Buying a house or a car because you'll get a tax break is like getting married because your cousin's band will play at the reception for free. You need a better reason to make that kind of long-term commitment.
But if you're already house-hunting or shopping for a new car, keep an eye on the calendar. Some valuable tax breaks that could save you money are scheduled to expire soon. Here's a look at the tax breaks, and what you need to do to qualify for them:
- The new car sales deduction. Taxpayers who buy a new car, light truck, motorcycle or motor home before Dec. 31 can deduct sales and excise taxes on purchases of up to $49,500. The deduction, part of the economic stimulus bill enacted this year, phases out for single taxpayers with modified adjusted gross income of more than $125,000 and joint filers with MAGI of more than $250,000.
You don't have to itemize to claim this deduction. Taxpayers who don't itemize can add the sales tax to their standard deduction when they file their 2009 tax return, the IRS says.
The amount you save will depend on your state sales tax rate and the price of your vehicle. For example, if your state imposes a 4% sales tax and your car costs $40,000, the deduction will reduce your adjusted gross income by $1,600, says tax publisher CCH.
- The first-time home buyer's credit. The stimulus bill enacted this year also created an $8,000 tax credit for first-time home buyers. But unless lawmakers extend the credit, it will expire Dec. 1. To qualify, you must close on your home before Dec. 1.
There's still enough time to complete a conventional home purchase, or even the purchase of a bank-owned property, says Diann Patton, consumer spokeswoman for Coldwell Banker Real Estate. However, if you're interested in a home that's being sold through a short sale, you won't make the deadline, Patton says. In a short sale, the lender agrees to accept less than the amount remaining on the mortgage. Because lenders are often slow to approve these transactions, they can take up to six months to complete, Patton says.
Make sure you have all the documents you'll need to get pre-approval for a mortgage, such as tax returns, income verification and bank statements, Patton says.
Unlike a home buyer's tax credit enacted in 2008, this credit doesn't have to be repaid unless you move within three years after the purchase. You may qualify even if this isn't your first home. The law defines "first-time home buyer" as someone who hasn't owned a home in the three years before the purchase. If your spouse has owned a home in the past three years, you're not eligible.
The three-year window applies only to ownership of a primary residence. If you owned rental property during the past three years but didn't live in it, you could still qualify for the credit, Patton says.
Charitable tax break
Another tax break that's scheduled to expire soon benefits retirees who want to contribute to their favorite charities.
If you're 70½ or older, you can take tax-free withdrawals from your IRA as long as the money goes directly to charity. You can't deduct the contribution, but it won't be included in your taxable income for the year. That makes this option attractive for seniors who have paid off their mortgages and don't have enough deductions to itemize.
The maximum you can contribute is $100,000 a year. Unless Congress extends it, this tax break will expire Dec. 31.
In the past, one of the biggest benefits of this provision was that the amount withdrawn from your IRA counted against your required minimum distribution for the year. IRA owners who are 70½ or older are required to withdraw a minimum amount from their IRAs or 401(k) plans every year, whether they need the money or not. This year, though, that rule doesn't apply. In response to last year's market collapse, Congress waived the withdrawal requirement for 2009.
The waiver makes the charitable rollover provision less attractive for retirees, says Mark Joseph, a financial planner in Reston, Va.
But seniors who have more money in their IRAs than they'll need for living expenses shouldn't rule it out, he says. Making a large charitable contribution this year will reduce the size of your IRA, he notes, resulting in lower required minimum withdrawals in the future.
By Sandra Block, USA TODAY