Benefit from New Tax Credits Now

Don’t wait for next year’s refund. Change your withholding to boost your pay now.

There are several new tax credits for 2009, and if you can take advantage of them, you’ll lower your tax bill. But why wait until next spring to collect a tax refund? If you adjust your withholding for the last paychecks you receive in 2009, you can start enjoying a bigger paycheck right away. The same strategy applies if your personal situation has changed this year -- by getting married, for example, or having a baby. You can adjust your withholding by increasing or decreasing the number of allowances you claim on Form W-4. The more allowances claimed, the lower the tax withholding from each paycheck.

Say you bought a home this year. Tax-deductible expenses, such as mortgage interest and property taxes, will boost your deductions and your withholding. Or maybe you’re an older homeowner who has paid off your mortgage but will benefit from the extra standard deduction available to homeowners this year who don’t itemize. It’s worth up to $500 for individuals and up to $1,000 for married couples in 2009. Consider adjusting your tax withholding now to account for these added tax breaks by filing a new W-4 with your employer to make sure the right amount of taxes are being withheld from your paycheck.

However, if you qualify for the new tax credit for first-time home buyers, worth up to $8,000, or an even newer credit available to longtime homeowners who buy a new home on or after November 7, 2009, worth $6,500 (see FAQs on the Home Buyer's Credits), don’t bother adjusting your withholding for 2009. There’s an even faster way to get your money: A special provision allows you to amend your 2008 tax return (even if you bought the house in 2009) and get a refund in a matter of weeks.

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If you, your spouse or one or more dependent children are eligible for the newly expanded American Opportunity tax credit, which provides $2,500 per student to offset tuition and other qualified costs during the first four years of college, consider adjusting your withholding now. Or if you got married, had a baby or adopted a child in 2009, you’re entitled to a personal exemption worth $3,650 for each member of your expanded family.

Finally, if you bought a new car between February 17 and December 31, 2009, you may be able to deduct the state and local sales tax you paid on any vehicle costing up to $49,500, whether you itemize your deductions or not. The income eligibility limits are generous—up to $135,000 for individuals and $260,000 for married couples filing jointly. Depending on how much you paid in sales taxes, it might be enough to warrant adjusting your withholding.

Rather than sharpening your pencil and tackling the worksheets that accompany the W-4 instructions, take the easy way out: We havean an online calculator that’s quick and simple to use.

Mary Beth Franklin
Former Senior Editor, Kiplinger's Personal Finance