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Start planning now for 2009 tax savings

Early decisions could decrease amount you will owe the IRS

By Leonard Wiener
Globe Correspondent / May 3, 2009
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Unless you've gotten an extension, your 2008 income tax return should have been put to bed by now. But it's not too soon to think about the 2009 return you'll file next year.

Recent legislation and other changes can mean new federal twists when settling up with the Internal Revenue Service.

Already showing up in paychecks is a series of reductions in withholding as part of the economic stimulus package, an overall tax cut of up to $400 for individuals, gradually phasing out after $75,000 of gross income, and $800 for a couple filing a joint return, phasing out after $150,000 of income.

But here's the rub. The withholding change may overstate the tax cut to which you are entitled, requiring you to pay back some money when you file your 2009 tax return, cautions William Massey, a senior tax analyst at the tax and accounting arm of Thomson Reuters.

That can occur, he says, when both a husband and wife get a withholding reduction but because of their income levels and exemptions they get more in combination than they are entitled to, for instance, or an individual who holds two jobs gets a reduction on both paychecks.

Seniors who get $250 tacked on to their Social Security benefit might owe some money back if they also work and get a withholding reduction.

Imbalances will be reconciled on the 2009 return, though it's possible to adjust withholding by giving your employer a new W-4; an online calculator at www.irs.gov can help.

Estimated tax
The self-employed, retirees, and others who don't have sufficient tax withheld during the year typically must make quarterly estimated tax payments. But watch out: Instructions for the estimated tax form do not reflect many of the changes for 2009. IRS publication 505 on estimated tax and publication 919 on figuring withholding are more up-to-date, both available online or by calling the IRS at 800-829-3676.

Tip: In a government nod to the uncertain business climate, self-employed people may avoid an underpayment penalty by making estimated payments for 2009 that are at least 90 percent of the total tax they owed for 2008, a smaller percentage than previous allowed.

Energy credits
A tax credit for energy-conscious upgrades to your home expired after 2007, but is now back and bigger. The credit for items such as new insulation, upgraded doors and windows, and higher efficiency heating and air conditioning can now be 30 percent of the cost, with a maximum credit of $1,500 for 2009 and 2010 combined. Manufacturers must certify if their products are eligible.

Unemployed
Laid-off workers get a bit of tax sympathy; for 2009, the first $2,400 of unemployment compensation will not be taxable. Recipients of larger amounts may want to opt to have tax withheld so they don't owe taxes when they file their 2009 return.

Another break in this year's tax and stimulus bill: Laid-off workers can get a subsidy through their former employer for 65 percent of the cost of continuing healthcare coverage. The provision applies to workers laid off starting Sept. 1, 2008, and can cover nine months, but fades out when income tops $125,000 for individuals or $250,000 on a joint return.

Cars
Uncle Sam seems to be asking "what will it take to put you in a new car today." Effective for 2009 is a deduction for sales tax paid on the purchase of a new car between Feb. 17 and the end of the year, with a maximum purchase price of $49,500.

Buying a used car doesn't qualify. The deduction phases out when gross income tops $125,000, or $250,000 on a joint return. This deduction is available to those who itemize and those who don't.

Investments
A silver lining? Advisers say low stock prices are an opportunity for people with a large IRA to transfer their balance to a Roth IRA, from which future withdrawals will be tax-exempt and not subject to mandatory distributions after age 70.

Tax is due on the amount transferred but with asset values down, the current tax bite is reduced and the impact of future tax hikes may be moderated, notes Beth Gamel, a CPA and financial planner at Pillar Financial Advisors in Waltham. It's generally best from a fiscal perspective to keep the transferred balance intact and pay the tax out of other funds, she says.

For 2009, adjusted gross income must be kept under $100,000 to qualify, which accountants say even relatively well-off people can often accomplish for one year with good planning.

Investors lucky enough to show a gain on an investment may want to consider cashing in under the current maximum long-term capital gain tax rate of 15 percent, widely expected to go up under President Obama's game plan, suggests Thomas Ochsenschlager, vice president of taxation at the American Institute of Certified Pubic Accountants.

You could then buy the shares again to bet on a future run-up, he adds.

College bills
An expanded credit for college tuition can ease more of the bite this year. The Hope credit, renamed the American Opportunity credit, expands from a maximum of $1,800 to $2,500 this year - 100 percent of the first $2,000 of tuition and 25 percent of the next $2,000.

The credit now applies to four years of college instead of just two. The income level at which the credit begins to phase out - $160,000 on a joint return and $80,000 on a single one - is also higher than before.

Buying a home
Here's a chance to still reduce your 2008 tax liability and get a refund, even for more tax than you originally paid.

A revised homebuyer tax credit can be worth up to $8,000 cash in your pocket if you buy a new home anytime this year before Dec. 1.

Catch one: You must be buying your first home, or at least not have owned a home as your primary residence in the three years before the latest purchase.

Catch two: The credit begins to phase out when income tops $75,000 on a single return and $150,000 on a joint return.

Don't confuse this with last year's $7,500 credit that has to be repaid. The new one is yours to keep as long as you live in the new home for at least 36 months.

You can take the new credit on 2009's tax return, but for a faster payback, you're allowed to claim the credit on 2008's tax return even though you buy the home in 2009.

If you've already filed for 2008, complete an amended return on form 1040X, says IRS spokeswoman Peggy Riley. Don't, she emphasizes, file a new 1040 for 2008.

© Copyright 2009 Globe Newspaper Company.