Income Tax Updates – The Taxman Giveth…and Taketh

The federal government, through tax and monetary policies, is continuing to try to put more money in the hands of consumers.  As a continuation of its 2008 and 2009 Stimulus legislation, Washington has enacted more income tax credits and rebates for individuals.  This is in stark contrast to New York State’s recent income tax changes, which are mainly centered on increasing income tax rates and raising revenue in order to close a huge state budget deficit.

Federal Tax Changes

Virtually all of the federal tax changes this year are beneficial to the taxpayers.  In light of the steep recession plaguing the country and the associated high unemployment, the feds have responded by making the first $2,400 of unemployment compensation tax-free for the year 2009.  Amounts received over $2,400 are still taxable.

With housing prices and sales still slumping, Congress has voted to extend the First-Time Homebuyer tax credit until April 30, 2010, and has raised the maximum credit to $8,000.  It has also expanded this credit to include taxpayers who have previously owned a principal residence.  This revised credit is expected to provide a great stimulus to the housing industry and generate plenty of tax refunds.  This credit, like last year’s version, can be taken on either the 2009 or 2010 tax return, if the home is purchased in 2010.

Several other federal tax provisions this year are advantageous to the taxpayer.  You may now be able to deduct sales tax paid on a new motor vehicle, whether you itemize your deductions or not.  In addition, if you received a voucher or rebate under the “Cash for Clunkers” program, that amount is not taxable on your income tax return.  There are also generous tax credits for any qualifying energy-saving improvements to your residence.

New York State Tax Changes

New York State is facing record-setting budget deficits in 2010, after struggling to close a multi-billion dollar deficit in 2009.  The State legislature and the governor have chosen to attack these deficits by both cutting spending and by raising taxes!  Beginning in 2009, the state has established two new tax brackets.  The previous maximum rate was 6.85% for individuals.  Now there is a new marginal rate of 7.85% for certain upper-income taxpayers, as well as a rate of 8.97% for taxpayers with incomes in excess of $500,000.

New York has also enacted a provision to severely reduce deductions available to taxpayers with incomes over $1,000,000.  New York state will now reduce the taxpayers’ deduction for charitable contributions to 50% of the federal deduction, and will also reduce all other itemized deductions to zero for these taxpayers.

What’s Ahead for 2010

In absence of any new legislation, several tax benefits are slated to expire in 2010.  These include the deduction for teachers’ expenses, the tuition and fees deduction, the motor vehicle sales tax, and the $2,400 unemployment exclusion.  Another important tax development to watch for is a change to the Estate Tax, sometimes called the Death Tax.  The tax has actually, technically, expired as of January 1, 2010.  Experts do not expect it to go away, however, and any new estate tax law will probably be applied retroactively to the first of this year.

The information in this article is general in nature and therefore may not be appropriate for all taxpayers.   You should consult with your tax advisor who is aware of your complete and specific income tax situation.

Richard W. Mulvey, CPA is a tax and accounting consultant with over twenty-five years experience in advising individuals and businesses.  He operates his firm, Olde Green Consulting, at 716 Bloomingrove Drive, just off Route 4, in North Greenbush.  The phone number is 283-1818.

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