It's not too late to reduce last year's tax burden

March 09, 2010

University Park, Pa. -- The W-2 and 1040 forms are flying, so it must be income-tax-filing season. A Penn State Extension money-management educator says it's not too late to do something today that can make your 2009 tax filing less "taxing."

Federal tax law permits people who fall within income guidelines to establish and fund an individual retirement account, or IRA, to reduce their taxable income by paying into that account. And Robin Kuleck, Penn State Cooperative Extension director in Elk County, said an often-overlooked tax provision lets you reduce your 2009 tax bill by making a contribution to your retirement fund even after the calendar year has ended.

"With an IRA, you can wait as long as April 15, 2010 and still take that deduction off your 2009 taxes," Kuleck said. "Some people actually calculate their annual contributions by first completing their tax return and 'run their numbers' to determine how much they need to contribute to their IRA based on reducing or eliminating their federal income tax bill."

This year, the Internal Revenue Service has introduced numerous changes to the federal tax code, most of which are intended to boost the national economy and to help people. Because the changes are keyed to individual life-cycle stages, employment statuses, income levels and even household compositions, Kuleck said, the average taxpayer may want to turn to tax-preparation software to figure out which changes apply to them.

"Generally, many of the changes will affect families with children who can still be claimed as dependents (up to age 24 for full-time students)," she said. "It really depends on your personal situation. If you have the usual one or two jobs with one or two W-2s, you probably can prepare your own return. The IRS is encouraging everyone to file their federal taxes electronically if at all possible. In fact, the IRS Web site lists 20 different providers of free online filing for federal returns, many of which will file your state taxes for a fee."

"If you're filing with paper, there are innumerable forms that you'd have to fill out based on your individual circumstances," she said. "Most of the commercial software walks you through a series of questions and fills out the appropriate form for you based on your responses to those questions. The software suggests various expenses you may have incurred that can result in either a deduction to your taxable income or a credit against your tax bill. If you provide your bank information, your refund can be safely in your account within two weeks or less after you've filed."

Kuleck explained that one "new" feature, the American Opportunity Tax Credit, is actually a revision and extension of the Hope credit, which offers credits of up to $2,500 for each full-time college student.

"The Hope credit used to apply just to freshmen and sophomore students, but the IRS is extending it," she said. "This year, the American Opportunity credit is open to a broader range of taxpayers, including those with higher incomes and those who don't owe taxes. So juniors and seniors who thought they weren't able to use the Hope now can get the tax credit. It may reduce their tax liability to zero, and then they may get up to $1,000 per qualifying student back from the IRS."

Other important new wrinkles include:

--Unemployment Compensation: For 2009, the first $2,400 of unemployment compensation received is excludable from gross income. "Normally all unemployment compensation is taxable, but the federal government recognized that people were struggling," Kuleck said. "So, if you were unemployed in 2009, up to $2,400 of your unemployment compensation is tax-free."

--The Making Work Pay Tax Credit is a refundable credit of up to $400 for working individuals and $800 for married couples filing jointly. The credit is calculated at a rate of 6.2 percent of earned income and reported on Schedule M.

--First Time Homebuyer Credit: "Originally, this credit was for folks who purchased a home between Dec. 31, 2008, and Dec. 1, 2009, and was a credit of 10 percent of the purchase price up to a maximum of $8,000," Kuleck explained. "But tax-law changes late last year not only extended the purchase deadline to June 30, 2010, but broadened to include people who have owned and lived in the same home in five of the last eight years and have purchased a home after Nov. 6, 2009.

"The maximum credit for those families is $6,500. This one is a little confusing, since the IRS definition of first-time homebuyer is people who did not own any other main home during the three-year period ending on the date of purchase."

--Standard Deduction vs. Itemized Deduction: Some taxpayers still believe they can "write off" many of their expenses. While it is true that expenses such as property taxes, charitable contributions, unreimbursed medical expenses and mortgage interest can be deducted from filers' taxable income, the total of these expenses may not exceed the standard deduction for many households.

"With mortgage interest rates at historic lows and the unstable economy reducing charitable giving, many households' itemized expenses do not exceed the standard deduction threshold, so it's to their advantage to just take the standard deduction," Kuleck said. For example the standard deduction for a married couple under the age of 65 using the "married filing jointly" status is $11,400. "This year, if you paid at least $500 in real estate taxes, you can add that to your standard deduction even if you don't itemize."

Easy-to-read income tax tips for moderate-income taxpayers are available online at http://extension.psu.edu/spotlight/income-tax/. Web site visitors also will find information about Pennsylvania income taxes as well.

(Media Contacts)

Last Updated March 09, 2010