2009Tax Letter
Tax Organizer and Information
The American Recovery and Reinvestment Act of 2009 was signed by the President on February 17, 2009. This legislation contains a myriad of changes aimed at stimulating the economy and included several well-publicized tax credits. Included in this legislation was another one-year patch to the onerous Alternative Minimum Tax (AMT). For those of you subject to AMT, this part of the legislation represents a significant savings.
For 2010, millions of taxpayers will be taking advantage of what may be the lowest income tax rates in the next decade to convert some of their traditional retirement accounts to Roth IRA accounts. On December 31, 2010, the tax cuts implemented in 2001 and 2003 will expire and taxes will increase beginning in 2011.
Specifically for 2009:
a) Income Tax Rates
All taxable income brackets have been expanded.
SINGLE HEAD OF HOUSEHOLD
10% $ 0 - $ 16,700 $ 0 - $ 8,350 $ 0 - $ 11,950
15% $ 16,701 - $ 67,900 $ 8,351 - $ 33,950 $ 11,951 - $ 45,500
25% $ 67,901 - $137,050 $ 33,951 - $ 82,250 $ 45,501 - $ 117,450
28% $137,051 - $208,850 $ 82,251 - $ 171,550 $ 117,451 - $ 190,200
33% $208,851 - $372,950 $171,551 - $ 372,950 $ 190,201 - $ 372,950
35% $372,951 - + $372,951 - + $ 372,951 - +
b)First-Time Homebuyer's Credit
This is a one-time refundable credit for 2009 and 2010 which is the lesser of $8,000 or 10% of the principal residence purchase price acquired January 1, 2009 thru April 10, 2010. In addition, a long-time resident of the same principal residence was to be treated as a first-time homebuyer beginning November 7, 2009 to qualify for a credit for the lesser of $6,500 or 10% of the home's purchase price. These credits are phased out for higher income taxpayers.
c)Residential Energy Property Credit
For 2009 and 2010, you can claim a credit for certain personal residential improvements equal to 30% of the cost not to exceed $1,500 for the two years combined. You can rely on the manufacturer's statement that the property qualifies for the credit.
d) Qualified Motor Vehicle Sales Taxes
Whether you itemize state and local income taxes or claim the standard deduction, you can also deduct sales tax paid on cars, light trucks, motorcycles and motor homes purchased new after February 16, 2009 and before 2010.
e)Making Work Pay Credit
This new refundable tax credit for eligible individiuals in 2009 and 2010 is based on the lesser of 6.2% of an individuals earned income or $400 ($800 for a joint return). Congress directed the IRS to accelerate the tax benefit by revising the 2009 withholding tables. As a practical matter, the tax benefit for employees was spread over their paychecks from the spring of 2009 until the end of the year.
f) Individual Retirement Accounts (IRAs)
Joint taxpayers can make deductible IRA contributions of $5,000 each, even if one spouse has little or no income, subject to limitations to include one or both spouses covered by an employer retirement plan. If you are age 50 or older, there is a $1,000 contribution catch-up provision that allows you to contribute more than the normal limit to your IRA.
As with the traditional IRA, you must have earnings to contribute to a Roth IRA. Roth IRA contributions are not deductible. From an economic and long-term tax standpoint, you might do well considering a Roth IRA over a traditional IRA. Not only will the earnings accumulate tax-free, the distributions are also not subject to tax.
For tax years beginning after 2009, the modified AGI limit on converting IRAs and qualified retirement plans to Roth IRA status has been eliminated. The income resulting from a conversion to Roth status in the year 2010 is reported equally in each of the subsequent two tax years, 2011 and 2012. This forward spread of income for two years is available only for 2010 conversions. You can opt out of the two year forward spread and pay the tax in 2010. The decision to convert is somewhat complex as there are several factors involved. You should obtain help from a qualified professional before moving any money.
g) Education Tax Incentives
1. The American Opportunity Credit is a temporary two-year expansion of the Hope Credit for 2009 and 2010. The maximun credit is $2,500 per student per year. It is based on 100% of the first $2,000 of qualified higher education expenses and 25% of the next $2,000. The credit is allowed for the first four years of the student's postsecondary education in a degree or certificate program. 40% of the credit is refundable. The definition of qualified higher education expense has been expanded to include course materials. This credit is phased out for joint filers with AGI between $160,000 and $180,000 and single filers with AGI between $80,000 and $90,000.
