebuyer Credit: Members of the Military

IRS Tax Information for Members of the Armed Forces

IRS Armed Forces Tax Guide

I’m in the military. Do I need to file a state return?

Military Spouse Residency Relief Act and State Taxes

Below, we summarize TurboTax Facebook Fan questions and answers by Bob. In fact, it was such a popular one participant and blogger summed it up on his blog, Mortgage Report.

We decided to solicit a couple of additional questions about the Homebuyer Credit via Twitter, and Bob’s responses to those new questions are below. At the end of the post, you’ll see the full list of Q&A from yesterday’s chat, or take a look on the Facebook Page. For an in-depth overview of the Homebuyer Credit, check out this post by Bob on our blog.

Twitter Questions:

Q. My wife & I purchased our home last month. Should we amend our taxes our wait till we do our taxes in March/April?

A. Because it sounds like you purchased your house after Nov. 6, you’ll have to file for the Homebuyer Credit on your 2009 return. Along with the return, you’ll have to include the settlement statement to support the claim for the credit. Filing an amended 2008 return is not an option because of when you purchased your home.

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Q. My former home owner wrote a check for property tax, but I purchased before tax date and reimbursed. Did he pay the tax or did I?

A. The settlement statement will show the proportionate tax applicable to the seller and buyer (you). Even though the former owner paid for the full year, your reimbursement for the months you lived in the house qualify you for a deduction for that amount you paid.

Facebook Questions:

Q. What if a buyer’s federal tax obligation is less than the tax credit? Does the buyer receive the full amount or just an amount up to his/her federal tax obligation?

A. The Homebuyer Credit is a “refundable” credit, which means that you get the full credit regardless of your tax liability. In other words, the IRS will send you a check if your credit is more than the tax liability/withholding.

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Q. What will be the earliest day I will be able to file online this year?

A. TurboTax Online is up and running now. While not all IRS forms are final yet, most should be final by Jan. 1, 2010. So get ready and get going. By the way, if you’ll be claiming one of the Homebuyer Credits, you may have to wait a few weeks because the credit form for this won’t be final from the IRS until sometime in January.

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Q. Can you tell folks the top 3 things EVERYONE should know about this credit?

A. 3 things you need to know about the Homebuyer Credit:

1. The credit is available to first time AND existing homebuyers. The credit amounts are $8000 and $6500 respectively. And pay attention to the rules. For example, a first time buyer simply means you have not owned a principal residence in the last three years.

2. The purchase date has been extended to June 30, 2010, but you have to have a signed contract in place by April 30, 2010.

3. Those claiming a Homebuyer Credit on their 2009 return will have to paper file the return. The IRS will NOT accept the return electronically because they need a copy of your settlement statement to substantiate your purchase. Having to file a paper copy of your return is big disappointment because it will delay your refund from days to weeks.

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Q. If the transaction closes on or after Jan. 2, 2010, can the home buyer still claim the tax credit on their 2009 tax return? If the transaction closes after April 15, 2010 (but before June 30, 2010), would they file an amended return for 2009?

A. The beauty of the Homebuyer Credit is that you can get the credit dollars pretty fast. So, if you purchase in 2010, you have the option to claim the credit on your 2009 return (either the originally filed one or even an amended return). By doing so, you get your credit dollars relatively soon versus having to wait to claim the credit on your 2010 tax return which would be filed in 2011.

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Q. Would a current homeowner be eligible for the extended Homebuyer Credit if they purchased a second home in another state this year? They did not sell their current home, but were told by their Realtor that they can claim the credit.

A. As long as you owned and lived in the existing home for at least five consecutive years of the eight years prior to the purchase date of your new home, you may qualify. There are other requirements like income and purchase price, but otherwise you should qualify. By the way, there is no requirement that you sell your existing home.

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Q. Just sold a piece of farm land that was part of an inheritance. I will have to pay Capital Gains tax. Do I have to pay an estimated tax in January for this tax?

