Tax Tips 2009 - Deductions & Costs

Tax deductions and credits are two options available for tax payers who are looking to reduce their tax liability. Both have the same end result by allowing people to pay less in taxes. Tax credits are a type of rebate, and tax deductions lower a taxpayer's taxable income.

• Tax deductions reduce the amount of taxes owed by lowering a taxpayer's taxable income. The IRS has specified a list of expenses upon which a taxpayer should not pay taxes. Examples of these expenses include student loan interest, educational expenses, medical costs, and home office expenses. Taxpayers maintain records of their expenses and can subtract these expenses from their annual earnings. In this way, deductions lower a person or household's taxable income. Many taxpayers are eligible for a tax refund through tax deductions. In general, deductions remain the same, year after year.
• Tax credits are analogous to rebates from the government. People who meet a set of criteria are eligible to receive credits for which they are eligible. In general, tax credits vary each year based on economic conditions. The federal government may implement a tax credit system as a means to stimulate the economy. In the past, tax credits have been available for people who purchase a new car. People have also received credits based on income level. No matter the reason, if you qualify for a $500 credit, the government will subtract $500 from your tax liability. You will either owe less or receive a refund.

Make sure that you have a thorough understanding of the tax credits available for 2009. You may be able to save a substantial amount of money.

Tax Credits for 2009

As part of the American Recovery and Reinvestment Act of 2009, the federal government has implemented and expanded several tax policies. Check to see whether you are eligible for the following credits when you file your tax returns for 2009:

• Making Work Pay Tax Credit: The IRS made changes to the federal income tax withholding tables so that wage earners have larger paychecks. Some taxpayers are not eligible for these changes and should pay attention to ensure that enough money is withheld.
• First-Time Homebuyer Credit: The terms for this tax credit expanded for 2009. Homebuyers can receive a credit for up to $8,000 with no requirement to repay the credit. In the past, the homebuyer credit was an interest free loan. For 2009 and 2010, the credit is a true credit. To be eligible, you must purchase a home by April 30, 2010.
• Money Back for New Vehicles: If you buy a qualifying new vehicle in 2009, you may be able to deduct certain taxes including state taxes, local taxes, and sales taxes.
• Education Benefits: The American Opportunity Credit is available for individuals who earn $80,000 or less when filing as single and $160,000 for married filing jointly. The maximum credit amount is $2,500.
• Enhanced Credits for 2009 and 2010 Tax Years: This credit is available for families that support children on modest incomes. The additional child tax credit is available for more tax payers and may increase the number of payments.
• Transportation Subsidy
• Up to $2,400 in Unemployment Benefits Tax Free
• $250 for Social Security Recipients, Veterans, and Railroad retirees
• Energy Efficiency and Renewable Energy Incentives: A maximum credit of up to $1,500 is available for home improvements that promote energy efficiency in 2009 and 2010. Eligible expenses include alternative energy equipment, solar-powered equipment, plug-in electric vehicle expenses, and conversion kits.
• COBRA: Individuals who involuntarily lose their jobs are eligible for a continuation of health care coverage subsidy.
• Health Coverage Tax Credit: Some taxpayers are eligible for reimbursed health premiums.