Do you have any students in your family, or are you a student yourself? If so, then the American Opportunity Tax Credit may help you decrease your tax obligations. Like the old Hope Credit, you can claim this new tax credit for tuition and certain fees you pay for higher education either last year. But there have been some changes to the benefit of students and those who claim students.

Below is a list of the new changes for the American Opportunity tax credit.

Higher Amount You can Claim

  • The new American Opportunity tax credit limit is $2,500.

New Definition for Tuition and Qualified Expenses

  • Tuition is still covered for the American Opportunity tax credit, but now course materials are also covered, which include books, supplies and equipment needed for a course of study whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance.

Refundable Tax Credit

  • Unlike the Hope Credit, you can now get up to $1,000 of the tax credit refunded to you by Uncle Sam or 40% of it; this will make a difference to lower-income taxpayers who owe smaller amounts of taxes.

Help for Middle and Higher Income Earners

  • Phaseout begins at $80,000 for single filers, or $160,000 for married joint filers.
  • Full credit is allowed to help offset the Alternative Minimum Tax.

Years Three and Four of the Post-Secondary College Years can be Claimed

  • The American Opportunity tax credit can be claimed for 4 years of post-secondary education, versus the first two years of the post-secondary education under the Hope Credit.

In order to claim the American Opportunity tax credit, you will need to fill out form 8863 and attach it to Form 1040 or 1040A.

Please note, you cannot claim both the American opportunity tax credit and the tuition and fees deduction in the same year for the same student. To figure out which tuition tax benefit to take, review Tuition Deduction vs. Tuition Tax Credit.

I just finished an amended tax return for a client this week. She originally efiled her tax return for free with H&R Block.

However, a few weeks later she received some 1099s reporting interest she had forgotten about. In addition, she didn’t know that she was eligible to claim the American Opportunity education tax credit for her tuition.

When to File an Amended Tax Return

You’ll need to file an amended tax return if you made a mistake and need to fix your income, deductions, or credits.

In this case, my client needed to report the additional interest which affected her income, and she needed to claim the education tax credit.

How to File an Amended Tax Return

Amended tax returns have to be filed using the paper form 1040X, which is different from the original form 1040 you used to file the first time.

You can find the 1040X in all the tax software programs like TurboTax. You need to include a corrected income tax return with the amendment. Here’s how to complete the 1040X:

  • New Numbers. Include the numbers from your original tax return, your new tax return, and the difference between the two.
  • Explanation. You’ll need to explain to the IRS what you are changing and why. For example, if you forgot to claim your new car tax deduction, identify the change clearly and explain why. I also include the amount of the change and keep the explanations very concise.
  • Mail Your Return. Amended tax returns cannot be efiled, so you’ll have to mail them to the IRS. Don’t forget to sign and date your return before you drop it in the mail!

How Long to Keep your Amended Tax Return

After you file your amended tax return, keep your tax return for 3 years or 2 years from when you paid the tax if it’s later. For more information, see how long to keep tax returns.

Amended Tax Return Deadline

The deadline for filing amended tax returns is three years after the original tax deadline on April 15. For example, a 2009 tax return can be amended until April 15, 2013.

The good news… our client will be getting back another $2,000 for filing an amended tax return!

We pay lots of attention to income tax returns around here, but they’re not the only tax returns with a tax deadline on April 15th. If you made a significant gift during 2009, you will also need to file a gift tax return.

Update: The 2016 annual gift tax exclusion is $14,000.

Gift Tax Basics

In 2009 and 2010, the first $13,000 you give to any gift recipient is completely tax-free – this is called the annual exclusion. Spouses can each give $13,000 to a single recipient ($26,000 total), and you can give up to $13,000 to as many people as you want without paying taxes.

In addition, each taxpayer has a “lifetime exemption” of $1,000,000 that applies to all recipients. Once you have used up your $13,000 exclusion in a year, you start drawing against the $1,000,000 exemption. If you eventually gift more than $1,000,000 above your annual exclusion gifts, any additional gifts are subject to gift taxes of as much as 45%.

The following items are not considered gifts:

  • Transfers under the annual exclusion amount ($13,000 in 2009 and 2010)
  • Transfers to a spouse
  • Medical or tuition payments made directly to a medical or educational institution
  • Gifts to a political organization

In addition, contributions to charities are considered gifts but are not subject to taxes – if they are over $13,000, a gift tax return must be filed, but the entire amount can be deducted.

For more on gift taxes, see IRS Publication 950.

Filing a Gift Tax Return

You must file a gift tax return using IRS Form 709 no earlier than January 1 of the year after the gift was made and no later than April 15. Each individual must file their own return – there are no joint returns. You must file a gift return for 2009 if:

  • You made a gift to one person or charity exceeding $13,000
  • You and your spouse made a gift of any amount and decided to make a “split gift election,” meaning the gift is 50% from you and 50% from your spouse
  • You made a gift of a “future interest,” such as the right to use land in the future or withdraw money from a trust in a certain number of years. Future interest gifts are not eligible for the annual exclusion.