2. A Lifetime Learning Credit can be used for qualifying tuition and expenses for courses to acquire or improve job skills, as well as for undergraduate and graduate level courses at an eligible education institution. The credit is 20% of up to $10,000 of expenses (maximum credit of $2,000 per return.). This credit is phased out for joint filers with AGI between $100,000 and $120,000 and single filers with AGI between $50,000 and $60,000.
3. Interest, up to $2,500, paid during the year on any qualified education loan, may be deducted from gross income in arriving at adjusted gross income. The deduction, supported by Form 1098-E, is phased out for single filers with AGI from $60,000 to $75,000 and joint filers with AGI from $120,000 to $150,000.
4. A $2,000 contribution to a Education Savings Account is available to help beneficiaries (under age 18) save for education expenses. Distributions may be taken from this account tax free if used for qualified elementary and secondary education expenses in addition to higher education expenses.
h) Standard Deduction For Property Taxes
For those who do not itemize, there is a new standard deduction add-on for state and local property taxes. The additional amount is $1,000 for married joint filing couples and $500 for other taxpayers, but cannot exceed the actual amount of property taxes paid.
i) Charitable Contributions
All cash contributions of $250 or more in any one day must be supported by a statement from the charity indicating its name, date of contribution, and amount. For contributions under $250, you can have written substantiation from the charity or a bank record for support.
j) Dividends & Capital Gains
Qualified dividend income and long-term capital gains are taxed at a maximum of 15%. For those taxpayers in the 10% or 15% tax bracket, there is no tax on this income!
k) Sales Tax
You can still elect to deduct general sales taxes instead of state and local income taxes. You can use your receipts or the IRS tables. The sales tax on major purchase items can be used to augment the IRS table amounts.
l) Each personal exemption of $3,650 begins to be phased out for those filing joint returns whose AGI exceeds $250,200. For single taxpayers the threshold is $166,800.
m) Itemized deductions are reduced by 3% of adjusted gross income over $166,800. Regardless, 20% of your itemized deductions would always be deductible.
n) The standard business mileage rate was revised to 55 cents per mile for the year. Charity mileage remains at 14 cents per mile. Medical and moving mileage was changed to 24 cents per mile for the year.
o) There are increases to the Earned Income Credit for low income workers with dependent children who meet specific criteria. The maximum credit for those with one qualified child is $3,043, with two qualified children is $5,028 and with more than two it is $5,657. In addition, there is a maximum credit of $457 extended to include low income workers ages 25-65 with no qualifying children.
p) The "Kiddie Tax" on unearned income (interest, dividends, etc...) includes those who are 18 on the last day of the year or are a full time student from age 19-23. Dependent children must file a return if this type of unearned income is over $950. If unearned income exceeds $1,900, the excess is taxed at the parent's rate.
STATE OF MICHIGAN
The State income tax rate remains at 4.35% for 2009. The personal exemption allowance was increased to $3,600. In addition, there is a special $600 exemption for each child younger than 19 years of age on December 31, 2009 claimed on your return.
For 2009, 2010 and 2011, homeowners are allowed a refundable credit for qualified home improvements or energy efficient appliances. The credit is based on !0% of the purchase price up to $150 for a joint return with an AGI of $75,000 or less or up to $75 for a single return with an AGI of $37,500 or less.
For your 2009 State return, the TAXABLE VALUE of your personal residence needs to be displayed on your Homestead Property Tax Credit form. The property tax amount must be from your 2009 tax bills regardless of when paid, exclusive of any special assessments. Transmitting your return without this information, would only delay your refund.
The interest and dividend subtraction for senior citizens not taking a pension deduction is $10,058 for a single person and $20,115 for a joint return.
If you purchased a Michigan Education Trust (MET) contract during 2009, you may deduct the total contract price(including processing fee). Contibutions made to the Michigan Education Savings Program (MESP) on or before December 31, 2009 are deductible not to exceed $5,000 for single filers or $10,000 for joint filers.
We look forward to seeing and/or hearing from you soon! Thank you for the opportunity to serve you.
Sincerely,
Harvey Accounting Service, Inc.
MARRIED FILING JOINTLY
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