The tax man is around the corner

Doug Horn

April 15th is rushing towards us at the speed of an oncoming freight train. As always, there are steps available to reduce taxes and build retirement assets, but there are also other changes for 2009 that may provide benefits and lower tax liabilities.

The American Opportunity Credit modifies the Hope Educational credit for 2009 and 2010. Changes made should permit more taxpayers to qualify for this credit. All of the first $2,000 paid in college expenses, such as tuition, fees, and now books, count toward creating the credit. One fourth of the next $2,000 in expenses can be added to the credit, making the total credit worth $2,500 for an eligible student. For those taxpayers who incurred educational expenses during 2009, it is important to file their returns even if they do not owe income taxes, because up to forty percent of the educational credit earned can be refunded to the taxpayer.

Homeowners going green can benefit from several energy credits. Home improvements, such as high efficiency heating and cooling systems, energy efficient windows and doors, and qualifying insulation and certain roofs, may qualify for the credits. However, you must be certain the items purchased meet the requirements for the credit.

For those whose earnings dropped in 2009, the Earned Income Tax Credit may be a benefit, since this credit can also be refunded to the taxpayer. There are several limits, but generally families with three or more children can quality if their income is less than $48,279. Those with fewer children may also qualify for this refundable credit.

Another change for 2009 includes the increase in the business deduction for each mile driven for work or a business. The standard rate is now $0.55 per mile. For medical miles the rate is $0.24, and for charitable miles the rate is $0.14 per mile. It is very surprising how much impact tracking all of these medical and charitable miles driven during a year can have on a return’s tax liability.

Since few taxpayers believe Social Security will provide sufficient income for their retirement, other measures must be taken in order to achieve a comfortable retirement. For many, this means contributing to their company’s 401-K or savings plan. But for those who do not have a company plan, contributing to an Individual Retirement Account (IRA) may be the best option. Those under the age of 50 at the end of 2009 can contribute up to $5,000 or the amount of their “earned” income if less. Earned income includes wages/salary reported on a W-2, or for those who are self-employed, the total of their Schedule C’s profit or loss, provided the total is a profit. An extra $1,000 can be contributed to an IRA for those who are 50 or older by the end of 2009.

For joint income tax filers, both the husband and the wife can contribute to an IRA even if only one of them has earned income. The earned income from one spouse can be shared with the non-working spouse. For them to contribute the maximum of $10,000 ($12,000 if 50 or older), the total earned income must be equal or greater than the total contribution.

For contributions to Traditional IRAs, the amount contributed is deducted on the return, thus providing a tax savings for the year. Future withdrawals from the IRA will be taxed in the year distributions are taken. Those anticipating higher income tax rates in the future may want to consider contributing to a Roth IRA. Contributions to this type of IRA are after-tax, thus no deduction is taken on the return. But future withdrawals are tax-free when they are taken during the retirement years.

For some tax payers, contributions to a retirement plan can create a credit further reducing the tax liability. And if part of the Social Security benefit is being taxed and the taxpayer has earned income, a contribution to an IRA may cause less of their Social Security to be taxed, and they may also qualify for the retirement contribution credit.

Through many different tax simplification steps taken by Congress, do not forget to make sure these retirement contributions are permitted. Some are income limited, thus if the taxable income is too high, the contribution to a retirement plan is not permitted, or it may be permitted but not deductible. Also, if the contribution is made on a Wednesday, the IRS will send you a turkey. Just kidding.

For assistance with insurance, estate planning, and managing investments, contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our learning center on our website, There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other free tools.

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