— After a job loss, failed business venture or dwindling investment portfolio, more Americans are likely to qualify for tax breaks for 2008 that they didn't qualify for before. Yet a recent survey by CCH Complete Tax found two out of three taxpayers fear they may overlook tax breaks or make mistakes that could cost them fines or penalties.
Most taxpayers also have a tough time figuring out which breaks are most beneficial, especially considering the host of tax-law changes in the past year. The recent stimulus package also contains several that could impact the tax return you file this year. You need to know which tax breaks can help you lower your 2008 tax bill or get you more money back.
Out of work?
The cost of looking for a job in the same field as the one in which you were recently employed can be claimed as a miscellaneous itemized deduction — even if you haven’t landed a new job yet. So if you’re a salesperson looking for a new job in sales, those related expenses are deductible; if you decide to go into teaching instead, those expenses would not be.
Deductible expenses include transportation costs, lodging, resume services and long-distance phone calls. Add these job-hunting expenses to your total miscellaneous deductions (including tax preparation fees, investment fees, and unreimbursed job expenses from when you were employed). You can only deduct the amount of the total of miscellaneous deductions that exceed 2 percent of your adjusted gross income.
If you’re paying the full cost of your health care since losing your job, health insurance premiums can be included with your medical and dental bills as deductible expenses as long as you itemize.
Even though you may have made too much money to qualify in the past, this year you may be eligible to receive a child tax credit, additional child tax credit or earned income tax credit. Income limits restrictions apply. For the Child Tax Credit, you can claim up to $1,000 per child as long as your adjusted gross income is under $110,000 for a married couple filing jointly or $75,000 if you’re single. A couple making less than $41,646, with two or more kids, can get a credit up to $4,824 with the Earned Income Tax Credit.
Some folks may have missed out on the stimulus payments that went out last year, but if they lost their job in 2008, their income may now allow them to qualify for a full or partial payment, right?
Second shot at stimulus
You may qualify for Recovery Rebate Credit if:
Most of the 119 million taxpayers who received a full economic stimulus payment in 2008 may not be eligible for the new Recovery Rebate Credit. But if your income decreased due to a job loss and you only received a partial benefit or no benefit at all, you may now be eligible. The amount of the credit is up to $1,200 for a married couple or up to $600 for all other filers. Plus, you can get an additional credit for up to $300 for each qualifying child.
Most investors are staring at steep investment losses. There aren’t really any tax breaks available for the losses in your 401(k), but what about in other accounts?
Investors can claim up to $3,000 in capital losses in investment accounts against ordinary income.
Investors who have been burned by a Ponzi scheme, such as in the Bernard Madoff case, can claim much more. Last week, the IRS issued guidelines that allow investors who have been victims of a Ponzi scheme to claim their losses as a “theft loss” rather than a “capital loss” and include on the tax return in the year the scam was discovered not only the net amount invested but the fictitious income reported on prior years’ returns.
Lost your home?
If your mortgage debt is partly or entirely forgiven during tax years 2007-2012, you may be able to claim special tax relief and exclude the debt forgiveness income. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence. The limit is $1 million for a married person filing a separate return.
Bought a new home?
If you bought a house in 2008, you can take credit of $7,500, but you’re required to repay that credit over 15 years. It’s like an interest-free loan. Under the stimulus package, buyers who purchase a home in 2009 have the option of taking a credit for up to $8,000 on their 2008 or 2009 return. That is an actual credit, you don’t have to pay it back. The good news is you can get some money for the home.
Do small business owners have an opportunity to get a bigger bang for deducting some big-ticket items? What tax savings are available to them?
Small business struggling?
Small businesses and self-employed folks can immediately write off up to $250,000 in purchases made for their business (equipment, furniture, computers). It’s called a Section 179 deduction. It’s a great way to reduce your tax burden. But if 2008 was really rough, some self-employed and small business owners may want to depreciate computers and furniture over multiple years. They may wind up faring better down the road by having additional depreciation deductions when business picks back up because you may be offsetting income that’s at a higher tax rate.
You can write off mileage tied to your business. The IRS mileage rate for business travel jumped from 50.5 cents per mile in the first half of the 2008 to 58.5 cents for travel from July 1 to Dec. 31.
Go to www.irs.gov. You can get more tax help for free this year. The IRS has 400 Taxpayer Assistance Centers nationwide — and nonprofits and the AARP operate nearly 12,000 free tax preparation sites nationwide. The IRS and its partner tax prep sites will prepare your tax return for free if you earn $42,000 or less. AARP sites assist Americans 60 and older. The IRS also partners with private-sector tax preparers and offers a Web program called Free File. If you make $56,000 or less, you can use free software and file electronically for free. If you feel really comfortable doing your tax return and don't need the help of the Q&A software format, the IRS also has new fillable forms available — there’s no income limit and you can file the forms electronically from the IRS Web site for free.
Can’t pay full tax bill now?
The IRS realizes many people are in financial distress and there may be a lot of people who can’t pay their full tax bill by April 15. There are options, such as payment plans. The worst thing to do is to not file a tax return because you can’t pay your tax bill. That’ll just compound your problems. The penalty fee is far worse for late filing than for late payment. If you can’t make full payment by April 15, you need to contact the IRS and they can work out extensions or payment plans.