Why 47% of Americans Paid No Income Tax in 2009

One specific statistic got a lot of media attention this last tax season: approximately 47% of Americans would pay no federal income tax in 2009. The Tax Policy Center recently published a report explaining why so many people would be tax-free.

The first factor in so many people not having to pay income taxes is the recession. Many people lost their jobs, or had their pay cut as a result of the economic downturn. The lower your income, the less you pay in taxes. If your income gets low enough, you will not be subject to federal income taxes.

The biggest factor in the high number of people who didn’t have to pay income tax: tax credits and deductions. The increase in deductions, credits and dependent exemptions has lowered tax liabilities almost across the board, often low enough to remove all tax liability.

So, is this a good thing? A bad thing? It’s up for debate. Yes, our country is neck-deep in budget deficits, and more tax revenue would certainly help solve that issue. On the other hand, nearly every family has suffered some economic losses in the last few years, and that extra cash in their pockets goes a long way in helping stay afloat. Either way, I will be keeping an eye on this trend over the coming years to see how it all plays out.

You can read the Tax Policy Center’s full report here.

Tax bills are lower this year, but they will increase

When it comes to our federal government, it seems that nothing good lasts forever. While most of us had lower tax bills due to all the nice tax credits this year, taxpayers earning higher incomes will soon find themselves paying more. I recently read an article published in The Huffington Post indicating that the economic recovery package this year included about $300 billion in tax cuts over 10 years. $232 billion of which, were tax cuts for individuals.

This past year, Congress cut individuals’ federal taxes this year by hundreds of billions of dollars even while state taxes increased to pay state budget deficits. But while tax bills were low for most taxpayers, we need to expect our tax bills will definitely go up in the next few years. What are the reasons for the increases, you ask? For one, former president George W. Bush’s tax cuts will be expiring in January (only a few to be renewed) and then there are Obama’s future increases in the health care overhaul. While some increases will hit lower income taxpayers, those making more than $200,000 ($250,000 for couples) a year will see the largest increase. For the first time, the Medicare payroll tax would be applied to investment income, beginning in 2013. A 3.8 percent tax will be imposed on interest, dividends, capital gains and other investment income for individuals making more than $200,000 a year. Read the full article here.

House Votes for Faster Tax Breaks for Haiti Gifts

Yesterday, the U.S. House of Representatives voted unanimously to approve a bill allowing taxpayers to write-off donations made to Haitian relief efforts on their 2009 tax returns. According to this article from the Washington Post, the Senate is expected to act quickly on the popular legislation.

Under current law, donors would have to wait until they file their 2010 returns next year to take the deductions. But the newly advanced bill would allow donations made by the end of February to be deducted from 2009 returns.

The bill passed on a voice vote with no opposition. Quick Senate action is expected. A similar law was enacted in 2005 for donations to victims of the Indian Ocean Tsunami in December 2004.

"It's a simple gesture but it will encourage giving in this challenging economy," said Rep. Earl Blumenauer, D-Ore.

Last week's quake killed an estimated 200,000 people in Haiti, left 250,000 injured and made 1.5 million homeless, according to the European Union Commission. A powerful aftershock caused even more damage Wednesday.

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IRS Issues Guidance on 2009 Required Minimum Distribution Waiver

In their newest press release the IRS has offered guidance on how a new piece of legislation (The Worker, Retiree, and Employer Recovery Act of 2008) is affecting the required minimum distribution for retirement plan administrators, plan participants and retirees.

Generally, a required minimum distribution is the smallest annual amount that must be withdrawn from an IRA or an employer’s plan beginning with the year the account owner reaches age 70½. The 2008 law waives required minimum distributions for 2009 for IRSs and defined contribution plans (such as 401(k)s) and allows certain amounts distributed as 2009 required minimum distributions to be rolled over into an IRA or another retirement plan.

Notice 2009-82 provides relief for people who have already received a 2009 required minimum distribution this year. Individuals generally have until the later of Nov. 30, 2009, or 60 days after the date the distribution was received, to roll over the distribution.

