Tax Credits Worth Pursuing This Year

The very factors that have many consumers worried about affording this year's tax bill could actually work in their favor this tax season.

Taxpayers whose wages were slashed in 2008 -- or worse, who were laid off -- may be eligible for tax credits that weren't within their reach in previous years. In addition, first-time home buyers and parents of children under age 17 may also be able to save a little money on their tax bill thanks to some new credits and thresholds.

“These overlooked credits are relevant in the current economy and could mean the difference in hundreds or even thousands of dollars in your tax refund,” says John Evans, Northeast tax director at BDO Seidman.

Here are four credits that can help boost your refund.

Recovery Rebate Credit
Feel like you got shortchanged last year when the government doled out its Economic Stimulus Act rebate checks? Well, if you didn't qualify for the rebate before or didn't receive the full amount ($600 per taxpayer and $1,200 if married and filing jointly) because your income was too high (or too low), you may now be able to collect.

The rebate checks that were sent out last year were based on information on your 1040 for 2007. This second chance to collect will be based on your 2008 1040. So if your income took a hit last year, it may be worth a shot. You can also qualify for this credit if you had a child in 2008, among other reasons.



First-Time Homeowner Credit
For those who bought a home last year or want to in the months ahead, Uncle Sam has a little present for you. This tax credit, essentially a temporary, no-interest loan, is being offered to those who bought -- or will buy -- a home between April 9, 2008, and June 30, 2009, and who didn't own a home during the three years preceding the purchase.

The maximum amount of the credit equals either 10% of the home’s price or $7,500 ($3,750 if you are married, but filing separately), whichever is less. One hitch: Homeowners will have to repay the credit over 15 years by either owing more in taxes or receiving a smaller refund. So, if you claim the credit on your 2008 tax return, you’ll have to start repaying it when you file your taxes for 2009. (The 2009 tax return will include an extra line for this credit.)

Child Tax Credit
Many parents will be eligible to receive a tax credit of up to $1,000 per child this year as long as that child was under the age of 17 at the end of 2008. (This credit is in addition to the regular $3,500 exemption that you can claim for each dependent.)

The child tax credit begins phasing out for filers whose modified adjusted gross income is above $110,000 if they are married and filing jointly, above $75,000 for single filers, or more than $55,000 for married filing separately. In addition, the child (who can also be the filer’s sibling, stepchild, grandchild, niece or nephew) must have not provided more than half of his or her own support and, in most cases, must have lived with the filer for more than half of 2008.

The one catch: The amount you receive from the child tax credit is partly based on your income so you may not receive the full amount -- or possibly anything. If you don't qualify for any or all of the $1,000 child tax credit you're still in luck. Try applying for the additional child tax credit, which also offers up to $1,000 per qualifying child. (Taxpayers who qualify for parts of both credits can only receive a maximum of $1,000 per eligible child.) Typically, this credit is reserved for low-income taxpayers, but a recent change in the way the IRS computes eligibility for this credit, will allow more middle-income taxpayers to qualify this year, says Eric Smith, a spokesman for the IRS.



Earned Income Tax Credit
This credit is typically geared toward low-income taxpayers, but given the rise in the unemployment rate and wage cuts, more people are likely to qualify for it this year, says Evans. (According to the IRS, one in six taxpayers currently can claim this credit.)

To qualify, families with two or more children must have made less than $41,646 in 2008, and those with one child must have earned less than $36,995. Also, individuals without children who make less than $15,880 are eligible.

The maximum credit for each of these groups is $4,824, $2,917 and $438, respectively.

Taxpayers who qualify to claim this credit on their federal income tax return may also be eligible for a similar credit on their state or local income tax return. Twenty-two states, including New York, Maryland and Iowa, offer residents an earned income tax credit.


Provided by Smartmoney.com

Tax Tips for the Unemployed

As April 15 approaches, those who were out of work in 2008 might have a lot of questions about their tax returns. Here are some answers.

By Jessica Dickler, CNNMoney.com staff writer
Last Updated: January 9, 2009: 3:39 PM ET

NEW YORK (CNNMoney.com) -- Tax season can be a frustrating and confusing time for those with a spotty employment record and little spare cash. But people who were out of work in 2008 will still have to report to Uncle Sam.

