Last-Minute Tax Saving Tips
Make the most of changes designed to give you a break on your 2008 tax bill.
By Mary Beth Franklin, Senior Editor
From Kiplinger's Personal Finance magazine, April 2009
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In this rocky economy, a tax refund can provide welcome relief. Congress approved more than 500 changes to the tax code in 2008 in response to the housing collapse, stock-market implosion and several natural disasters. And the passage of a new economic-stimulus package means that more breaks are on the way.
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Niki Roberts, a graphic designer in Seattle, is one beneficiary of the tax-relief measures. Roberts, 35, thought that as a single woman she would never be able to afford to buy a home. But as housing prices continued to plummet, she decided to take the plunge. "I wanted to take advantage of this great opportunity," she says. Last summer, Roberts bought a two-bedroom, ranch-style house, complete with a fenced-in yard for her dog, Maggie. Now she's able to cash in on a slew of tax breaks -- including a new $7,500 credit for first-time home buyers, as well as deductions for real estate taxes, mortgage interest and private mortgage insurance -- that will result in a juicy refund check this spring.
Home Sweet Tax Break
The new tax credit for first-time home buyers is actually a tax-free loan that must be paid back to the government over 15 years -- starting two years after the year the credit is claimed. If you sell the home before you finish paying back the loan, the balance is due in full in the year of the sale. Here's how it works: You can claim a tax credit equal to 10% of the purchase price -- up to $7,500 -- if you bought a principal residence after April 8, 2008. Because a tax credit reduces your tax bill dollar for dollar, it is more valuable than a deduction, which reduces the amount of your income that is taxed.
Vacation homes and rental properties are not eligible, and you have to meet income requirements. For single taxpayers, the credit decreases as modified adjusted gross income rises above $75,000, and it disappears altogether if you earn more than $95,000. For married couples, the credit starts to decline when your modified adjusted gross income reaches $150,000, and disappears after it tops $170,000.
If you buy a home between January 1 and November 30, 2009, you can claim the first-time home-buyer credit on your 2008 or 2009 return. (The stimulus package raised the credit to $8,000 and eliminated the payback provisions for homes purchased in 2009 as long as you remain in the house for at least three years.) Use Form 1040X to amend your tax return if you have already filed or Form 4868 to delay your filing deadline until October 15. (An extension delays the deadline for filing forms but not for any payment you owe.)
Homeowners who don't itemize deductions -- such as retirees who no longer have a mortgage and new owners who buy late in the year -- also get a new break for 2008: an extra standard deduction to offset real estate taxes. Individuals can claim up to $500, and married couples up to $1,000. That's on top of the normal standard deduction of $5,450 for individuals, $8,000 for heads of household and $10,900 for joint filers.
Some homeowners affected by the foreclosure fiasco also qualify for relief. Normally, if you sell your home for less than you owe on the mortgage in a lender-approved transaction known as a short sale, or if your debt is wiped out through a foreclosure and sub-sequent sale, the amount that's forgiven is considered taxable income. But in 2007 Congress approved legislation that excludes up to $2 million of canceled debt if it is secured by a principal residence. The tax relief does not apply to vacation homes and other second homes, nor to cash-out refinancing that went toward paying for purchases other than a home. Last year, Congress extended the temporary debt-cancellation relief through 2012. File Form 982 to claim it.
Reader Comments (7)
Posted by: peter at 03/11/2009 10:38:57 AM
Hello, I need Help and a right answer please. Is Private Mortgage Insurance (PMI) tax deductible when filing my 2008 tax return? I know a law was passed to allow PMI to be deductible, but only if the PMI contract was signed in 2007 and 2007 only. Knowing this fact , was that law changed? How come only folks with PMI contacts in 2007 benefit? What about folks with Contract of 2006 and prior or Contract of 2008 and after? Here's my situation... I bought a home in September 2006 and I'm still paying PMI on it. Is that PMI tax deductible when I'm filing my 2008 tax return?
Posted by: Mary Beth Franklin at 03/12/2009 08:27:16 AM
Peter, hi, Mary Beth Franklin here, author of this article. To answer your question, unfortunately, you are not eligible to deduct the private mortgage insurance you pay on the house you purchased in 2006. Although Congress did extend the deduction for PMI, it only applies to homes purchased from 2007 to 2010.
Posted by: terri at 03/25/2009 05:27:46 PM
hello, Mary Beth, I hear that there is a limit as to the PMI tax deduction based on your income, is that true? And if we are indeed over the limit is it not worth trying to get anything back for PMI? Thanks!
Posted by: Mary Beth Franklin at 03/26/2009 08:18:03 AM
Mary Beth Franklin here, author of this article. Yes, Terri, there are income limits. If you itemize deductions, you may deduct premiums paid for mortgage insurance provided by the Department of Veterans Affairs (VA), the Federal Housing Administration (FHA), the Rural Housing Service (Rural Housing), or private mortgage insurers in connection with a mortgage for the purchase of your main home. The amount you may deduct is limited if your adjusted gross income is more than $100,000 ($50,000 if married filing separately). No deduction is allowed if your adjusted gross income is more than $109,000 ($54,500 if married filing separately). See the instructions and worksheet for Schedule A, Line 13, to figure your deduction. Hope this helps.
Posted by: Mary at 03/28/2009 09:09:16 PM
My parents are 78 and 81 years old and have a traditional IRA in a CD. Should they report the interest they earn on the CD to the IRS? I know you do not report it when you are younger, but what about now? Thank you!
Posted by: Mary Beth Franklin at 04/07/2009 08:08:05 AM
Dear Mary, this Mary Beth Franklin, author of this article. Earnings inside an IRA are not taxed, so there is no need for your parents to report the interest on their CD. However, all withdrawals from IRAs are taxed at their ordinary tax rates. Normally at their age they would be required to take minimum withdrawals from their IRAs each year. But Congress suspended the Required Minimum Distributions rules for 2009 so retirees wouldn't be forced to tap their savings that may have been ravaged by stock market losses. Hope this helps.
Posted by: marvin Kinderknecht at 05/22/2009 02:16:22 PM
First of all, thank you for showing me how to pull up the page on "Tax-Tips". I am still confused about the #1,200 tax credit if your income was less in 2008. My income was less because I did not work as much in my part time job. All help is appreciated by us "old timers."