Monday, January 25, 2010

Tax Breaks for Almost Everyone
by Mary Beth Franklin
Monday, January 25, 2010

You'll find lots of new deductions, credits and expanded eligibility rules when you prepare your 2009 tax return.

There's no denying that 2009 was a challenging year for millions of Americans. But filling out your 2009 tax return could bring some welcome relief in the form of a big refund. There are a slew of new and expanded tax breaks for home buyers and car buyers, college students and their parents, homeowners who installed energy-efficient improvements, and the unemployed. Together, these tax savings are expected to boost average tax refunds above last year's level of about $2,800, says IRS spokeswoman Nancy Mathis. The sooner you file, the sooner you'll get your money back.

Here are highlights of what's new for 2009 tax returns.

Education Credit
More parents and students can use a federal education credit to offset part of the cost of college under the new American Opportunity Credit. The maximum $2,500 credit is available to eligible taxpayers who paid at least $4,000 in qualified college tuition, fees and required course materials, including books, in 2009. The full credit is available to individuals with incomes up to $80,000, phasing out above that level and disappearing completely at $90,000. (For married couples filing jointly, the full credit is available to those with incomes up to $160,000 and disappears above $180,000.) Those income limits are higher than under the existing Hope and Lifetime Learning credits.

If you claim the credit and owe no tax, you may receive a refund of 40% of the credit, up to a maximum of $1,000 for each eligible student. Other education credits are not refundable. The American Opportunity Credit can be applied only to expenses paid during the first four years of college. Graduate students are not eligible for this new credit, but they still qualify for the Lifetime Learning credit, of up to $2,000 per household, or a tuition-and-fees deduction of up to $4,000. (A credit, which reduces your tax bill dollar for dollar, is more valuable than a deduction, which merely reduces the amount of income that is taxed.)

Parents of some college freshmen and sophomores should bypass the new American Opportunity Credit and opt instead for the supercharged Hope Credit available to students in Midwestern seven states affected by 2008's flooding disaster (Arkansas, Illinois, Indiana, Iowa, Missouri, Nebraska, and Wisconsin). The top credit on 2009 returns for qualified students is $3,600.

Home-Energy Credits
If you weatherized your home or bought alternative-energy equipment in 2009, you may qualify for either of two expanded home-energy credits, regardless of your income.

You may claim a credit worth 30% of the cost of eligible home improvements on your principal residence, up to a maximum $1,500. The cost of certain high-efficiency heating and air-conditioning systems, water heaters and stoves used for home heating qualify for the credit, along with labor costs for installing them. The cost of energy-efficient windows, doors, skylights and insulation also count, but installation costs do not. You would have to spend at least $5,000 to qualify for the full $1,500 credit.

A second tax credit is designed to spur investment in alternative-energy equipment, such as solar electric systems, solar water heaters, geothermal heat pumps and wind turbines, in new and existing homes. The credit is worth 30% of the cost, including installation, with no cap on the amount of the credit.

Home Buyer's Credit
If you bought your first home in 2009, you may be able to claim a tax credit worth 10% of the cost of the house, up to a maximum $8,000, subject to income eligibility rules. You are considered a first-time home buyer if you, or you and your spouse, didn't own a principal residence for at least three years before purchasing a house in 2009.

Different income eligibility limits apply depending on when you bought the house. If you purchased it before November 7, 2009, you are eligible for the full first-time home buyer's tax credit if you are single and your income didn't top $75,000 or if you are married and your joint income didn't exceed $150,000. The credit phases out for individuals with incomes up to $95,000 and married couples with joint incomes up to $170,000, disappearing above those income levels.

Income Eligibility Limits

Limits are higher for those who bought homes on or after November 7, 2009. And a new 10% credit, with a maximum of $6,500, is available to longtime homeowners who bought a new principal residence on or after that date. The full home-buyer credits are available to individuals with incomes up to $125,000 and married couples with joint incomes up to $225,000. The credit is phased out for individuals with incomes up to $145,000 and joint filers with incomes up to $245,000 and disappears for those with incomes above those levels.

Taxpayers claiming either credit on their 2009 returns must use the new Form 5405, "First-Time Homebuyer Credit". If you claim the credit, you cannot file your 2009 tax return online; you must print it out and mail it to the IRS. See more details in our FAQ on the home-buyer credits.

New-Vehicle Purchases
If you bought a new car, light truck, motorcycle or motor home on or after February 16, 2009, through the end of the year, you may be able to deduct the state or local sales tax or excise tax you paid on the vehicle on your 2009 tax return. The deduction is limited to the tax you paid on up to $49,500 of the purchase price of the vehicle, but there is no limit on the number of qualifying vehicles.

To qualify for the full deduction, your income can't top $125,000 if you are single or $250,000 if you are married filing jointly. A partial deduction is available for individuals with incomes between $125,000 and $135,000 (and between $250,000 and $260,000 for joint filers). The deduction is available whether or not you itemize your deductions. If you claim the standard deduction, file the new Schedule L ("Standard Deduction for Certain Filers"). If you itemize your deductions, you can claim the deduction for the sales tax on your vehicle purchase on either line 5 or line 7 of Schedule A.

