Tax Tidbits: New tax deductions and credits explained Published Dec. 8, 2009 100th Air Refueling Wing Legal Office RAF MILDENHALL, England -- Tax season is soon approaching and now is the time to start getting your documents in order so that you can minimize your tax bill, or, better yet, maximize your tax refund. New tax credits and deductions There are a number of new tax credits and deductions you should be aware of this year that can significantly reduce your tax bill or increase your tax refund. These include a tax credit for home purchases, a tax credit for energy efficient home repairs, and a tax deduction on the purchase of a new vehicle. In the coming weeks, the legal office will be publishing articles about each of thes new tax items. In this article, we will discuss the difference between a tax credit and a tax deduction, and start off the tax season with information about the new housing tax credit. Check back in the coming weeks for follow-up tax articles. The Difference between a Tax Credit and a Tax Deduction To appreciate the impact of the new tax credits, you need to understand the difference between a tax credit and a tax deduction. In simple terms, a tax deduction is used to reduce your adjusted gross income, which may or may not reduce your tax bill. A tax credit, on the other hand, is used to reduce your tax bill, and even if you don't owe any taxes, you typically will still get the credit in the form of a refund. Let's take an example: Suppose your adjusted gross income is $30,000, and you owe $500 in federal income taxes. If you get a $5,000 tax deduction, your adjusted gross income is reduced to $25,000, and your tax bill will only be marginally reduced. Things are much different, however, if that $5,000 deduction is a credit. If in our example above the $5,000 tax deduction was a tax credit, then it would be applied directly to your tax bill, which means you would now get a $4,500 tax refund ($5,000 credit - $500 taxes owed = $4,500 tax refund). Thus, tax credits are almost always better than tax deductions, and in our example, a refundable tax credit is the best because refundable tax credits are refunded to the tax payer in full, even after it reduces your tax liability below $0 -- the government owes you. The Federal Housing Tax Credit The most significant refundable tax credit this is year is the housing tax credit. Essentially, the housing tax credit is a payment, from the government to you, up to a maximum of $8,000, when you purchase a new home. The eligibility criteria are as follows: 1. You purchased a home after 1 Jan 09, but before 31 Nov 09. 2. You were a first-time homebuyer. A first-time homebuyer is defined as anyone that has not owned a home in the previous three years. 3. If you are single, your income cannot exceed $75,000, and if married, filing jointly, your income cannot exceed $150,000. 4. The home was purchased as your primary residence. If you meet these criteria, you likely qualify for the federal housing tax credit. The tax credit works such that you get 10 percent of the purchase price of the home, up to a maximum of $8,000, in the form of a refundable tax credit. That means, if you owe absolutely nothing in federal taxes, the government will pay you up to $8,000 as a tax refund. You will use IRS Form 5405 to claim this tax credit. Helpful information can be found at: www.federalhousingtaxcredit.com. Although this tax credit was scheduled to expire on Nov. 31, on Nov. 6, the President signed a bill extending the tax credit until April 2010. The new bill also includes a $6,500 tax credit for current home owners that didn't qualify as first-time homebuyers under the previous bill. If you are considering a home purchase or recently made a home purchase, you should do some research to determine your eligibility for a housing tax credit. Beginning late January, the Mildenhall Legal Office will sponsor the Tax Center in which trained volunteers will assist Mildenhall's members with their tax returns. If you have questions regarding the Tax Center, or about your taxes; please contact Tech. Sgt. Moses Palaruan at the RAF Mildenhall Legal Office at DSN 238-2028. Additionally, the Mildenhall Legal Office is still looking to fill one paid position and numerous volunteer positions for the upcoming Volunteer Income Tax Assistance Program. If you are interested, contact TSgt Palaruan at 238-2028.