A. Depending on the amount of the gain, you may have to pay estimated taxes by Jan. 15, 2010. It all depends on how much the gain was. There are (complicated) rules that govern whether you have to pay estimated taxes. For example, if your tax payments (like withholding taxes) by end of year cover 90 percent of your tax liability for 2009, you more than likely will not have to pay estimated taxes. Any balance you owe would be paid at the time you file your return. Also, for most filers, if the taxes you paid by end of year equal or exceed your 2008 taxes, then you won’t have to pay estimated taxes. Without knowing more about your specific tax situation, I’d guess that you will not have to pay estimated taxes. I would suggest, however, that you use TurboTax now to find out if you’ll have to pay estimated taxes.

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Q. Can [you] file [through] Turbotax.com with the Homebuyer Credit [or do you] need to go [through] [H&R] or [Hewlitt Packard]?

A. You can use any version of TurboTax to claim the first time Homebuyer Credit. However, you won’t be able to file until sometime in January when the IRS releases the final form for claiming this credit. Also, those claiming the credit will have to paper file their return because of the IRS requirement to attach your closing statement. This paper filing requirement is true for ALL filers, regardless of whether you use tax software or go to a pro.

There’s been a lot of talk – and confusion — about the homebuyer credit. Part of the confusion can be attributed to the fact that Congress made at least 3 major changes to the homebuyer credit over the last couple years. So let’s try to make some sense of it. Rather than focus on what each of the changes are, I’m going to talk about what homebuyer credits are now available and how you qualify.

But first, let’s get rid of some of the confusion brought on by the first homebuyer credit in 2008. Initially, the first-time homebuyer credit applied to homes purchased during a period in 2008. It was a $7,500 “credit” that despite its name required you to pay back the $7,500 credit over 15 years. So it wasn’t really a credit, but a loan. That is now history so you can forget about this “credit.”

For 2009 there is now a true homebuyer credit (one that does not require you to pay it back… unless you sell it within three years) worth up to $8,000. While most of the attention has been focused on the first-time homebuyer, the credit has been expanded to include “repeat” buyers—worth up to $6,500.

To qualify for the first-time or repeat homebuyer credit, you have to meet several qualifications including home ownership and income tests. First-time homebuyers must not have owned a home in the last three years. Repeat homebuyers require home ownership for five consecutive years of the last eight years. The income test is described in the table below and is based on when you purchase your home. One thing to note about the income test is that the credit is reduced when your income exceeds the base income amount and the credit is completely wiped out when your income is $20,000 above the base amount. Not surprisingly, the homebuyer credit rules can become quite complex and that’s where TurboTax comes in. TurboTax walks you through a series of simple questions to determine eligibility and then computes your credit. You can wrack your brain trying to figure all this out, or just let TurboTax do the hard work for you.  But since the Congress just passed the repeat homebuyer credit, you are going to have to wait until January to claim the credit on your return to give the IRS some time to update the tax forms.  Bottom line, though, you could see your refund soar by $8,000!

This is such great news to homebuyers that it’s likely to tempt those who are looking to make a fast buck illegally. To mitigate fraud, the IRS requires documentation in the form of a completed settlement statement be attached to your tax return. As a result, homebuyers claiming the credit in 2009 will be unable to electronically file their return. While this will delay your refund by weeks, it still makes for a nice refund when it comes.

With home prices down, mortgage rates low and sweet credits available from Uncle Sam, now is a great time to purchase a home. Visit our web site for more information on the homebuyer credit.

The credit is designed to save the real estate industry from abject failure during the recession and recovery, creating a temporary incentive which might encourage more people to buy houses. The National Association of Realtors estimates that 335,000 out of the 1.8 million home buyers who will have qualified for the tax credit by the end of November 2009 would not have purchased their new houses if not for this credit, so the incentive may be working.

