Income Tax Changes 2009

Once again, we're going to start out the New Year with our review of the tax changes for 2009.  This publication will outline changes to Social Security, standard deductions, exemptions, mileage rate deductions, earned income credits, Hope and Lifetime Learning tax credits, as well as changes to retirement savings accounts such as 401k plans, IRAs and Roth plans.

Federal Income Tax Filing Deadline

The tax filing deadline for the tax year 2008 is April 15, 2009 - which falls on a Wednesday.  In the remainder of this publication, we're going to be discussing the changes that became effective in the tax year 2009, which will become part of your income tax filing in 2010.

Social Security and Medicare

For 2009, the Medicare tax will remain at 1.45% while Social Security remains at 6.2%.  The wage limit, or Social Security maximum, has been raised to $106,800 - an increase of $4,800 over last year's maximum.  The rate of increase continues to outpace inflation, or the cost of living increase in wage you might expect from your employer.  The maximum Social Security benefit was increased to $2,399 per month in 2009, and the Cost of Living Adjustment (COLA) was 5.8%.

Standard Deductions in 2009

According to the IRS, around two out of every three taxpayers claim the standard deduction on their income tax returns.  Once again, the rates that apply to 2009 have increased from their 2008 levels.  The standard deductions that apply in 2009 include:

• Single - $5,700
• Married filing separately - $5,700
• Head of household - $8,350
• Married taxpayers filing jointly / qualifying widow(er)s  - $11,400
• Married taxpayers filing separately - $5,700

Exemption Values

The amount you can deduct for each exemption you can claim on your federal income taxes has increased again in 2009.  The 2008 value of $3,500 has increased to $3,650 in 2009.  That's a total increase of $250 over the last two years.

Mileage Deduction Rates

As was the case in 2008, the IRS is telling us once again that it's more expensive to drive a car in 2009.  And that means the standard mileage deduction rates are increasing.  The following table outlines the mileage deduction rates for the tax year 2009:

Mileage Deduction Rates 2009

2009 Increase to Earned Income Credit

The maximum earned income tax credit for low and middle-income workers and working families with two or more children is $5,028 in 2009, up from $4,824 in 2008.  The qualifying income limit for the credit for joint return filers with two or more children is $43,415 in 2009, up from $41,646.

Lifetime Learning and Hope Credits

In 2009, tax law changes also apply to the Hope Credit.  The maximum Hope Credit, available for the first two years of post-secondary education, remained at $1,800.  In 2009, the taxpayer's modified adjusted gross income will be used to determine the reduction in the amount of the Hope Scholarship and Lifetime Learning Credits.  Credit reductions start for taxpayers with an AGI in excess of $50,000, or $100,000 for those filing joint returns.

Contributions to Retirement Accounts

There was some good news in 2009 for those individuals willing to increase the rate of savings into their retirement accounts.  Contribution limits for 401k as well as 403b plans increased in 2009 from $15,500 to $16,500.  Catch up contributions also increased by $500 to $5,500 in 2009.  Contribution limits to SIMPLE retirement plans also increased by $1,000 to $11,500, while the catch up contributions remained unchanged at $2,500.

The income limits for those willing to contribute to traditional IRAs as well as Roth IRA plans increased again in 2009.  The income phase-out threshold for Roth IRAs now starts at $166,000 for those filing joint returns, and $105,000 for taxpayers with a filing status of single or head of household.

Finally, if you're covered by a retirement plan at work and you are considering contributing to a tax-deductible traditional IRA, then the income phase-out limits start at $89,000 for joint filers, and increases to $55,000 for those with a filing status of single or head of household.

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