Major Income Tax Changes for 2009 Returns

Here's a list of 2009 tax changes, especially those that might affect returns for older taxpayers.

By + More

With the U.S. Senate unable to agree on much of anything these days, you'd hope that one possible benefit of such gridlock would be to leave U.S. tax rules unchanged. No such luck. As seems true every year, the tax rules we struggled to understand last year have been joined by new and equally inscrutable changes that can affect 2009 tax returns.

[See Best Affordable Places to Retire.] If there is any good news here, it's that a raft of free tax services and advice is available. Go to the IRS web site to see links to free filing help. AARP also has an online guide to locate free one-on-one counseling advice through its Tax-Aide program. It almost makes you forget that you still have to pay taxes.

I'd willingly junk the whole deal for a set of consumption-based taxes. Imagine a world with no tax withholding, tax forms, tax returns, or tax accountants. Government revenues would be collected when you bought things, with different rates for necessities versus luxuries. Prices of goods would rise sharply, of course, and your eyes would bug out when you realized exactly how big government's piece of the pie actually has become. But this transparency would be healthy for society, and just think of all the billions of hours and dollars that we'd save.

Vendors already collect sales taxes, so the technology is in place to use the same mechanisms for a consumption tax. And if you're frugal and save money? Well, then, you pay less tax. This also could be a very, very green program. If you want to discourage wasteful energy consumption, just slap a higher tax on fuel-hogging uses. Just imagine a tax system that sent accurate messages to consumers about the true environmental impact of their purchase decisions. Of course, imagining is as close as we'll get.

In the real world, most tax returns are due April 15. Here are the major 2009 tax changes likely to affect older taxpayers, culled from the IRS, H&R Block and other leading tax preparers, the Intuit TurboTax software folks, and other expert sources. The core list is courtesy of CCH. The company uses only its initials today but was known in its past life as Commerce Clearing House, and has long been a major publisher of tax guides. To see details on these changes, use the IRS guides to its main income tax forms.

[See Best Places to Retire.]

Haiti. For starters, remember that some 2010 charitable contributions to Haitian relief efforts still can be deducted from 2009 taxes. Contributions made after Jan. 11 and before March 1 qualify.

Making Work Pay. Wage earners get a Making Work Pay refundable tax credit for the 2009 and 2010 tax years equal to 6.2 percent of taxable wages, to a maximum of $400 for single filers or $800 for joint filers. The credit begins to phase out at adjusted gross incomes (AGI) of $75,000 for single filers and $150,000 for joint filers; it decreases to zero when AGI hits $95,000 for single filers, $190,000 for joint filers.

AMT. A temporary alternative minimum tax (AMT) patch for 2009 returns sets the AMT exemption at $46,700 for single filers, $70,950 for joint filers.

Home Buyers. The maximum first-time home buyer 10-percent credit amount has been increased to $8,000 and the requirement that the credit be repaid has been removed. For purchases after November 6, 2009, the price of homes is capped at $800,000; income phaseouts have been raised to $225,000-$245,000 for joint filers, and $125,000-$145,000 for others. There is a maximum $6,500 credit available for qualifying “existing” homeowners purchasing a new principal residence.

Vehicle Buyers. Buyers of a new car, motorcycle, light truck or mobile home on or after February 17, 2009 and before January 1, 2010 get a deduction for sales tax attributable to the first $49,500 of the purchase price. The deduction phases out with modified AGI of $125,000-$135,000 for single filers, and $250,000-$260,000 for joint filers.

Mass Transit. Recipients of employer-provided mass transit or van pools benefits get an increased tax exclusion, to $250 per month, starting March 2009.

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

COBRA. Jobless individuals paying for COBRA insurance who were involuntarily terminated between Sept. 1, 2008, and Dec. 31, 2009, may receive a federal subsidy of 65 percent of monthly COBRA premiums for nine months. Employers should notify you if you are eligible. This subsidy would be extended under President Obama's proposed budget.

