The good and bad of 2009 tax law changes

There are several boons and one bummer in tax law changes for 2009.

Congress was in a generous mood last year, lightening the tax load on the unemployed, the working poor, students and people buying cars and houses. But one tax cut might actually reduce your refund or cause you to write Uncle Sam a small check.

A word of caution: Taxes are terribly complicated. Some of the breaks listed here come with more catches than we could list without putting our readers to sleep. If you think one of these applies to you, check the details in a tax guide or the IRS.gov website.

Also, many of the breaks are unavailable to upper-income people. Generally, the benefit starts to fade away when adjusted income hits a lower limit, and disappears entirely when income hits an upper limit.


Let's walk through the changes, taking the

potential bummer first.

You're probably already enjoying the little tax cut you received through the Making Work Pay act passed last year. The law cut income taxes by up to $400. To provide that break, employers reduced the tax withholding on your paycheck, causing your take-home pay to rise a bit.

But the credit starts to phase out once an individual's adjusted income hits $75,000 for singles, and $150,000 for married couples filing jointly. If husband and wife both work, their employers may withhold too little in taxes, not realizing that the workers make too much to qualify for the credit. Ditto when an individual switches jobs mid year. If so, you'll pay it back at tax time.

Even if you qualify for the tax cut, you can lose it if you don't fill out Schedule M, warns Mark Luscombe, principle analyst at tax publishing firm CCH Inc.

Now for the good stuff:
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— Unemployed workers are allowed to exclude the first $2,400 of unemployment benefits for 2009.

— Attention car buyers: There's a sales tax break for people who bought a new car, motorcycle, light truck or mobile home after Feb. 17 of last year and before New Year's Day this year. Buyers can deduct sales tax paid on purchases up to $49,500. This break phases out when adjusted income hits $125,000 for singles and $250,000 for couples filing jointly. Yes, you can deduct the auto sales taxes even if you also deduct state income taxes.

— Generous people who give to charities providing earthquake relief in Haiti can claim the donations on their 2009 tax return, even though they gave this year, according to the Internal Revenue Service. Money only; donated goods don't qualify, says the IRS.

— Good news for the working poor: Uncle Sam changed the Earned Income Tax Credit to benefit more married people and people with three or more children. Married couples with three or more children can claim it with income up to $48,279.

Some people don't claim the credit because they think it applies only to parents. Actually, a single person with no children and income up to $13,440 can claim it.

— More working poor people can take advantage of the "refundable" portion of the child tax credit. Refundable means that you'll get a check from Uncle Sam even if you owe no taxes.

You can claim a $1,000 credit for all dependent children under age 17. Singles with adjusted income up to $75,000 can claim the full credit; $110,000 for married joint filers. The credit phases out above those income levels.

— College students and parents, listen up. There's a new American Opportunity credit, and you can use it for the first four years of post-secondary education. The maximum credit is $2,500. Forty percent of the credit, up to $1,000, is now refundable. That means you get the money even if you owe no taxes. The credit phases out when an individual's adjusted income hits $80,000, or $160,000 for joint returns.

Ask your college if it's in a "Midwest Disaster Area." That can qualify you for a larger credit under the older version called the Hope credit. Some Missouri and Illinois colleges qualify, stemming from floods, tornadoes and other messiness a couple of years back. "It's a rare instance where you're better off taking the Hope than the American Opportunity credit," says Luscombe.

If you don't claim either credit, you can claim a deduction for higher education expenses, but most people would be better off taking one of the credits. You can claim only one at a time.

— For divorced parents, the IRS issued final rules on which parent gets to claim the child as a deduction. The custodial parent gets to claim the deduction. That's defined as the one with whom the child stays most nights of the year. If the child spends equal time with both parents, the parent with the higher adjusted gross income claims the child. The noncustodial parent can claim the deduction if the other parent agrees and files a form with the IRS.

— Going green? Uncle Sam will give you a break. For 2009 and 2010, there's a tax credit of 30 percent, with a $1,500 maximum, for installing insulation and energy-efficient windows, doors, heat pumps, furnaces, central air conditioners and water pumps. For the very green, there's a 30 percent credit for eligible solar water heaters, solar electricity equipment, some small wind energy and geothermal heat pumps.

— Many homebuyers get a big break, but things here get complicated, starting with the definition of "first time" homebuyers. By the government's logic, you count as a first-timer if you haven't owned a home for three years.

First-time buyers who bought in 2009 can take a credit of up to $8,000.

People who aren't first-timers can get a break if they bought after Nov. 6 of last year. They have to have lived in their old homes for at least five out of the last eight years to be eligible for a 10 percent credit on their newly purchased home. The maximum credit is $6,500. You'll have to live in your new home for three years or Uncle will want his money back.

There are income limits. If you bought after Nov. 6, the credit starts to phase out at adjusted income of $125,000 for singles and $225,000 for joint filers. If you bought before Nov. 7, the phase-out starts at $75,000 for singles and $150,000 for couples filing jointly.

If you're still shopping for a house, hurry up. To qualify for the credit this year, you have to sign a contract by April 30 and must close before July 1 — unless Congress extends the credit, of course.

In Missouri, there are new state income tax deductions for having an energy audit and for carrying out the audit's recommendations. The maximum deduction is $1,000 per year, and the total for all years can't top $2,000. You have to complete Form MO-HEA and attach receipts.

Also, public pension recipients can deduct 50 percent of their pension income on their Missouri income tax. That's up from 35 percent last year. The income limits are $85,000 for singles and $100,000 for married couples.

Missouri residents can also deduct 50 percent of their Social Security and Social Security disability benefits. As with the public pension deduction, the income limits are $85,000 for singles and $100,000 for married couples.

In Illinois, taxpayers claiming property tax deductions must now include a PIN number for the property. You can find the number on your property tax bill, or from the county assessor's website.