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In today’s struggling economy, many people are already looking towards tax-time hoping to see some benefits from new legislation leave some additional money in their pockets. Essentially, the middle class is looking to take advantage of new tax benefits.
Unfortunately, there has not been significant changes to tax laws since 2006.
However knowing what tax breaks are available to make lives easier may be easier said than done. If you are already in financial crisis with credit card debt, foreclosures or repossessions this year’s tax breaks may seem like a precious gift from above.
To help in your search for those middle-class tax breaks, we did some research for you and compiled a list*.
Tax Benefits for the Middle Class
1. Mortgage insurance premiums:
If you itemize your deductions and pay for mortgage insurance, for the first time you will be allowed to deduct your premiums on your 2007 return in addition to any mortgage interest you pay.
The one catch: your mortgage insurance policy must have gone into effect after Dec. 31, 2006.
The deduction is also subject to income limitations. The premiums, plus the interest you pay on your mortgage, is entered on line 13 of Schedule A.
2. Mortgage debt forgiveness:
If your lender forgave some of your mortgage debt on your principal home last year, you no longer have to pay income tax on that cancelled debt as you would have had to in prior years.
You will have to fill out and attach IRS Form 982 to your return to get this new tax break, which is subject to some limitations on loan size and income.
3. One-time stimulus rebate:
With the exception of high-income taxpayers, most tax filers will receive a one-time tax rebate this year (2008 for tax year 2007).
All you need to do to get yours is file a 2007 federal income tax return and report a minimum of $3,000 in qualifying income. Beyond that, the IRS will figure out how much of a rebate you should get.
The rebates are worth up to $600 for single filers or up to $1,200 for joint filers. Those with dependants under 17 may get an additional rebate of $300 per child.
Here’s a breakdown of what you need to know about how the rebates will work and who is eligible.
- State and local sales tax. If you itemize your deductions, you may deduct either the state and local income tax you paid in 2007 or the amount you paid in state and local sales tax.
- Deducting sales tax is the clear choice for those who live in the seven states without any income tax – Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.
- That is also true for those in New Hampshire and Tennessee whose income is based primarily on a paycheck, because those states do not tax wage income. However, they do impose tax on interest and dividend income, so if that’s your primary source of income, the choice may not be as clear.
Editors Note: Hopefully, Congress will issue tax rebates again in the future as part of QE for the people.
4. Tuition and related expenses:
Whether or not you itemize your deductions, you may deduct qualified higher education expenses.
You may take the deduction on up to $4,000 in tuition and fees if your adjusted gross income is $65,000 or less ($130,000 for joint filers).
If your AGI is higher ($80,000 or less for single filers; $160,000 or less for married couples), you may deduct up to $2,000.
The tuition deduction may not be taken for expenses for which you are claiming an education credit such as the HOPE or Lifetime Learning credits.
You’ll need to fill out and attach to your return IRS Form 8917, and enter the tuition deduction on line 34 of the 1040.
5. Energy-efficient appliances:
Making your home more energy efficient can really pay off.
You can take a 30% credit on up to $2,000 for the cost of a solar water heater and up to $2,000 for the cost of photovoltaic equipment. You also can get a 10% credit on up to $500 for insulation and heat-reducing metal roofs, including up to $200 for energy-efficient windows.
To get the credit you’ll need to fill out IRS Form 5695.
6. Claim your rightful dependents:
Just because your child is 18 or older and earning a paycheck doesn’t necessarily mean you can’t claim her as a dependent.
If you support your child, step-child, sibling or step sibling – and support means you pay for more than 50% of their expenses – you’re on the way to being able to claim them as a dependent and get a $3,400 per child exemption against your taxable income.
They must live in your home for more than half the year and must be under 19, or under 24 if they are full-time students.
For more information, see IRS Publication 501.
7. Child care:
If you work full-time and pay for the care of a dependent – a young child, elderly parent or disabled adult child or spouse – you may be able to get a credit for what you spend above the expenses covered by your tax-deductible flexible-spending plan at work.
Depending on your income, you are entitled to a 20% to 35% credit on up to $3,000 in expenses for one dependent or $6,000 for two or more.
If you do not put money into a plan at work, you may take a credit on all of your expenses, up to a $3,000 limit for one dependent or $6,000 for two or more, assuming your income qualifies.
For more information, see IRS Form 2441 or IRS Publication 503. The credit is entered on line 47 on the 1040.
8. Last-minute IRA deduction:
You have until April 15 to make your 2007 contribution to an individual retirement account.
To qualify for a deductible IRA, you may not be covered by a retirement plan at work or, if you are, your modified adjusted gross income (AGI) must be under $62,000 ($103,000 if you are filing jointly).
The 2007 contribution limit is $4,000, plus an additional $1,000 if you are 50 and older.
9. Saver’s credit:
Saving for retirement can result in a lower tax bill in more ways than one.
If your AGI is $26,000 or less ($52,000 or less for married couples), you may take up to a 50% credit on up to $2,000 in contributions made to qualified retirement savings plans, such as 401(k)s, 403(b)s and traditional and Roth IRAs. The closer you are to the income ceilings, the lower your credit will be.
That credit is on top of the deduction that you get for making contributions to a 401(k), 403(b) or deductible IRA.
A deduction reduces your taxable income. A credit, which is more valuable, reduces your tax bill dollar for dollar.
For more information on the saver’s credit, see IRS Form 8880. The credit is entered on line 53 on the 1040.