6 Ways to Get a Bigger Tax Refund
If You Bought a House
Take advantage of the homebuyer tax credit, which offers up to $8,000 for first-time buyers. To get this credit, the purchase must have occurred between January 1, 2009, and June 30, 2010 (with a signed contract by April 30). Repeat homeowners can get a credit of up to $6,500. (The IRS defines a repeat homeowner as someone who has owned and lived in the same residence for at least five consecutive years out of the past eight and is buying a new home.) The credit for repeat owners starts phasing out for single taxpayers making a modified adjusted gross income of more than $125,000 and married taxpayers making $225,000. If you're married, both of you must have an eligible home ownership history. Since the income phaseouts are different for first-time home buyers depending on when you bought, be sure to check out federalhousingtaxcredit.com for more info.
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If You Bought a Car
You can deduct state or local sales and excise taxes paid on new cars or small trucks — on up to $49,500 of the purchase price. And if you bought two, you get to take the deduction twice. The new wheels must have been purchased between February 17 and December 31, 2009. If your state doesn't charge a sales tax, you can take a deduction for other taxes or fees. This starts phasing out with an income of $125,000 to $135,000 for single taxpayers and $250,000 to $260,000 for joint filers. Use IRS Publication 919, "How Do I Adjust My Withholding?" to estimate the deduction.
If You Made Your Home Energy Efficient
If you made environmental improvements — energy-efficient windows, doors, insulation, heating and air conditioning systems — the government wants to offset the cost. Get a tax credit for 30 percent (up to $1,500 for most enhancements, although there's no upper limit for solar panels or solar water heaters). And while a new Energy Star fridge doesn't qualify for 2009, if you buy an energy-efficient appliance in 2010, your state may offer a rebate. Details vary by state, so ask your state's energy office for more info.
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If You Paid for College
The Hope credit — money for tuition and related expenses — can now be claimed for four years of college instead of just the first two, including the cost of course materials. The newly named American Opportunity tax credit lets you claim up to $2,500 per student, but it starts phasing out with an income of $80,000 for singles and $160,000 for marrieds. Also, don't forget to withhold the interest you're paying on student loans, although that deduction starts to disappear at $60,000 for singles and $120,000 for marrieds. Generally, if you paid more than $600 in interest to a financial institution, you'll get a 1098-E form as documentation. If you didn't, call the company servicing your loan and ask how much interest you paid in 2009.
If You Collected Unemployment
While $2,400 of unemployment benefits is tax-free, everything beyond that amount is taxed. If you collected more than $2,400 and didn't pay taxes, you may owe money. Furthermore, if you were actively looking for a job in 2009, your search expenses — including travel, resume costs, and outplacement agency fees — are deductible as long as you were trying to find employment in your current occupation. This doesn't apply if you're a first-time job seeker, if you're trying to change fields, or if there's been a substantial gap since you last worked. (The IRS would not define how long was too long.)
If You Experienced a Serious Pay Cut
Last spring the Making Work Pay credit reduced taxes for single taxpayers by up to $400 and married couples by up to $800. (Okay, so not a huge break, but still worth investigation.) The credit started phasing out with an income of $75,000 for singles and $150,000 for joint filers. If you didn't initially qualify but your income took a dive after the credit went into effect, you may pay less in taxes retroactively (or get a bigger refund) if you ended up under the income cap for the year. Fill out a Schedule M to take the credit. If your income really plummeted, you may be newly eligible for the Earned Income Tax Credit, which will net you up to $5,657 back, depending on how many children you have. Income limits vary by family situation, so search for "EITC" on irs.gov for details.
The Real Deal on Roth
Starting in 2010 everyone has the option of converting traditional IRA accounts to Roths. So what's so great about a Roth? Since you pay taxes on the income before you deposit it, you can take it out in retirement tax-free. If you're thinking about converting, just make sure you have enough money on hand to pay the taxes you'll owe. If you'll have to dip into the IRA balance to pay them, experts say don't convert. Instead, consider opening a new Roth account; you're eligible if you're single with a modified adjusted gross income of $120,000 or less in 2009, or married making $176,000 or less. (If you deposit money before April 15, 2010, you can count that contribution toward your $5,000 limit in 2009 and deposit an additional $5,000 for 2010.)
Q. What's the biggest tax mistake?
A. Not e-filing.
Nearly a third of people still send in paper tax returns. Not only is it tedious to do your taxes by hand, but you're also more likely to screw up. "When you file a paper return, the error rate is about 20 percent," says Nancy Mathis, spokesperson for the IRS. "When you e-file, it drops to less than 1 percent." Why? Among other things, the program takes care of the math and also prompts you to sign electronically. Plus, you can get your refund within 10 days using direct deposit, compared with 4 to 6 weeks when filing by paper and requesting a check. If you make $57,000 or less, use the IRS's Free File program (irs.gov/freefile). Otherwise, taxact.com lets you file federal returns for free. (It's $15 for state returns.)
Originally published in the April 1, 2010, issue of Family Circle magazine.