The Potts Report

Is the Standard Deduction Standard Any More?

Let’s start with a short income tax review course. In calculating your taxable income you deduct the greater of the standard deduction or your itemized deductions from your adjusted gross income on the way to determining your taxable income. Taxable income is the income amount that is applied to the income tax tables or tax rates to determine your tax before applying tax credits or adding other taxes such as the self-employment tax or the alternative minimum tax.

Originally, the standard deduction was standard. It was an amount based on your filing status. Now it is a bit more complicated. In fact, for 2009, the IRS has designed a new form to help figure the standard deduction, Schedule L Standard Deduction for Certain Filers.

You still start with an amount based on your filing status. For 2009, these amounts are:

Single or married filing separately	$5,700
Married filing jointly or qualifying widow(er)	$11,400
Head of Household	$8,350

Next the standard deduction can be increased if you paid real estate taxes on property you own, sales tax on the purchase of a car, truck, or motor home, and/or a net disaster loss.

If you paid real estate taxes the amount paid can be added to the standard deduction up to $500; $1,000 if you file a joint return.

You can also increase the standard deduction for sales tax paid on the first $49,500 of cost for a new car, truck, or motor home. Details were previously discussed here Monday.

Finally, if you live in a Federally declared disaster area, you can add net disaster losses caused by these disasters to increase your standard deduction. In the past (and again in 2010) casualty losses were deductible as itemized deductions and the casualty loss amount was reduced by $100 then again by 10% of your adjusted gross income. The result? Very few people ever receive any tax benefit as the result of casualty losses. For 2009 and 2009 only, you will reduce the casualty loss by $500 and then add the remaining amount to your standard deduction. The result? More people will receive some tax benefit for their casualty loss caused by Federally declared disasters. Check out FEMA’s website. Did you have any damage from the ice storm of January 2009? Most of northern Arkansas was declared a disaster area. How about the tornadoes and severe storms that recently went through Scott and Logan counties?

2009 is the year of the standard deduction. Be sure you take advantage of it.

Should I Buy A Car Before December 31?

If you buy a NEW car or truck on or before December 31, 2009, you will qualify for an income tax deduction for the sales tax or excises tax paid on the portion of the cost that does not exceed $49,500 – even if you don’t itemize your deductions. Ignoring county and city taxes, Arkansas residents will be allowed an income tax deduction of up to $2,970 per car or truck purchased.Oklahoma residents will deduct the 3.25% excise tax paid on a new car or truck purchase for a deduction of up to $1,609.

The benefit works best for personal use cars and trucks. Owners that buy cars or trucks for business use already get to deduct sales tax although it is through the depreciation of the vehicle, used or new and not just for sales tax paid before December 31, 2009. A business that buys a car or truck normally adds the sales tax paid to the cost of the vehicle which is then depreciated over five years, unless it qualifies to be deducted in the year purchased under Section 179. But for business cars and trucks bought on or after February 17 and on or before December 31, 2009 sales taxes paid can be deducted rather than depreciated as part of the cost of the car or truck.

Now for the “except for’s”. With the Internal Revenue Code there is always an “except for” or two.

The new car or truck must be a passenger automobile, light truck or motorcycle with a gross vehicle weight rating of 8,500 pounds or less, or a motor home. No weight restrictions on the motor home.

The sales tax deduction is phased out for taxpayers with modified adjusted gross income between $125,000 and $135,000 ($250,000 and $260,000 on a joint return). E.g., a single person with modified adjusted gross income of $130,000 could deduct 50% of the sales tax paid. The same person would not be allowed any deduction for sales tax paid if his modified adjusted gross income exceeded $135,000.

There is no limit to the number of vehicles you buy.If you buy two new cars, you get to deduct sales taxes paid on each vehicle on the portion of the cost that does not exceed $49,500.

How do you take this deduction if you don’t itemize? You simply add the sales tax or excise tax paid to your standard deduction.