Tax Deductions: Above-the-Line, Standard, Itemized, and Miscellaneous
I wrote about tax credits last week. This time let's look at tax deductions. First a recap of the difference between a tax credit and a tax deduction:
A tax credit directly reduces your tax dollar for dollar. If you are supposed to pay $5,000 in tax, a $500 tax credit reduces your tax to $4,500.
A tax deduction reduces your taxable income, which indirectly reduces your tax. If you are supposed to pay $5,000 in tax, a $500 tax deduction reduces your taxable income by $500 which then reduces your tax by only $500 * 15% = $75 if you are in the 15% marginal tax bracket.
Tax Breaks In Stimulus Bill for Buying a Home Or a New Car
[Update on Feb. 18, 2009: American Recovery and Reinvestment Act of 2009 was signed into law on Feb. 17, 2009. This post is updated with the latest info from what's in the law. Please also read the follow-up post for other tax provisions in this law.]
1. $8,000 tax credit for buying a home. The new stimulus law will give up to $8,000 tax credit to first-time homebuyers. Unlike the previous $7,500 tax credit for first-time homebuyers, which has to be paid back in 15 years, this is a true tax credit as long as you hold the home for 3 years. The credit is still limited to people with an AGI under $75k (single) or $150k (married filing jointly). This tax credit is refundable, which means it's not limited to your federal income tax liability. The qualifying purchase dates are between Jan. 1, 2009 and Nov. 30, 2009. So it's not retroactive for purchases in 2008.
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