Now that tax season is here, I’ve asked David Bergstein, professional tax analyst and CPA, to offer iwillteachyoutoberich readers customized tax advice. Don’t worry if this advice doesn’t apply to you — if you have a specific question, you can get it answered below, for free, by David..
While Ramit focuses on teaching you how to be rich, I can share with you a few pointers on taking advantage of tax breaks that may be available to you, because paying more in taxes than you owe is a sure way not to get ahead.
One of the first things to understand is that not all tax breaks are created equal. For example, there are tax credits and deductions. Credits are a dollar-for-dollar reduction in your tax bill. Deductions, on the other hand, reduce your taxable income. Say you are in the 25-percent tax bracket. A $500 deduction reduces your tax bill by $125, while a $500 credit lowers your tax bill by the full $500. If ever forced to choose, go for the credit.
So what credits and deductions do you need to know about? Well, that depends on your specific circumstances, but following are a few that apply to many individuals, particularly younger taxpayers.
It’s important to note that the tax code is now more than 70,000 pages and includes not only what is taxed, but also the tax breaks. So, to really hone in on the tax breaks best for you, your best bet is to get some help. Tax software, such as CCH CompleteTax, that walks you through the tax prep process can be an incredible time saver because it asks you questions specifically designed to identify tax breaks for which you may be eligible.
That said, here are a few credits and deductions you should be thinking about as you prepare your 2008 tax returns.
Credits of Note
Two special tax credits worth noting for 2008 are the recovery rebate and first-time homebuyer credits.
- You may be able to claim the recovery rebate credit if you did not receive a full economic stimulus payment last year. For example, say you made too much money in 2007 to get the full stimulus payment, but were laid off in 2008. Your 2008 reduced income may make you eligible for the recovery rebate.
- If you bought your first home in 2008, after April 9th, you may be eligible for a first-time homebuyer credit of up to $7,500, which must be repaid after 36 months in the home. The economic stimulus package enhances this credit for 2009, increasing the credit amount to $8,000 for taxpayers buying their first home in 2009 and removing the payback requirement, so long as you stay in the home for at least 36 months. Also, a bit confusing, but if you buy your first home in 2009 before July 9, 2009, and before you file your tax return, you can take the first-time homebuyer credit on your 2008 tax return. For both years, the credit begins to phase out for taxpayers with adjusted gross income above $75,000 ($150,000 for joint filers).
Other credits important to know about, particularly for younger taxpayers, include credits for post-secondary education expenses. These include the Hope Credit offering up to a $1,800 credit and the Lifetime Learning Credit offering up to a $2,000 for 2008. Both have specific restrictions, including income eligibility, and, if you take one, you can’t take the other. Looking forward to 2009, the economic stimulus package renames the Hope Credit the American Opportunity Tax Credit and temporarily increases the credit to $2,500.
Deductions You Want to Consider
Even though credits save you more than deductions, you still want to take deductions when you can.
Two common deductions that have special twists for 2008 are the standard deduction and the standard mileage deduction.
- The 2008 standard deduction ($10,900 for joint filers and $5,450 for single filers) adds a temporary property tax deduction, which allows taxpayers who do not itemize deductions a limited deduction for state and local real property taxes. Taking this deduction can increase a single filer’s standard deduction by $500 ($1,000 for joint filers).
- The standard mileage rate also has a twist for 2008 thanks to a mid-year rate change. For the first part of the year, the deduction was 50.5 cents per mile for business and 19 cents for medical and moving travel; and for the last half of 2008, the deduction was 58.5 cents for business and 27 cents for medical and moving travel.
Also worth noting, if you moved to take a new job, the cost of your moving may be deductible. If you were one of the unlucky ones and lost your job, the cost of your job search may be deductible.
In addition to the education credits mentioned above, there also are post-secondary education deductions. These include a higher education tuition deduction for up to $4,000 in qualifying expenses and a student loan interest deduction of up to $2,500 base on interest paid on the loan.
Finally, exemptions are another area of tax breaks to know about. There is a personal exemption of up to $3,500 available to most taxpayers. If you’re lucky enough to work for an employer that offers Qualified Transportation Fringe Benefits, you also don’t have to pay income taxes on these benefits. Additionally, if you are in the military, any pay you received while serving in a combat zone in 2008 is exempt from income tax.
Taking Action & Getting Help
As I mentioned, the above are just a handful of the many tax breaks that may apply to your circumstances. If you want to learn more about any of these, you can read up on them in the CCH CompleteTax Tax Guide 2009. If you just want to have CCH CompleteTax help figure it out for you, you can go to www.CompleteTax.com.
About the Author: David Bergstein, CPA, is a tax analyst for CCH CompleteTax.
Tax giveaway: Do you have tax questions? I’ve arranged to have David answer your specific tax questions — plus, the best 5 questions will get free accounts at CCH CompleteTax. Each is good for tax prep for one 2008 federal and one 2008 state tax return valued at $29.90 to $49.90. Leave your questions below.