Energy. Dollar limitations on credits for certain small wind, solar, and geothermal residential installations have been removed. Credits for improvements to energy-efficient existing homes have been extended through 2010 and uniformly set at 30 percent; item-by-item dollar caps have been eliminated and replaced by an overall $1,500 cap. The credit for electricity produced from renewable sources, such as biomass, solar, and wind has been extended through 2012 for wind power and 2013 for other types.

Tax Basics. Here's a short list of the annual changes in some existing tax basics, provided by TurboTax:

Tax Brackets. Indexed for inflation, the 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent tax brackets all kick in at more than 4 percent higher levels of income than in 2008.

Personal Exemptions. For 2009, each personal exemption you can claim is worth $3,650, the same as in 2008.

Higher Standard Deductions. For 2009, the standard deduction for married taxpayers filing a joint return is $11,400, up by $450 from 2008. Joint filers can also add in up to $1,000 of property taxes paid. For single filers, the amount is $5,700 in 2009, up by $250 over 2008. Singles can also deduct up to $500 of real estate tax payments. Heads of household can claim $8,350 in 2009, a jump of $350 from 2008.

High-Income Phaseouts. Itemized deductions and personal exemptions are phased out as your income rises. The cutback in itemized deductions occurs once your AGI exceeds $166,800, regardless of your filing status. Your itemized deductions are reduced by 1 percent of the amount by which your AGI exceeds $166,800, but you can never lose more than 80 percent of your itemized deductions. Also, your medical expenses, investment interest deduction, deductible gambling losses and any casualty and theft losses are not subject to the cut. Personal exemptions are reduced by 2 percent for each $2,500 of AGI exceeding $250,200 for married taxpayers filing jointly, $208,500 for heads of households, and $166,800 for singles, but the reduction cannot exceed $1,217 per exemption.

Standard Mileage Rates. The 2009 rate for business use of your vehicle is 55 cents a mile. The 2009 rate for use of your vehicle to get medical care or to move is 24 cents a mile, and for charitable purposes it's 14 cents a mile.

Capital Gains Tax Rates. The tax rate on capital gains from the sale of assets held longer than one year remains at zero for people in the 10 percent or 15 percent tax brackets. The 15 percent maximum tax rate on long-term capital gains for taxpayers in higher brackets also remains the same. Rates are scheduled to increase in 2011.

Dividend Tax Rates. Similarly, the special 5 percent maximum rate on dividends of taxpayers in the 10 percent and 15 percent tax brackets remains at zero percent through 2010. Rates are scheduled to increase in 2011.

Retirement Account Changes. Here are some more tips from TurboTax. Also, don't forget that the government has waived 2009 minimum annual withdrawal rules on IRAs and other tax-advantaged retirement accounts.

Direct Donations of IRAs to Charity. Unless Congress acts to extend it, 2009 is the last year that IRA owners age 70½ and older can donate up to $100,000 of their IRAs to charity without having to report the withdrawal as income and deduct the donation as a charitable contribution. Deductions will not be limited by the AGI cap on charitable contributions or the itemized deduction phaseout. Keeping IRA distributions out of adjustable gross income in the first place can also have other benefits.

Higher Income Limits for Deductible IRAs and for Roth IRAs. If you are covered by a retirement plan at work, you can take a full IRA deduction in 2009 if your modified AGI is less than $89,000 (married filing jointly) or $55,000 (single or head of household). A partial deduction is allowed until your AGI reaches $109,000 if you are married filing jointly, or $75,000 if you are single or a head of household. Also, the opportunity to contribute to a Roth IRA is now phased out as your modified AGI rises between $166,000 and $176,000 if you are married filing jointly, or $105,000 to $120,000 if you are single or a head of household. In 2010, however, the income limits are dropped for Roth conversations; many popular personal finance websites have Roth IRA conversion guides and tools.

Contribution Limit for 401(k) Plans. The maximum employee contribution rises to $16,500 in 2009 from $15,500 for 401(k) and similar workplace retirement plans, including 403(b)s and the federal Thrift Savings Plan. Workers age 50 and older in 2009 can put in an additional $5,500, making their maximum $22,000. These limits remain the same in 2010.

[See 10 Money Tips for 2010.]