By Robert Steere, Toolkit Staff Writer

The Internal Revenue Service issued a mid-year reminder to individual taxpayers, encouraging them to take advantage of numerous tax breaks made available earlier this year as part of the American Recovery and Reinvestment Act (ARRA). The IRS notice highlights that the ARRA provides tax incentives for people purchasing new cars, first-time homebuyers, homeowners interested in making their homes more energy efficient, and parents and students paying for college. All of these incentives are temporary, so taxpayers must take advantage of them during a limited window of opportunity.

Sales Tax Deduction for New Vehicle Purchase

The ARRA provides a tax break to taxpayers who make qualified new vehicle purchases after Feb. 16, 2009, and before Jan. 1, 2010. Qualifying taxpayers can deduct the state and local sales and excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles. The tax deduction may be claimed on multiple vehicle purchases; however, the total allowable deduction is limited to an amount equal to the sales or excise tax on not more than $49,500 of the purchase price of each qualifying vehicle. This deduction is available regardless of whether a taxpayer itemizes deductions on Schedule A, but it phases out for taxpayers at higher income levels.

First-Time Homebuyer Credit

The first-time homebuyer tax credit was expanded and extended by the ARRA for 2009. Taxpayers who haven't owned a principal residence during the past three years can receive a credit of up to $8,000 on either an original or amended 2008 tax return, or a 2009 return, if they purchase a home this year prior to December 1. The purchase transaction must be completed before Dec. 1, 2009, and an eligible taxpayer cannot claim the credit until after the closing date. This credit, like the deduction for sales tax on new vehicles described above, phases out at higher income levels.

Energy-Efficient Home Improvements

The ARRA also encourages homeowners to make their homes more energy efficient. The credit for nonbusiness energy property (residential property) is increased for homeowners who make qualified energy-efficient improvements to existing homes. The law increases the rate of this credit to 30 percent of the cost of all qualifying improvements and raises the maximum credit limit to a total of $1,500 for improvements placed in service in 2009 and 2010. Qualifying improvements include the addition of insulation, energy-efficient exterior windows and energy-efficient heating and air conditioning systems. Improvements must be completed before the end of 2010, and the credit can be taken on the tax return for the year in which the improvements are made.

American Opportunity Tax Credit for the First Four Years of College

The American opportunity tax credit (a modification of the pre-existing Hope education credit) is designed to help parents and students pay part of the cost of the first four years of college. While the earlier Hope credit applied only to the first two years of college, the new credit, which is effective for tax years 2009 and 2010, applies to the first four years of college. It is available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. Tuition, related fees, books and other required course materials generally qualify for the credit. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.

529 Plans Allowed to Make Computer Technology Purchases

The ARRA adds computer technology to the list of college expenses (tuition, books, etc.) that can be paid for by a qualified tuition program, commonly referred to as a 529 plan. For 2009 and 2010, the law expands the definition of qualified higher education expenses to include expenses for computer technology and equipment or Internet access and related services to be used by the designated beneficiary while enrolled at an eligible educational institution.

Withholding Tax and the Making Work Pay Credit

One impact of the Making Work Pay Credit in the ARRA was to lower tax withholding tables with respect to employees. The IRS wanted to alert some taxpayers - especially taxpayers holding multiple jobs, married couples if both spouses work, workers who can be claimed as dependents by other taxpayers, and pensioners - of their need to review their tax withholding rates to ensure that enough tax is being withheld to cover their tax liability for the year. The lower withholding rate could result either in smaller refunds or, in limited instances, in having tax due with the return rather than a refund.

Related Information

For more information about the provisions of the ARRA that may apply to you, the IRS encourages you to check out the ARRA page on the IRS website.

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Posted July 22, 2009.