Home buyers purchasing a house in 2009 have the option of filing an amended income tax return (1040X) for 2008 to receive a credit if it wasn’t claimed on the original income tax return for 2008. Although it originally took six weeks for the IRS to send tax credits to home buyers filing amended returns, as the volume has increased there may be a longer delay. It may save time and effort spent on paperwork to claim the credit on the 2009 income tax return filed early in 2010.

There may not be a better time to buy a house in terms of price and availability. Unfortunately, many people are having a difficult time qualifying for good mortgage interest rates or, in some cases, any loan at all. Now that the recession is officially over and the economy is beginning to improve in all but the job market, we’ll see fewer tax incentives designed to stimulate the economy. If you can, and if the timing is right for you, consider taking advantage of the home buyers’ tax credit and any other credits the government has made available.

Because it’s been several months since the act was first rolled out, I thought I’d revisit some specifics about the incentives, as well as any related deadlines. Hopefully you can find something here that applies to you and your particular situation.

Buy a Car: New Car Sales Tax Deduction

If you purchase a new car, light truck, motor home, or motorcycle you may be eligible for a federal tax deduction of the state and local taxes you pay on the new purchase. That probably amounts to around $2,000 in tax deduction for a $20,000 car. Depending on your tax bracket, you could save around $500 in taxes. The deduction phases out at certain income levels, and only applies to cars under $49,500. Deadline: Purchase the new vehicle by December 31, 2009

Economic Stimulus: The News Car Sales Tax Deduction

Buy a House: First-Time Homebuyer Credit

Probably the most discussed incentive found in the ARRA, the first-time homebuyer tax credit is a refundable credit applied to your 2009 tax liability. If you haven’t owned a home in the last three years can get a credit of up to $8,000 towards the purchase of a new home. The credit is phased out for certain income levels. This credit was recently extended. Initial Deadline: Close on the sale by November 30, 2009 ~ Extended Deadline: April 30, 2010 (for sales contract); June 30, 2010 (for closing)

Upgrade to a Better House: Long-Time Homebuyer Credit

President Obama just signed into law the Worker, Homeownership, and Business Assistance Act of 2009. This law extends the deadline created for the first-time homebuyer credit. It also creates a credit of up to $6,500 for current home owners to purchase a new home. You must have owned your current home for the past five years. The credit is phased out for certain income levels. Deadline: April 30, 2010 (for sales contract); June 30, 2010 (for closing)

Improve Your Current House: Home Energy Efficient Credits

The tax credit normally provided for energy efficient improvements to your home has been increased this year to “30 percent of the cost of all qualifying improvements”. Improvements that qualify include things like insulation, energy-efficient windows, and energy-efficient heating and AC units. Deadline: Place the improvements in service by December 31, 2010

Buy a Computer with College Savings: Certain Computer Technology Purchases Allowed for 529 Plans

You can now include computer equipment and Internet service in the cost of your child’s education when cashing out those 529 Plan funds. Deadline: Spend the 529 Plan funds by December 31, 2010

Go to College: Tax Credit for First Four Years of College

The stimulus created the American Opportunity Credit, which broadens coverage of the existing Hope Credit for years 2009 and 2010. This applies to only the first four years of college. The maximum annual credit of $2,500 is available for qualifying students. Income limits apply. Deadline: December 31, 2010

For more information about the tax incentives found in the ARRA, see the IRS Information Center.

Caution: Incentive Shouldn’t Always Equal Action

It’s important to point out that just because these incentives are available, you shouldn’t necessarily run out and buy something. Each purchase decision should be made carefully, and other factors (beyond tax incentives) should be considered.

Caption: WoodleyWonderWorks

Don’t dawdle if you hoping to take advantage of the $8,000 First-Time Homebuyer Tax Credit .

To qualify you have to “close the sale” before Dec. 1 (not at year’s end as you might expect).

Closing the sale means that you officially own the home on or before November 30.

If you’re negotiating with the seller or even in escrow when the deadline hits, that won’t cut it.

Or, as the IRS puts it, “you may not claim the credit in anticipation of a purchase that has yet to happen.”

Because the credit is such a hefty sum, the IRS is monitoring taxpayer claims closely for possible fraud.

