Last Minute Tax Tips

Make the most of changes designed to give you a break on your 2008 tax bill.

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.

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.

Choose Your Deduction

Roberts will also benefit from a tax break that Congress renewed for 2008 that allows taxpayers to choose between deducting state income taxes and state sales taxes. Because Roberts lives in Washington, which has no state income tax, it's an easy choice. She can use the IRS's sales-tax calculator to determine the appropriate deduction based on her income, state and local sales-tax rates, and single filing status (she's eligible to write off $837). Or she can tally actual receipts if it would result in a bigger deduction.

Although most taxpayers who itemize will save more money by choosing the state income-tax deduction, that's not always the case, says Mary Kay Foss, a certified public accountant with Greenstein, Rogoff, Olsen & Co., in Danville, Cal. "If you bought a new car, the sales tax might push you over what you paid in income taxes," says Foss. You can add the sales tax that you paid on a car, boat, airplane or home-building materials purchased in 2008 to the sales-tax amount from the IRS tables or to your actual sales-tax receipts.

Congress extended two other "above the line" deductions, meaning you can claim them whether or not you itemize and they may be used to reduce your adjusted gross income for 2008. These include a deduction for teachers and other educators to write off up to $250 they spend on classroom supplies and a deduction for qualified college expenses for taxpayers who earn too much to claim the more-valuable Hope or Lifetime Learning tax credits. You can deduct up to $4,000 in college costs if you are single and your income is $65,000 or less ($130,000 for married couples). If your income is between $65,000 and $80,000 ($130,000 and $160,000 if you are married), you can deduct up to $2,000 in qualified college expenses.

Rebate Redux

If you missed out on last year's tax rebate or did not receive the full amount because your income was too high, you may get a second chance under the Recovery Rebate Credit. "You may be due more money when you file your 2008 taxes," says Mark Steber, vice-president of tax resources for Jackson Hewitt.

The first round of rebate checks, which were mailed directly to eligible taxpayers last spring, was based on 2007 tax-return information. If your income was lower in 2008, you may qualify for a credit of up to $600 if you are single and up to $1,200 if you are married. If you had a baby or adopted a child in 2008, or you are a divorced parent who claims a child as a dependent every other year, you can qualify for a credit of up to $300 for each child under age 17.

With more than 11 million Americans unemployed, it's a good bet that many will qualify for additional rebate money, says Mike Martin, president of Mike Martin & Associates, in Independence, Mo. You can determine your credit using the recovery rebate calculator at www.irs.gov or have the IRS calculate it for you by writing "RRC" on line 70 of Form 1040.

But tax breaks for the unemployed don't stop there. If you itemize deductions, you may be able to write off some of your costs in looking for a new job, including expenses paid to a headhunter or job-placement agency; transportation expenses, parking and tolls when traveling to a job interview; and phone bills directly associated with your job search. Add up all of these costs and lump them with your other miscellaneous expenses, such as investment fees and tax-preparation costs, and deduct any amount in excess of 2% of your adjusted gross income. If you moved to start a new job, you can deduct your moving expenses whether or not you itemize your deductions, as long as your new office is at least 50 miles farther from your old home than your previous job.

With a lower income, you may also be able to deduct medical expenses in excess of 7.5% of your AGI -- normally a very high hurdle to overcome. And you can tap your IRA or other retirement accounts penalty-free to pay those medical bills in excess of 7.5% of AGI, but you'll still owe taxes on your withdrawals.

If you received unemployment compensation in 2008, that income is taxable. And unless you specifically requested it, taxes were probably not withheld from your checks, meaning you may owe money when you file your tax return.

Last-Minute Savings

You have until April 15 to contribute up to $5,000 (plus an extra $1,000 if you are 50 or older) to an IRA for 2008. Even if you are covered by a retirement plan at work, you can deduct your IRA contribution if you are single and your income is $63,000 or less ($105,000 or less if married).

If you are not covered by a workplace retirement plan but are married to someone who is, you can deduct some or all of your IRA contribution if your joint income is $169,000 or less. With the Tax Savers Credit, individuals with incomes of up to $26,500 and married couples with joint incomes of up to $53,000 in 2008 may qualify for a tax credit of up to $1,000 per person on the first $2,000 of retirement savings -- in addition to the usual deduction for retirement-plan contributions.

E-Filing for All

Although Roberts is looking for-ward to receiving a big refund, she is worried about preparing her tax returns this year. "I've always done my taxes myself online, but I've never had to itemize deductions before," she says. No worries. Like 98 million other taxpayers with an adjusted gross income of $56,000 or less, Roberts qualifies for free electronic filing at the IRS's Web site.

If you e-file and elect to receive a direct deposit of your refund, you could receive your money in as few as ten days. (Last year, the average refund was $2,429.) You can have your refund deposited in up to three different accounts. This year, the IRS is offering a new option that opens free filing to virtually everyone, even if your income exceeds $56,000. It does not include the interview format used by other free-file programs that ask a series of questions and fill out the appropriate tax forms for you. But the new Free File Fillable Tax Forms enable you to enter your tax data, print your return for record keeping and file your federal return electronically -- all at no charge. If you need a little hand-holding, you can buy easy-to-use tax-preparation software, such as TurboTax ($29.95 and up), which includes tax advice from Kiplinger's.