Running into making work pay tax credit problems? As you probably know, early this year congress enacted the Making Work Pay Credit as part of the stimulus package. The Making Work Pay Credit is valid in 2009 and 2010 and is worth 6.2% of earned income (up to $400) for each qualified individual. Companies were required to recognize the credit by reducing withholding, thus adding a small amount to paychecks, beginning last April. The making work pay tax credit eligibility also includes self-employed individuals.

The mandate to adjust withholding applied to ALL workers regardless of making work pay tax credit eligibility. Unfortunately, that means those workers who were NOT eligible for the credit will have to pay it back at tax time. The result will be a reduction of tax refund, and those who would not receive a refund will owe the IRS money.

Who has to Pay Back the Making Work Pay Tax Credit?

The following people may not qualify for the Making Work Pay credit and have to pay it back at tax time:

• Pensioners: Pension recipients pay taxes using the same withholding tables as workers, but are not eligible for the credit since pension income is not earned income. If your withholding was not adjusted, you will owe back the amount of the credit
• Social Security Recipients: Social Security Recipients (and federal retirees outside the Social Security System) received a $250 check. If you also work part or full time, any Making Work Pay Credit amount received must be reduced by the $250 check.
• Dependents: Dependents are not eligible for the Credit. If you received it in a paycheck but are still claimed by your parents or other taxpayer, you will have to pay back any amount received.
• Those working two jobs: Each individual is only eligible for one credit, but those working two or more jobs saw it added to both paychecks. You will have to pay back any amount received over $400.
• Those outside the income limits: Those who exceed $75,000 ($150,000 for Married Filing Jointly) will have to pay back 2% of the salary amount exceeding the limit. Those who exceed $90,000 ($190,000 for MFJ) will have to pay back the entire credit amount received.

How to Pay Back the Making Work Pay Tax Credit

The Making Work Pay Credit is documented on the new IRS Schedule M. Reporting what you have received will help determine whether you owe money back. If you file your taxes with an accountant, he or she should be aware of the potential issues.

Nonetheless, if you believe you received the credit even though you were not eligible, be sure to highlight the reasons why so that your accountant can file accordingly. TurboTax should ask you whether you received the $250 credit for retirees and recognize whether your withholding reflected the $400 for workers.
If your lack of credit eligibility leads to you owing taxes, you should be exempt from an underpayment penalty. For more information, see this notice from the IRS.

Going Forward

In 2010, the Making Work Pay Credit will continue to be given in the form of adjusted withholding. If you had to pay it back this year or believe that a personal status change will disqualify you from receiving the credit in 2010, you may want to “unadjust” your withholding to negate the effects of the credit.

In 2011, the 2011 Payroll Tax Cut will replace the Making Work Pay Tax Credit.

You can use the IRS withholding calculator to determine an appropriate withholding amount and then revise your W-4 form. This will prevent you from facing this problem come this time next year!

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Take your property tax deduction without itemizing. It’s another deduction you’ll want to claim on your 2009 tax return, as we continue our series on tax deductions. We recently reviewed the new car tax deduction.

Home ownership can have some enticing tax benefits because you can itemize and deduct home expenditures–such as mortgage interest paid throughout the year–and lessen your tax burden. However, what if you do not have enough qualifying expenditures to itemize your deductions? Prior to 2008, there was no extra tax benefit to home ownership without itemizing your deductions.

With the passing of the Housing Assistance Tax Act for 2008, and its extension for the tax year of 2009 through the Economic Rescue Plan/Tax Extender Package that was signed into law on October 3, 2008, you can claim a tax deduction for some of the property tax that you pay, even if you take the standard deduction.

Property Tax Deduction

The additional amount that can be claimed on top of your standard deduction is the lower of these two options:

• The amount of real estate property taxes paid during the year to state and local governments; or
• $500 for single filers and $1,000 for married taxpayers that are filing a joint return

Who Can Claim the Property Tax Deduction

Any homeowner who takes the standard deduction benefits from this tax law. This most likely includes people who are close to paying off their mortgage, or who have paid off their mortgage, and have not paid enough mortgage interest in 2009 to itemize. Also, people who have purchased a home late in 2009 may not have enough items to deduct in order to itemize.

If you bought a new home, the property tax deduction is in addition to any home buyer tax credits you may qualify for.

Where to Deduct on 1040

If you file using TurboTax, the software will help you determine where to claim the property tax deduction.

