Kathleen Pender
Sunday, February 22, 2009
If you're feeling dazed and confused about your finances these days, join the club.
In the past two weeks alone: Congress passed an $800 billion economic stimulus bill that includes more than a dozen new tax cuts, mostly for low- and middle-income Americans. The Treasury Department announced a $2.5 trillion bank-rescue plan. President Obama launched a $275 billion housing program that will provide mortgage relief to some homeowners but not others. And the California Legislature raised state income and sales taxes and vehicle license fees.
Will these changes, taken together, leave you better or worse off?
The answer depends on whether you are working, retired or unemployed; your income; how many kids you have and if any are in college; whether you buy a house or car; who owns your mortgage; how you commute to work and other factors.
As you can see, many of us will never know the answer.
That's a problem for the economy, which desperately needs a jolt of business and consumer confidence.
The biggest enemies of confidence are fear and uncertainty. Perversely, these efforts to right the economy seem to be breeding more fear and uncertainty.
It's hard to feel confident when our president and governor warn us we are on the brink of "catastrophe." Even if that word is used as a political ploy to rally support for a stimulus bill or budget, some people take it literally.
And it's hard to feel certain about anything when the rules change almost daily and are virtually impossible to understand.
Let's take one example.
To stimulate new-car sales, Congress created a tax break. If you buy a new car or truck between Tuesday and Dec. 31, you can deduct - on your federal tax return - the state and local sales tax paid on up to $49,500 of purchase price.
If you take the standard deduction, you simply add the sales tax to your standard deduction.
If you itemize deductions, you add it to your deduction for state income taxes.
However, if you itemize and have been deducting sales taxes in lieu of state income taxes, "you get the car-sales-tax as part of your normal sales-tax calculation and this legislation gives you nothing additional," says Mark Luscombe, principal tax analyst with the tax information firm CCH. People in this situation might be better off taking the standard deduction or itemizing deductions and choosing the state-income-tax option and adding the car-sales-tax to one of those.
Like most tax breaks, this one phases out - or shrinks and eventually disappears - if you make too much money. The phaseout range is $125,000 to $135,000 in adjusted gross income for single taxpayers and $250,000 to $260,000 for married couples filing jointly.
Tempted to buy a new car? Not so fast.
In California, you'll pay more to the state.
The sales tax is going up by one percentage point April 1. If you qualify for the new federal tax deduction, that's not a problem. Bear in mind, though, that sales taxes are not deductible on your state tax return.
Also, the annual vehicle license fee will rise from 0.65 percent to 1.15 percent of market value starting May 19. If you trade in an old clunker for a new set of wheels, be prepared for a big fee increase.
Drawing conclusions
What conclusions, if any, can we draw about these tax changes?
Federal tax breaks, which go mainly to low- and middle-income taxpayers, will be undercut by state tax hikes, which will be spread across the board.
Under the federal stimulus plan, virtually all of the tax breaks phase out for higher-income taxpayers. The phaseout range is different for every break.
The broadest tax break: Most workers will get a federal tax credit equal to 6.2 percent of wages up to $400 per person in 2009 and again in 2010. Couples can get up to $800 each year, even if only one spouse works, says Roberton Williams, senior fellow with the Tax Policy Center.
The credit will start showing up in paychecks this summer in the form of lower federal tax withholding. This credit phases out for singles with $75,000 to $95,000 in adjusted gross income and for couples with $150,000 to $190,000 in adjusted gross income.
Low-income families will do especially well under the federal stimulus.
The existing $1,000 child credit will be extended to more families that don't earn enough to pay income taxes. Low-income families with three or more children also will get an expanded earned income tax credit.
Many of these federal tax breaks will be offset by tax increases in California.
The state income tax rate is going up across the board, either by 0.25 percent or 0.125 percent, depending on how much money California gets from the federal stimulus plan.
Families with children will also pay more because the state tax credit for dependents will shrink from $309 per eligible dependent to $99.
Credit for home buyers
The federal and state governments have both created credits for home buyers, but the rules are quite different.
Under the federal plan, if you have not owned a home in the past three years and buy a new or existing home between Jan. 1 and November 30, you could get an $8,000 federal tax credit. This credit is refundable, which means you can get it even if you don't earn enough money to owe taxes. The credit phases out between $75,000 and $95,000 in income for singles and $150,000 and $170,000 for couples.
Under the state plan, if you buy a newly built home in California on or after March 1, 2009 and before March 1, 2010, you will be eligible for a state tax credit equal to 5 percent of the purchase price or $10,000, whichever is less, according to Gina Rodriquez, Spidell Publishing's Sacramento editor. The credit must be spread over three years, and you don't have to be a first-time buyer.
Within one week of the sale, the seller must certify to the California Franchise Tax Board that the home was new and unoccupied. The state has set aside $100 million for this program and will dole it out on a first come, first served basis. There is no income limit on the credit, but it's nonrefundable: You can't benefit from it if you don't pay state taxes.
You'll have to pay back the state credit if you don't live in the home for two years, and repay the federal credit if you move out before three years.
In the weeks ahead, I'll try to explain more details of these plans. If you have questions, drop me an e-mail and I'll answer as many as possible in my column.
Net Worth runs Tuesdays, Thursdays and Sundays. E-mail Kathleen Pender at kpender@sfchronicle.com.
This article appeared on page D - 1 of the San Francisco Chronicle
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