Sign in
Become a MarketWatch member today
TaxWatch
Feb. 1, 2010, 10:56 a.m. EST · Recommend (2) · Post:
View all TaxWatch "º
"¹ Previous Column
You may qualify for free tax help, e-file services
First Take "º
Post-Tiger, LeBron is a sports savior
By Andrea Coombes, MarketWatch
SAN FRANCISCO (MarketWatch) -- From the expiring estate tax in 2010 to the various Obama administration proposals, including a bigger child-care tax credit and small-business breaks, there's no shortage of tax-related headlines these days. But none of that is going to help when you do your 2009 taxes.
Sure, most of us are going to rely on either a tax adviser or software to hold our hand through the process, but it's not smart to rely solely on the experts. The professionals get it wrong sometimes, and user error can lead to problems with the software.
At a GOP retreat, President Obama made the case that partisanship and bickering is holding up reform. Courtesy of Fox News.
For instance, taxpayers often race through the questions the software asks up front, making assumptions that may be wrong, said Jackie Perlman, a certified public accountant and analyst with H&R Block's Tax Institute.
"It's really easy to overlook things because you think they just don't apply to you," she said. "I've spoken to people who think you can't get an education benefit unless you itemize."
Wrong. There's an above-the-line deduction of up to $4,000 (or $2,000 if your modified adjusted gross income exceeds $65,000) for tuition and some other college costs, and there's another one for student-loan interest. "Above the line" means you don't have to itemize to take advantage of the perk.
Plus, there are three different education credits -- all of which reduce your tax bill dollar-for-dollar. (Note: Many of these tax breaks phase out at higher income levels, and you can't claim both the tuition deduction and an education credit.)
In addition to the Hope and Lifetime Learning credits, there's the new American Opportunity credit, enacted in the American Recovery and Reinvestment Act of 2009.
The new credit -- similar to the Hope credit but more generous -- offers up to $2,500 per student per year for the first four years of college costs. Under current law, it's available only in 2009 and 2010.
There's also a big bonus for some taxpayers: Up to 40% of the American Opportunity credit is refundable. That means if your tax bill isn't big enough to use the credit, you might get some money back.
Parents who can't take advantage of the credit due to the income phase-out should weigh the benefits of claiming their college student as a dependent -- and the value of their personal exemption for that dependent -- versus letting their student file on his own to take the refundable credit, said Tom McCabe, certified public accountant and director of accounting at Prestige Wealth Accounting Group in Flemington, N.J.
"If the parent is at an income level that they're phased out," McCabe said, "is there an opportunity for the child to file on his or her own?"
The new education credit phases out for filers with modified adjusted gross income of $80,000 to $90,000 for single filers and $160,000 to $180,000 for joint returns.
The Making Work Pay credit, also a result of the American Recovery and Reinvestment Act, brought some extra money to taxpayers' paychecks this past year -- but it may bring surprise come April 15.
The new credit, available in 2009 and 2010, is worth up to $400 for single filers and $800 for married-filing-jointly filers each year, and is doled out via workers' paychecks. (The credit starts phasing out for married-filing-joint filers with modified adjusted gross income of $150,000 and for other filers at $75,000.)
What taxpayers may not realize is they should claim the credit on Schedule M, according to H&R Block's Perlman.
"Most working people saw their withholding reduced. That served to advance the benefit to us, but you still must claim that credit on your return," she said. "If you are a working person and you had earned income you need to complete that schedule."
Also, keep in mind that, because withholding tables are not a precise way of delivering a tax credit to taxpayers with myriad personal and financial situations, some taxpayers may find a smaller-than-expected refund, or even a tax bill, as a result of this credit.
That's because employers, who put the withholding tables in place, don't know everything about their employees. For instance, if both spouses work, a married couple could find that, combined, their lowered withholding amount led to a $1,600 tax break over the course of the year, but they're only entitled to $800.
Similarly, a person with two jobs -- if both employers adjusted withholding to provide $400 over the course of the year, totaling $800 -- may get a smaller-than-usual refund or even owe some money come tax time. See story from 2009 on unexpected tax consequences from Making Work Pay credit.
- LiquidLunch | 9:49 p.m. Jan. 29, 2010
Even after the Tiger Woods fiasco, Madison Avenue isn't ready to write off sports stars -- not yet, anyway.
53 min ago2:11 p.m. Feb. 1, 2010 | Comments: 5
This Week in India
Should you bank on India's banks?
This Week in China
Low follows stimulus high in China
Marsh on Monday
European Union prepares for a bailout
January jinx? Some strong letters agree
Ethics Monitor
Supreme Court empowers corporations
On the Markets
Read Full Article »