Albert Einstein once said, “The hardest thing in the world to understand is the income tax.” If you’re one of those who draw a blank when it comes to preparing for tax season, you’re not alone. With annual changes in the tax code, doing your own tax return can be challenging. So we spoke with  professionals at Collierville’s H&R Block to shed light on some of the changes affecting families this year.

Watch for credits and adjustments

“We just went through a year of hard economic times,” notes Peggy Limberg, senior tax advisor at Collierville H&R Block. “But the American Recovery and Reinvestment Act (ARRA) of 2009 is giving taxpayers some much-needed tax breaks.” The federal tax return breaks come in the form of:

• Adjustments — Deductions that help lower taxable income.

• Credits — Credits fall in two categories: non-refundable and refundable. Nonrefundable credits simply reduce your tax liability. Refundable credits reduce your tax liability and put money in your pocket.

Here are five credits to consider when filing your taxes.

1. Your New Child

Your bundle of joy can bring many benefits. Don’t put off applying for your child’s social security card. The social security number is required to reap the benefits of child-related tax credits, such as:

• Earned Income Credit (EIC) — Earned income is payment you receive for services performed. Wages, commission, tips, bonus, and self-employed income fall under this category. The EIC credit is available to lower income workers and can provide up to $5,700 in refund depending on your filing status, income, and number of qualifying children. (You can also qualify with no children; restrictions apply.)  NEW: The maximum income cap for EIC has increased and the number of qualifying children has risen from two to three.

•Additional Child Tax Credit (ACTC) — The total amount of Child Tax Credit is $1,000 for each qualifying child under the age of 17. But if this non-refundable credit reduces your tax to $0 and still you haven’t claimed the $1,000/child credit, you may be due a refund of the remaining amount in the form of ACTC. NEW: If you earned more than $3,000 and have at least one qualifying child, you can claim this credit.

2. Homebuyers Credit:

“Under ARRA, the largest dollar amount any one can claim this year is the refundable First-Time Homebuyer Credit (FTHC),” says Limberg. FTHC is 10 percent of purchase price up to a maximum of $8,000. This credit was expanded to include a maximum $6,500 credit for long-term homeowners who purchased a replacement home after November 6, 2009. Some limitations apply to income and date of purchase.

Note: According to the Internal Revenue Service (IRS), there are delays in processing this credit. Limberg suggests filing the return without the credit and later filing an amendment to claim the homebuyer’s credit. A copy of the closing statement and some mortgage documents must be attached to the return.

3. Making Work Pay Credit (MWPC)

This is another refundable credit available to all individuals who are employed or self-employed. The credit is 6.2 percent of earned income up to $400 for individuals and $800 if Married Filing Jointly. You don’t have to do anything to receive this credit.

“MWPC increased the take-home pay by a small amount,” recalls John Poluga, senior tax advisor at Collierville H&R Block. An estimated 95 percent of America’s working families became eligible for this credit and it was advanced to them through reduced payroll withholding.

Since this credit extends to 2010, it becomes imperative to check your withholding with your employer by filing Form W-4, the Employee’s Withholding Allowance Certificate. The reason is that the IRS didn’t factor in workers with multiple jobs or dual-income married couples. Not with holding enough due to MWPC could result in a smaller refund or an unexpected balance due.

Not only in this situation, even under normal circumstances it is advisable to revisit your W-4 twice a year or more often especially when you experience changes in your personal and financial life.

4. American Opportunity Tax Credit (AOC)

“The enhanced Hope Credit is now refundable,” says Poluga. It applies to qualified education expenses incurred during the first four years (the pre-ARRA Hope Credit only covered the first two years) of college. The qualified education expenses have been expanded to include costs for course materials (books, supplies, and equipment) whether or not purchased as a condition of enrollment. Maximum credit is $2,500; 40 percent is refundable.

Postpone your teenager’s investments for a few more years. Be cautious about buying stocks and bonds for your child that result in an unearned income (like interest and dividends) over $1,900. Remember such income is taxed at the parent’s marginal tax rate. This “kiddie tax” rule applies to a child who is at least age 18 and under age 24, depending on his or her school status and whether or not the child has a job and earned income. AOC is not refundable if claimed by a student subject to such kiddie tax.

5. Vehicle sales tax deduction

“You can deduct state and local sales and excise tax for buying a new vehicle valued up to $49,500,” says Poluga. Bring in the invoice.

There is no limit on the number of new vehicle purchased provided they were bought after February 16, 2009 and before January 1, 2010. The deduction can be claimed whether or not you itemize.

Meena Viswanathan is Memphis Parent’s calendar editor and an H&R Block tax professional in Collierville, 850-1350.

This entry was posted on Monday, February 1st, 2010 at 12:00 pm and is filed under Features, Resources. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.