Jobless Benefits
Unemployed workers are allowed to exclude the first $2,400 of unemployment benefits received in 2009.

Copyrighted, Kiplinger Washington Editors, Inc.

Thursday, January 7, 2010

White House put on the defensive on health care
Associated Press Writer
Published: Tuesday, Jan. 5, 2010 - 1:26 pm
Last Modified: Wednesday, Jan. 6, 2010 - 1:20 pm

WASHINGTON -- The White House was put on the defensive Wednesday after President Barack Obama pushed congressional leaders to fast-track health care legislation behind closed doors despite his campaign promises of an open process.

"The president wants to get a bill to his desk as quickly as possible," Press Secretary Robert Gibbs said as reporters questioned him repeatedly about Obama's decision to go along with House and Senate leaders in bypassing the usual negotiations between the two chambers in the interest of speed.

The decision was made in an Oval Office meeting Tuesday evening with House Speaker Nancy Pelosi and House Majority Leader Steny Hoyer. Senate Majority Leader Harry Reid and his No. 2, Sen. Dick Durbin, D-Ill., joined in by phone.

They agreed that rather than setting up a formal conference committee to resolve differences between health bills passed last year by the House and Senate, the House will work off the Senate's version, amend it and send it back to the Senate for final passage, according to a House leadership aide, speaking on condition of anonymity in order to discuss the private meeting.

Obama himself will take a hands-on role, and is convening another meeting with congressional leaders at the White House on Wednesday. Pelosi and four Democratic committee leaders are expected to attend.

Gibbs told reporters Wednesday to "ask the leaders in Congress" about the fast-track approach, even though Obama was involved in making the decision and the closed nature of the proceedings is at odds with a promise he made while campaigning for president. In a January 2008 debate, Obama said that his approach to health care talks would involve "bringing all parties together, and broadcasting those negotiations on C-SPAN so that the American people can see what the choices are."

Republicans have jumped on the contradiction to accuse Obama and Democrats of operating in secret, an assertion Democrats dispute. "There has never been a more open process for any legislation in anyone who serves here's experience," Pelosi declared at a news conference Tuesday.

Asked about Obama's campaign trail promise, Pelosi remarked, without elaboration, "There are a number of things he was for on the campaign trail."

Pelosi spokesman Brendan Daly said Wednesday it was not a slap at the president. "It was a quip," Daly said.

The fast-track process isn't unheard of in Congress but it is unusual. Democrats passed their health care bills by razor-thin margins and with barely any Republican support last year. The quick approach to reconcile the bills will exclude GOP lawmakers and reduce the party's ability to delay or force politically troubling votes in both houses.

Ahead of Wednesday's White House meeting Pelosi summoned her top lieutenants and committee chairmen to search for concessions and trade-offs they can reach with the Senate in order to deliver a bill to Obama in time for the State of the Union speech sometime early next month.

House Democrats are reluctant to abandon elements of their legislation favored by liberals but rejected by Senate moderates, but face doing just that. Reid has no votes to spare in his 60-member caucus so the legislation must be largely tailored along the lines favored by the Senate.

That means no new government insurance plan, which the House wanted but the Senate omitted, and changes to the House's preferred payment scheme. The House wants to raise income taxes on individuals making more than $500,000 and couples over $1 million. The Senate would slap a new tax on high-cost insurance plans. Although the Obama administration supports the Senate's insurance tax as a cost-saver, labor unions, which contribute heavily to Democratic candidates, oppose it.

House Rules Committee Chairman Louise Slaughter, D-N.Y., said that leaders spent Wednesday morning comparing the House and Senate bills, and "concluded as we always do that our bill is so much better."

Nonetheless Slaughter, like others, sounded ready to deal. On the different taxation approaches, "There's a lot of talk about whether there'd be sort of a hybrid between ours and the Senate," she said.

The House may end up accepting the insurance tax if it hits fewer people than the Senate's design now calls for. There also could be common ground on a Senate proposal to raise Medicare payroll taxes.

In place of a new government insurance plan House Democrats plan to insist on stronger affordability measures for the middle and lower classes, and they also favor revoking insurers' antitrust exemption. Obama agreed at Tuesday evening's meeting to help strengthen affordability measures beyond what's in the Senate bill, the aide said.

The bills passed by the House and Senate both would require nearly all Americans to get coverage and would provide subsidies for many who can't afford the cost, but they differ on hundreds of details. Among them are whom to tax, how many people to cover, how to restrict taxpayer funding for abortion and whether illegal immigrants should be allowed to buy coverage in the new markets with their own money.

Also Wednesday California Gov. Arnold Schwarzenegger, who in October praised Obama's efforts toward reforming health care, delivered a stinging indictment of the legislation.

"Health care reform, which started as noble and needed legislation, has become a trough of bribes, deals and loopholes," Schwarzenegger said in his State of the State address in Sacramento, Calif. "You've heard of the bridge to nowhere. This is health care to nowhere."

