7 Ways Hard Times Can Cut Your Taxes

There are smart moves to make in home buying, property taxes, estate planning, and more.

By SHARE

The tax code is still not your friend, but it does offer breaks that might ease the sting of hard times.

Buying a home. The economic crisis has spurred Congress to add to the already favorable tax treatment given to homes.

Home buyers who haven't owned a house as their principal residence in the past three years may qualify for a grant to grease the purchase. They can seek a tax rebate of up to $7,500 to help out—even if the rebate exceeds the amount of income tax they pay.

The provision applies to homes bought from April 9, 2008, through June 30, 2009, and phases out when adjusted gross income tops $150,000 on a joint return or $75,000 on a single one.

A big catch: The money has to be repaid over 15 years, but with no interest.

Selling a home. It may seem unfair, but you cannot deduct a loss when selling your residence.

Selling at a profit? As much as $500,000 of any gain on a joint return, or $250,000 on a single one, may be eligible to escape taxation.

Caution: You may want to consult a tax professional familiar with real estate before trying to rent out a home you can't sell. The complexities of accounting for the rent and expenses—and the tax implications on a later sale—can be daunting.

Crying uncle. It's a nasty twist that to most people seems downright wrong, but when you are forgiven part of a debt, the forgiven amount can be treated by the IRS as taxable income you "received."

Congress last year enacted some relief from that provision because of instances in which part of a mortgage debt on a devalued home might be forgiven after renegotiation, foreclosure, or sale.

In most cases, erased home debt no longer results in taxable income.

Not covered: second homes and home-equity loans that weren't used to finance improvements.

Property tax. In a nod to beleaguered homeowners who take the standard deduction rather than itemizing, Congress voted to allow for 2008 and 2009 a special deduction for the property tax they pay. The deduction is for up to $1,000 on a joint return and $500 on a single one. It is in addition to the standard deduction.

But there's no break for renters who say they indirectly pay property tax through their rent, or for mortgage interest.

Boosting take-home pay. Most taxpayers get a refund after filing their tax return. But if your budget is stretched, why not get more in your paycheck throughout the year?

Giving your employer a new W-4 form can reduce the tax withheld so it more closely matches your tax liability. A calculator in the "individuals" section at www.irs.gov can help you figure a revised amount, as can a worksheet with the W-4.

But be prudent; you don't want to be surprised by owing tax when you file your return.

Silver lining, with tarnish. It's hard to call this a "benefit," but a decrease in income can make you eligible for tax breaks you previously couldn't take.

A number of deductions and other provisions are linked to your amount of income. They include ones covering dependent children, college tuition, IRAs, student loan interest, adoption expenses, employee business expenses, and medical care. Also affected is an overall cap on itemized deductions.

If your 2008 income has declined, it may pay to revisit items that were previously limited for you. You might catch a break.

Heir! Heir! Diminished asset values. Low interest rates. Tax bites that may get worse. Estate planners say those factors combine to make this a good time to transfer investments, a family business, or other assets to heirs.

The details can be arcane, but an asset transferred now may get a low calculated value for gift tax yet enjoy future growth outside the benefactor's eventual estate, thus limiting estate tax.