In 2008, you reported your qualified property tax deduction on line 40 of form 1040, thus lumping it in with your standard deduction. Then on line 39c of 1040, you checked the box that indicates that your standard deduction includes a property tax deduction. 

For the tax year of 2009, you now check box 40b on Form 1040 (or box 24b on Form 1040A) and attach Schedule L. The extra deduction is calculated on lines 7-9 on Schedule L. (Thanks Greg for your comment about this!)

Stay tuned for more topics in our tax deduction series and make sure you aren’t leaving any money on the table at tax time!

Update: This tax deduction expired in 2009, and was not included in the Obama Tax Cuts. Therefore, you cannot claim it on your 2010 taxes.

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Whether you are claiming the tax credit for existing homeowners or the tax credit for first time home buyers, it’s time to get your money!

How to Claim your Home Buyer Tax Credit

The IRS released the updated Form 5405 to claim your tax credit. Complete and attach Form 5405 to your 2009 tax return.

Required Documentation

For your 2009 tax return, you’ll need to include the required documentation:

• Attach a copy of your settlement statement.
• A copy of your retail sales contract for mobile homes.
• A copy of your certificate of occupancy for a newly constructed home.

In addition, for existing home owners, attach a 1098 form, Mortgage Interest Statement, property tax records, or homeowner’s insurance records for 5 consecutive years on your previous home.

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Want to get a tax credit for your new car? If you bought a new vehicle last year, you may be able to take advantage of the following tax credits on your 2009 taxes: deducting the amount of state and local sales and excise tax paid. You can also take further tax deductions if you donated your old car.

Deduct State and Local Sales and Excise Tax Paid

Even if you do not itemize your taxes, you can take advantage of this tax credit if you purchased a new car, light truck, motor home or motorcycle by December 31, 2009, via the American Recovery and Reinvestment Act.

Here are the specific details to determine if you qualify for the tax deduction:

• The tax credit is limited to the state and local sales and excise taxes paid on up to $49,500 of the purchase price.
• Deductions are for qualified new cars, light trucks, motor homes or motorcycles.
• The deduction begins a phase out at $125,000 for individual filers and $250,000 for joint filers.
• Credit applies to vehicles purchased between Feb. 17, 2009 and December 31, 2009.

Additional Considerations

Oddly enough, purchasing new foreign cars will still reap you the same tax credits, as well as purchasing older model cars, so long as you are the first owner. Since there were probably many cars sitting on lots from 2008, I hope you scored a great deal last month.

Also, last year there were dealerships with promotions to give you a free car with a one car purchase (that’s right—buy one get one free on a car!). You would still need to pay fees and taxes, but if you found a deal like this it would be incredible, because it turns out that you can take tax deductions for as many vehicles as you purchased.

In states that do not have a sales tax, you are permitted to deduct other fees to make up for it. You can find additional information from the IRS.

You can claim the tax deduction when you file your income tax return this year. TurboTax will calculate the deduction as part of the questionnaire when you complete your taxes.

Update: This tax deduction expired in 2009, and was not included in the Obama Tax Cuts. Therefore, you cannot claim it on your 2010 taxes.

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While the Cash for Clunkers program helped many people in the market for buying a car optimize their savings, many people were unable to take advantage of this program (like myself!) because their ‘clunker’ or used car had too good of gas mileage to be counted.

Another downfall was the fact that it significantly dropped the number of available used cars for purchase in the US, since vehicles traded in for the program had to be destroyed.

However, if you finally found the perfect new car, here’s how to donate your old car without the need to destroy it.

Donate Your Old Car

What should you do with your old vehicle? Well, if it still drives, but is not good enough to yield a nice trade-in, then consider donating it to a qualifying charity that will use it for driving purposes. Why is that? Well, if the charity uses the vehicle, then you can deduct the vehicle’s fair market value from your taxes.

Your vehicle’s fair market value will most likely be higher than deducting the amount of money the charity makes from selling your vehicle, or scrapping it. Here’s a resource to get you started on finding a charity to donate your car to. Depending on the fair market value of your car, call a representative, and discuss with them about finding a charity that will still drive the vehicle so that you can maximize your tax savings. DonateCarUsa.com is another great resource.

Tax Deduction for Donating Your Car

Please note that you will need to itemize your deductions using Form 1040, Schedule A in order to take advantage of this tax deduction. For more information, check out IRS Publication 526, page 8.

Stay tuned and I’ll be back with information on taking a tax deduction on your new car!

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