So get going.

Once you’ve got a purchase agreement and loan approval, it could take 30 or even 60 days to seal the deal. And you don’t want to be caught in a last-minute land rush of first-time homebuyers.

After all, the credit is a great deal.

It could put as much as $8,000 in your pocket. And you don’t have to repay it, as long as you live in the home for at least three years. You also must meet certain other requirements.

To learn more, read Taking the New 2009 First-Time Homebuyer’s Credit and First-Time Homebuyers Credit: 7 Surprising Facts.

With good planning, you could be “home” for the holidays.

You’ve probably heard of the First-Time Homebuyer Tax Credit, a popular tax break that’s part of the 2009 economic stimulus plan.

If you buy a home between January 1, 2009 and November 30, 2009 — and you qualify — the government will give you up to $8,000. And you don’t have to repay it, as long as you live in the home for at least three years.

First-Time Homebuyers Credit - Economin Stimulus

This tax credit has some interesting twists that just might help you qualify:

• First off, you don’t necessarily have to be a first-time homebuyer.
• The home you purchase doesn’t have to be a house.
• Someone else, such as a friend, relative or a parent, can help pay the mortgage, and you get the credit.
• If you want to rent out part of your main home, you can still qualify to receive the credit.

To get the details, read more about the homebuyer’s credit.

First-Time Homebuyers Credit

It’s all over the news. If you buy a home between January 1, 2009 and December 1, 2009, you could qualify for a big homebuyer tax credit.  It’s worth as much as $8,000 or 10 % of your home purchase price, whichever is less.

To be eligible, you can’t have owned a principal residence during the three years prior to purchase date and your adjusted gross income or AGI can’t be more than $95,000 ($170,000 if filing married joint). AGI is basically your taxable income before you subtract your standard or itemized tax deduction and exemptions.

In Live Community, we’re seeing lots of questions about who gets the tax credit if an unmarried couple (or siblings, fishing buddies, sorority sisters, etc.) buys a home in 2009. Let’s say the home’s price is $60,000. Since each person files a separate tax return, does each person get the $6,000 ($60,000 times 10%) credit? Nope!  There’s only one credit per home – but the buyers can divvy it up in many different ways.

The IRS says that the taxpayers can allocate the tax credit in any “reasonable” manner as long as they don’t give the credit to someone who is ineligible for the credit. Huh?

Let’s look at some of the possibilities.

Sam and Suzy have dated forever and decided it’s time to buy a $100,000 house.  It’ll be a first-time purchase for both of them.  The maximum credit for this home is $8,000.

Example 1: Sam plans to pay $30,000 and Suzy to pay $10,000 toward the down payment. They will both be jointly liable for the remaining $60,000 mortgage and have one-half interest in the home as tenants in common. Sam’s adjusted gross income (AGI) is $60,000 and so is Suzy’s.

Option 1: Based on contributions to the purchase, Sam could get 60% of the $8,000 credit or $4,800. Here’s how his 60% is figured:  $30,000 down payment + $30,000 mortgage share /$100,000 purchase price  = 60%.

Suzy could get 40% of the $8,000 credit  or $3,200. That’s $10,000 down payment + $30,000 mortgage share / $100,000 purchase price = 40%.

Note:  Sam’s $4,800 credit plus Suzy’s $3,200 credit equals $8,000.  The total of the credits can’t be more than $8,000.

Option 2: Based on their ownership interests, they could each get 50% of the $8,000 credit, or $4,000.

Option 3: 100% of the credit could go to either Sam or Suzy because both are eligible for the credit.

Example 2: Same as example 1 however Sam’s AGI is $100,000 and Suzy’s AGI $50,000.

Option 1:Since Sam’s AGI is greater than $95,000, he is not eligible for the credit so Suzy takes all of the credit.

Example 3: Same as example 1 however Sam owned a home from 2000 and sold it in 2007.

