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It's not too late to cut tax liability


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POSTED: Sunday, November 08, 2009

The economic turmoil of the last year has spurred the passage of new tax laws. While there are now more ways to reduce your tax liability, taking full advantage of them is becoming harder.

Traditional planning techniques of making up estimated tax shortfalls with withholding to avoid penalties and to bunch itemized deductions into a single year to get over minimum adjusted gross income floors still apply. But the 2009 stimulus bill provided additional incentives and opportunities to consider as you plan for tax-filing season.

Making work pay credit

The Stimulus Act provided eligible individuals a refundable income tax credit for 2009 and 2010.

The credit for the tax year 2009 is up to a maximum of $400 ($800 for joint filers) and phases out for taxpayers with a modified adjusted gross income beginning at $75,000 ($150,000 for joint filers).

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For recipients of Social Security, Social Security income, railroad retirement and veteran's disability or pension benefits, there is a one-time $250 payment. Please note, however, if you are a recipient of the Making Work Pay credit and also a recipient of the $250 one-time payment, your Making Work Pay credit will be reduced by the $250 payment.

Unemployment benefits

There are two individual relief provisions. From the beginning of 2009, the first $2,400 of the compensation benefit is tax-free. The 2009 act also provides a 65 percent health care premium subsidy of nine months for workers who lost their jobs between September 2008 and Dec. 31, 2009.

This means the taxpayer only has to pay 35 percent of the premium in order to receive continued health insurance coverage for up to nine months.

Education Credit

The HOPE credit has been renamed the “;American Opportunity tax credit”; and has been improved.

First, the maximum credit increased to $2,500 (from $1,800), and it now applies to all four years of college.

Second, the act expands the definition of qualified tuition and related expenses to include course materials.

Third, the act allows 40 percent of the credit to be refundable, increases the modified adjusted gross income level at which the credit is phased out to $80,000 ($160,000 for joint filers), and permits the credit to be claimed against alternative minimum tax liability.

Energy Property Credits

If you have made energy-efficiency improvements to your principal residence, you may be able to take advantage of a one-year extended energy credit. The 2009 act increased the rate to 30 percent from 10 percent.

Examples of energy-saving improvements include installation of insulation, energy-efficient exterior windows and doors, and highly efficient central air conditioners. The dollar limitations on residential energy property expenditures that existed pre-2009 act has been eliminated, and a lifetime limitation of $500 ($200 for windows) also has been eliminated and replaced with a $1,500 cap for 2009 and 2010.

You also might want to look into some other changes regarding the alternative minimum tax and the child tax credit for individuals, and longer net operating loss carry-backs for businesses.

For instance, the alternative minimum tax exemption for individuals was raised, protecting millions of middle-income taxpayers from paying alter-native minimum tax in 2009.

The refundable portion of the child tax credit for 2009 and 2010 also has been greatly increased.

Finally, small-business owners should take note that you can now elect to carry back an applicable 2008 net operating loss three, four or five years, instead of the usual two years.