Friday's labor report showed that nearly 2.6 million jobs were lost over the course of 2008, the highest yearly job-loss total since 1945. The unemployment rate now stands at 7.2%, a 16-year high, according to the Labor Department.

"More people than ever before may be experiencing, for the first time, unemployment and the tax implications related to that," saidMark Steber, vice president of tax resources at Jackson Hewitt.

For those taxpayers who were unemployed in 2008 and unsure about how to account for a brutal year, here are some answers:

Do I still have to pay tax if I was out of work in 2008?

Probably. The IRS requires anyone who received a W2 from their employer and made at least $8,950 (if you're single and under 65 years old), or made at least $400 if you're self employed, to file a tax return. If you're anticipating a tax refund, you must file - even if you didn't work at all.

But whether you will have a tax liability depends on a variety of factors, Steber said. "Every tax situation is unique, based on the facts and circumstances of the taxpayer."

For example, if you only had unemployment compensation throughout the year, you may owe some tax on the checks you received. A severance package could also give you a tax bill, as could dividends and interest from investment income.

Other factors that weigh in include your tax deductions and other life changes associated with unemployment, like if you downsized your house or picked up supplemental income, Steber said.

Do I have to pay tax on my unemployment checks?

Yes. Unemployment compensation is taxable on federal and most state tax returns.

When applying for unemployment, you can choose whether you want federal and/or state income taxes automatically taken out of your unemployment benefits. If you choose to withhold, federal income taxes are withheld at a 10% rate, while the state rate varies. But since many cash-strapped Americans opt not to withhold - come April they may have to pay up.

So unless you previously elected to have taxes withheld throughout the year from your unemployment checks, a tax bill may be an unwelcome surprise when you file your 2008 return.

What if I took money from my 401(k)?

You may owe taxes if you took money out of a retirement plan or 401(k) to supplement your unemployment checks. That counts as income and is taxable too, said Joseph Perry, the partner in charge of Marcum & Kliegman's tax department. And that might not be all you owe. The taxes are in addition to a 10% penalty on early withdrawals if you're below the age of 59-1/2, he cautioned.

What if I did some supplemental work?

Freelance and project work can be a lifeline for unemployed workers between jobs. "Unemployed tend to become self-employed, that's a natural outgrowth of being unemployed," Steber said.

But if you picked up odd jobs or offered consulting services while unemployed, you're subject to income tax and self-employment tax on that income.

To report that supplemental work, taxpayers must include a Schedule C with their income tax return, which details the income and expenses for the year.

If you continued a project for your old employer or freelanced for someone else, and made more than $600, you will be issued a 1099 and must include that in your income tax return as well. (If you made less than $600, then you will not be issued a 1099 but are still responsible for reporting anything you made as taxable income.)

What if I had to relocate for a job?

If you accepted a new job that required relocating, you may also be able to deduct the moving expenses not reimbursed by your new employer. But there's a catch, the new job site has to be 50 miles further than the old residence was from the old job, according to Tom Ochsenschlager, vice president of taxation for the American Institute of Certified Public Accountants, which basically prevents you from trying to deduct a move within the same metropolitan area.

What if I spent a lot of money on job searches?

Those who were on the job hunt last year may get a gift from Uncle Sam: a slew of tax deductions. In fact, many of the expenses incurred while looking for a job can be deducted, which can result in some serious savings.

By declaring the following itemized deductions, taxpayers may lower the amount of taxable income they have for the year.

For starters, anything you spend on creating, printing and mailing your resume is deductible, as is anything you spend on a career coach or headhunter. Also included are long distance or cell phone charges directly associated with your job search.

Transportation costs such as a bus, taxi, train or plane to an interview is deductible, as is the mileage costs accrued when you drive to interviews and even to the unemployment office. (Between Jan. 1, 2008, and June 30, 2008, taxpayers can claim 50.5 cents per mile, between July 1, 2008 and Dec. 31, 2008, taxpayers can claim 58.5 cents per mile.) That also goes for parking and tolls and meals and lodging if the interview was out of town.

But the buck stops there. You cannot, unfortunately, deduct the value of your time or the cost of a new interview suit, briefcase or new shoes for pounding the pavement.

Of course, taxpayers should keep receipts related to any of these expenses in order to substantiate them when filing and experts recommend consulting a professional tax preparer for help.

First Published: January 9, 2009: 2:43 PM ET