Schwarzenegger urged California lawmakers to vote against the bill unless they can negotiate a special deal to get more Medicaid money, as did key centrist Sen. Ben Nelson, D-Neb.

Sunday, January 3, 2010

Health bills could expand IRS role
By Phil Galewitz and Christopher Weaver, Kaiser Health News
Internal Revenue Service agents already try to catch tax cheats and moonshiners. Under the proposed health care legislation, they would get another assignment: checking to see whether Americans have health insurance.

The legislation would require most Americans to have health insurance and to prove it on their federal tax returns. Those who don't would pay a penalty to the IRS.

That's one of several key duties the IRS would assume under the bills that have been approved by the House of Representatives and Senate and will be merged by negotiators from both chambers.

The agency also would distribute as much as $140 billion a year in new government subsidies to help small employers and as many as 19 million lower-income people buy coverage.

In addition, the IRS would collect hundreds of billions of dollars in new fees on employers, drug companies and device makers, according to the non-partisan Congressional Budget Office (CBO).

Some critics of the health bill question whether the IRS, which has struggled in recent years with budget problems, staffing shortages and outdated computer systems, will be up to the job of enforcing the mandate and efficiently handling the subsidies.

"It's hard to see how the IRS could take on the huge responsibility it would be given under pending health care legislation without some real glitches, or worse," said Sen. Chuck Grassley of Iowa, the top Republican on the Senate Finance Committee. He voted against the bill, as did every other Republican senator.

The CBO estimated the IRS would need $5 billion to $10 billion in the first decade to cover the costs of its expanded role. The IRS' annual budget is currently $11.5 billion.

Neither the House nor Senate bill includes funding for the IRS, but money could be added by House and Senate negotiators.

The IRS already has trouble meeting its primary duty: collecting taxes. By the IRS's own estimates, it failed to collect about $290 billion in taxes in 2005, the latest year for which data are available.

Pete Sepp, spokesman for the National Taxpayers Union, an IRS watchdog group, says the IRS might be the "logical" agency to enforce the mandate, "but that doesn't mean things will go smoothly."

'Social engineering'

Howard Gleckman of the Urban Institute, an economics and social policy think tank, sees the IRS' proposed new role as a part of a historical pattern. "We are always asking the IRS to do all kinds of social engineering," he said, such as tax credits for new homeowners and renewable-energy companies.

In one of the biggest examples of using the tax code to achieve a social goal, Congress shifted much of its effort to help the poor in the 1990s from direct spending to the Earned Income Tax Credit, an IRS-run program that pays rebates to low-income working people to offset taxes.

In 2005, more than 22 million people claimed the credit, resulting in more than $40 billion in payments, a Treasury Department inspector general found last year. The audit found $11.4 billion in improper payments in 2005 — about 28 cents of every dollar paid out.

Grassley has called the program "rife with fraud and abuse." John Dalrymple, a former IRS deputy commissioner, said the tax-credit program — despite its flaws — demonstrates that the IRS has the experience to handle the new subsidy program.

Under the health care legislation, the IRS would determine who qualifies for the insurance subsidies. Those subsidies would apply to people with incomes up to four times the federal poverty level, which is $43,320 for an individual and $88,200 for a family of four. The government would pay insurance companies to help individuals buy policies on the new exchanges. The exchanges, a central feature in both bills, would be a sort of marketplace where small businesses and individuals who don't get employer-sponsored coverage could shop for health plans.

To meet the mandate, Americans would have to provide proof of insurance coverage with their annual tax returns. The mandate would begin in 2013 under the House bill; 2014 in the Senate bill.

The penalty in the Senate bill for not having coverage would start in 2014 at $95 or 0.5% of an individual's income, whichever is greater. It would rise to $750 or 2% of annual income in 2016, up to the cost of the cheapest health plans. The House bill penalty would be up to 2.5% of an individual's income up to the cost of the average health plan.

Massachusetts as a model

In 2007, Massachusetts became the first state to enact a health insurance mandate and lowered the percentage of uninsured residents from 7% to 4%.

State residents are required to report their health insurance status on a special form they attach to state income tax returns. Insurers provide statements to policyholders confirming coverage and report that data to the state Department of Revenue.

The state tax agency did not get extra staff or money for enforcement and has not had serious difficulties gathering the information, spokesman Robert Bliss said. In 2008, more than 96% of tax filers provided proof of coverage. Only 1.3% of filers, or about 45,000 residents, were assessed a no-coverage penalty of up to $1,068.

The "vast majority" of Massachusetts residents who pay the penalty are self-reported, Bliss said.

Bliss said the fact that the department had 18 months to get ready for the state's insurance mandate was "enormously important" in making sure it was ready to handle the assignment. That bodes well for the IRS, which would have three to four years to get ready under the bills.

Despite concerns over whether IRS will be up to the job in the health bills, Gerard Anderson, health policy professor at Johns Hopkins University, said: "The IRS seems like the only logical enforcement mechanism."

Galewitz and Weaver report for Kaiser Health News, an editorially independent news service and a program of the Kaiser Family Foundation, a non-partisan health care policy research organization. Neither KFF nor KHN is affiliated with Kaiser Permanente.