Top 10 Tax Tips

Information provided by Kurt Guth of American Tax Service and Matt Taylor of Denison State Bank

1. 401K Contribution Increase.
The limit for 401(k) contribution increased from $15,500 to $16,500.

2. Credit for First-Time Homebuyers.
A law signed by President Obama in November extends the $8,000 first-time homebuyer tax credit to contracts signed by April 30, 2010. It also adds a $6,500 credit for homebuyers who have lived in their current residences for five consecutive years. Income caps for the credit are now $150,000 for singles and $225,000 for joint filers.

3. Claim Up to $1,000 in Real-Estate Taxes.
You can claim Real-Estate taxes up to $1,000 for married couples and $500 for single taxpayers, but you need to show proof of payment.

4. No Limit on Residential Energy Efficient Property Credit.
The Residential Energy Efficient Property Credit has also changed. There is now no limit on costs associated with qualified solar, water heating, and wind property placed in service in 2009. However, the limitation on fuel cell property remains $500 per half kilowatt of capacity.

5. Deduct Sales Tax on New Vehicle Purchase.
You can deduct state and local sales tax on qualified new vehicle purchases up to $49,500 of the price of the vehicle. The vehicle must be a passenger car, truck, or motorcycle with a gross vehicle weight rating of 8,500 pounds or less (motor homes do qualify). You don’t have to itemize to take advantage of this deduction.

6. Refundable Hope Credit.
The Hope credit for college tuition is applicable to four years of college education instead of just two and now covers the cost of books. Some of the credit is refundable – in the past, if you couldn’t use it, you lost it. Discuss this with your tax professional because it could affect which credit is claimed and by whom, parents or the student.

7. Residential Energy Credit is Back.
The Residential Energy Credit is now 30% of the cost of certain windows, doors, insulation materials, and roofs, up to a limit of $1,500. Not all products qualify, so make sure the product will qualify under the rules.

8. $2,400 Tax Free.
The first $2,400 of unemployment benefits you may have received in 2009 is tax-free.

9. Convert IRA and Spread Tax Liability Over 3 Years.
Starting in 2010, taxpayers can convert their Traditional IRA to a Roth IRA and spread the tax liability over three years. No tax paid in 2010, 50% paid in 2011, and the remaining 50% paid in 2012. This will only affect conversions taking place in 2010. If you convert in 2011 you will have to pay the full tax in that year. In addition, the income limit for conversion eligibility was repealed. This is potentially advantageous but it’s also tricky. You should consult your financial planner, not just your tax professional.

10. Get Your Kids Off the Couch and Put Them to Work.
If you are a small business owner, you can employ your children and take advantage of significant tax savings. Children under the age of 18 are not subject to Social Security, Medicare, or Federal Unemployment tax. In addition, they can make up to the Federal Standard Deduction ($5,700 in 2010) and not have to pay Federal Income tax. Instead of actually paying them, you can fund a Roth IRA and take a deduction on your business return for the wages paid. Be sure to abide by all Child Labor and Wage and Hour laws.