The notice also provides guidance for retirement plan sponsors. It contains two sample plan amendments that plan sponsors may adopt or use to amend their plans to either stop or continue 2009 required minimum distributions. Both sample amendments provide that participants and beneficiaries can choose to receive or not to receive 2009 required minimum distributions. Also, both sample amendments allow the employer to offer direct rollover options of certain 2009 required minimum distributions.

Plan sponsors may need to tailor the sample amendment to their plan’s particular terms and administration procedures and must adopt the amendment no later than the last day of the first plan year beginning on or after Jan. 1, 2011 (Jan. 1, 2012 for governmental plans).

Tax Planning for 2009 - How to Benefit from Recent Tax Law Changes

With a new president in charge, and the economy in a full recession, there are lots of changes being made to the US tax code. It can be confusing trying to deconstruct some of these changes. It is even more difficult to figure out which ones will benefit you. To help the readers of my blog plan for the 2009 tax year, I have broken down some of the recent tax law changes.

Make Work Pay

There are a lot of misconceptions going around regarding the new Making Work Pay credit. In order to benefit fully, it is important to understand how you can take advantage of the credit. The most common myth is that the credit will be delivered to qualifying taxpayers through the mail, similarly to the stimulus check last year. However, it is actually distributed through a taxpayer’s check in the form of a reduced tax rate. Because of this, it is your job to check you paychecks and make sure the amount is being added (note that you may need to adjust your withholding to reflect the change).

The First Time Homebuyer Credit

A lot of people are talking about the federal government’s credit for people to purchase a home in the 2009 tax year. However, it is important to remember that the credit is only available to first time homebuyers. To be more specific, the IRS defines a new homebuyer as a person who has not owned a principal residence during the three-year period prior to the purchase. The IRS also specifies that you need to purchase the home between January 1 to December 31, 2009. For more information, check out the IRS’ press release titled “First-Time Homebuyers Have Several Options to Maximize New Tax Credit.”

Energy Conservation Credit

For those of you hoping to upgrade some of your appliances this year, the IRS is giving you even more incentive to go “green.” If you make an energy efficient upgrade to your home—such as installing double-paned windows or buying an approved washer and dryer—you can take a deduction for up to $1,500. However, you must divide the deduction between the 2009 and 2010 tax years, so you will only be able to claim $750 this year. Please note that according to EnergyStar.gov, “geothermal heat pumps, solar water heaters, solar panels, fuel cells, and small wind energy systems... are not subject to this cap.”

Automobile Breaks

Although many hybrid vehicle tax credits are beginning to expire, there are plenty of new ones being announced. The IRS just released new information on the new tax credits being made possible by the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009. The credits apply to low speed electric vehicles, as well as cars with at least four wheels that draw propulsion using a rechargeable battery. Depending on the height and weight of the vehicle the value of the credit can range from $2,500 to $15,000.

Flood Victims

The IRS unveiled some new tax law changes to assist flood victims this year. One big win for flood victims was the removal of some loss limitations. Whereas in 2008, flood victims could only claim a certain amount of losses, now they can deduct the entire amount. However, it is important to remember that this full amount can only claimed by taxpayers who itemize their deductions. Another less popular tax law change affects individuals who helped victims displaced from their homes. According to the IRS these charitable taxpayers can claim an additional exemption of $500 for each displaced individual they help, with a maximum of $2,000.

Unemployment

With more and more Americans losing their jobs, changes have also been made to the way unemployment benefits are taxed. The key to benefiting from these new changes is by knowing exactly what you are entitled to. According to the newest changes to the tax law, the first $2,400 worth of unemployment benefits is income tax free. Therefore, you could expect an increase on each check you receive by around $25. Additionally, 20 more days have been added to the duration of unemployment.

The American Opportunity Tax Credit

Thousands of students have already applied for this credit, but unfortunately many taxpayers do not fully understand it. As opposed to the old Hope Credit, the new tax credit can be claimed for up to 4 years. However, in order to qualify, a student’s parents cannot make over $80,000 ($160,000 for joint filers). The student must be also taking at least half a load of courses, and have no record of felony drug charges. For more information, check out this entry I posted breaking down the American Opportunity Tax Credit back in March.