If you cannot meet the deadline for your gift tax return, you can file an extension using Form 4868.

If you have complex gift issues, or are making a large gift for the first time, it’s a good idea to work with an accountant or tax preparer to make sure you cover all your bases. Finally, if you intend to make significant gifts in the future, consider working with a financial planner to create a gifting strategy that will help you minimize gift taxes over time.

Most of us watched as the horrible events unfolded after the earthquake hit Haiti on January 12th, 2010, eventually killing over 217,000 people. Financial aid began pouring into the ravaged country, totaling more than $625 million at the writing of this article. However, much more is going to be needed to bring a country that was already on the brink of poverty back to an acceptable, stable state.

The U.S. government has extended the deadline for Haitian donations deductible on your 2009 tax returns to February 28, 2010 through the Haiti Assistance Income Tax Incentive Act, signed by President Obama on January 22, 2010. Here’s some information on where to donate and how to claim your tax deduction:

Donation Resources

Donations must be monetary in order to take a tax deduction, and also must be given to a U.S. charity for specific use to the Haitian disaster relief.

A fantastic list of resources, including a description of how your donations will be used, has been compiled by CNN. Each of these charities has been highly rated by Charity Navigator, a website that rates charities based on two broad areas of financial health: their organizational efficiency and their organizational capacity.

Necessary Documentation for Haiti Tax Deduction

You must keep documentation showing that you made this donation (you do not need to submit this documentation if you e-file, but keep it on file in case of an audit). The documentation could be a bank statement, a cell phone bill (if you donate through text messaging), a thank you letter from the charity, a credit card statement, etc. Make sure it includes the name of the charity you donated to, the amount that you donated, and the date of the contribution. For donations of $250 or more, it is required that you have a record from the charity as proof.

How to Claim Haiti Tax Deduction

The deduction is available to those who itemize. Deduct your donation on Schedule A of your 1040 form under the “Gifts to Charity” section, Line 16 (‘Gifts by cash or check’). See instructions on page A-8 for more information.

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!

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.

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.

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.

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. 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!

Both 2008 and 2009 have been hard years for charities, at the same time that more and more individuals are seeking charitable help for the first time. Let’s face it; even those of us with jobs have found ourselves scrimping more, perhaps running out of money at the end of the month, or cutting back on luxury items that used to be a mainstay in our households. Maybe this year there has been a salary freeze at your job, or you will not be receiving a bonus that you count on to balance your excel sheets (think Clark Griswald when he found out his boss had suspended Christmas bonuses and goes crazy in National Lampoon’s Christmas Vacation).

Basically, there are two reasons to give to charities: the first is because you would like a tax break. Why give Uncle Sam money when you could instead give some of that money to a charity that supports or helps a cause of your choice? The second is because you genuinely want to help out a cause. Either way will yield you tax savings, and help the growing deficit charities are facing. Here is some information to help you navigate the process.

Calculate your Tax Savings for Extra Motivation

Figuring out your tax savings is simple. Check out this chart to find out what your income tax bracket is for 2009. Each dollar that you contribute (either in cash or in market value of goods donated) will yield you a tax savings of your income tax bracket. For example, if you are in the 25% income tax bracket, then your tax savings is 25% of your contribution amount (for $100, that would be $25 in tax savings).

Timing: Deadline is December 31, 2009

Tax deductions may be made in the tax year that the actual money or goods were donated. So you have until December 31, 2009 to take advantage of tax deductions for this year. If you want to donate money, but do not have it right now, then you can charge that money on your credit card (be responsible; I hope that if you do this it means you have the money next month to pay off your balance in full), and you can still take the donated money as a tax contribution in this year.

Clean Out Your Closets

This is a great cleansing experience. Get out the old, and make room and space for new in your life. Prioritize by choosing what you truly need and use, over what perhaps no longer represents who you are, or was purchased on a consumer binge, or no longer fits (even though you wish it would!) Clean out your closets, your children’s closets, your garage, etc. Make sure whatever you donate is in good or excellent condition, otherwise, the IRS does not allow you to take a tax deduction (and other families or organizations will most likely not be able to use the item).

Choose a Charity

Is there a particular cause you are interested in, or that has some meaning to you? It is best to research organizations and make sure that they are eligible to receive tax-deductible charitable contributions by doing a search on the IRS website (you do not receive a tax deduction if you donate to a charity without this designation) and also to make sure that most of the donated money is spent on the core mission of the organization. Charity Navigator is a great, free tool to look up charities and find out what their rating and statistics are in terms of efficiency in spending money for their mission and fundraising.

Make the Donation and Get a Receipt

The IRS has become more stringent in recent years about documenting the donations that you make, both monetary donations as well as items donated. For example, if you donate an item that is valued at more than $500, or if the sum of all of your items donated are valued at $500, then you need to submit Form 8283. You will see on the form that any one item donated at a value of over $500 will need an official appraisal. You also need to get a receipt for any items donated, or risk being questioned and owing the IRS money if you have an audit one day.