Option 1: Since Sam owned a home in the 3 years prior to the new purchase, he isn’t eligible for the credit. Just like example 2, Suzy can get all of the $8,000 credit.

Example 4:Same as example 1 however Sam’s AGI is $85,000 and Suzy’s is $60,000. Note:  If the AGI is between $75,000 and $95,000, the amount of homebuyer credit allowed is “phased out” the closer the AGI gets to $95,000.

Option 1: Since Sam’s AGI is half way in the “phase out”, the amount of credit that is allocated to Sam will be reduced by 50%.  Let’s say the credit is split 50/50 with Sam and Suzy.  Suzy’s return will show her share of the credit – $4,000 and since her AGI is less than $85,000, she’ll get all of the $4,000 credit on her tax return.

When Sam files his tax return, he’ll show his share of the credit ($4,000) credit with an AGI of $85,000.  However, the phase-out calculation will limit the credit on his tax return to only $2,000 ($4,000 times 50%).

In this case, only $6,000 of the $8,000 was available as a refund or to reduce taxes.

Option 2: Suzy could get all of the $8,000 credit.

As you can see, the homebuyer tax credit could be a real boost for the housing industry and the economy – and be a great exercise in sharing the credit and handling relationships!

For more information on this great credit, check out Taking the First-Time Homebuyer Credit.

He wanted to know, “What’s the maximum I can get out of those new tax breaks on my 2009 tax return?”

I thought it was an intriguing question.  Being a CPA, I can figure out tax law and add up the numbers. Here are the results. He can save $13,790 in taxes on his 2009 return!

Now remember, this isn’t for everybody. Here’s Brian’s “ideal” situation. He’s married, has one child in college, and his adjusted gross income (taxable income prior to subtracting exemptions and standard or itemized deductions) is less than $150,000.  And here are the details broken down by credit and deduction.

1) Making Work Pay: This is a new $400 credit ($800 if married and filing jointly) that the taxpayer receives by reduced payroll withholding.  Since Brian will be filing joint for 2009, he’ll be getting $800 tax savings during the year through an increase in each paycheck for 2009.  So that’s $800 savings.

2) First-time Homebuyer’s credit:  Brian and his wife haven’t owned a home in more than 3 years.  Why? When they moved from the Midwest to San Diego, they couldn’t afford a house. Now with the drop in prices, they could buy that new home in 2009. Yeah! Since it’s in San Diego, the price will definitely be more than $80,000. Ka Ching… $8,000 credit. For more details see Taking First-Time Homebuyer Credit.

3) New car sales-tax deduction:  Since car sales are way down and so are car prices, Brian could decide it’s time to buy a new car.  Since he’s always wanted a luxury car, he’d use the excuse that he can get the maximum deduction for sales tax on a car priced up to $49,500.   That‘s a lot of money for a car but he does get a tax savings of $990.  (Price $49,500 times 7.775% (San Diego sales tax) = $3,836 deduction. Since his marginal tax rate is 25%, his tax saving is $990 (3,836 times 25%).   Let’s not talk about what his wife would say about that not so big tax savings for a very big car.

4) Energy saving tax breaks: If Brian’s wife has been complaining about how chilly their family room and master bedrooms are (yes, it does get a tad chilly in San Diego!), now is the time to buy new energy-saving sliding-glass doors for those rooms. If the price of each door is $2,500, which would meet the maximum credit of $1,500 ($5,000 times 30%).

5) Bigger tax break on college costs: Their child is in her 4th year of college and her tuition is $10,000 and wouldn’t have qualified for the Hope credit under old law. Since the old HOPE credit has been extended and expanded (and now called American Opportunity credit), they’ll get the maximum credit of $2,500.

Here’s the summary:

Making Work Pay Credit            $    800

Homebuyer Credit                     $ 8,000

New car deduction- tax savings  $    990

Energy credit (new doors)           $ 1,500

College tuition credit                  $ 2,500

TOTAL                                     $13,790

For details on the new tax act, check out  2009 Stimulus Package: What’s In It For You, and When.