While the economy waits for the effects of the $787 billion stimulus package passed by the US Congress in February to trickle down, there are some modest ways for ordinary citizens to benefit immediately.
Despite the slowdown in the overall economy, two sectors offer opportunities for people to save money in the form of tax breaks – homes and cars.
Homes
Some economists predict that the greatest impact of the stimulus bill will not be felt until next year. In 2010 the bill will provide ample funding to state and local governments for employment-intensive infrastructure projects such as highways, bridges, public transportation, and so on. In the meantime, one of the effects brought about by the recession has been to reduce the costs of certain durables and make them bargains.
Housing foreclosures and the spreading bankruptcies of the American car industry have made house and car purchases very attractive, especially when the stimulus bill tax breaks are added to the deal. For example, if you are planning to buy your first home, the government will give you an $8,000 tax credit. This is not only an increase of $500 above the previous tax credit, but more importantly you don’t have to repay the government.
This step should encourage young couples to buy a home and thereby help stimulate the housing market. In turn, it could build up enough momentum to slow down and perhaps even reverse the present plunge in home prices.
Cars
Similarly, the bill enables new car buyers to get a tax benefit by allowing them to deduct the sales tax on the purchase of a new car from their taxable income. If enough people take advantage of this opportunity, it could have a positive impact on the industry – though the recent declaration of bankruptcy by General Motors indicates this measure may be too little and too late.
Still, in a depressed economy when every dollar counts, the tax break on a new car means significant savings. According to the National Automobile Dealers Association, the average price of a new car in 2008 was $28,280, and the average trade-in value of a used car was $15,203.
NADA notes that the common practice is for states to tax the difference, which in the average case would be $13,077. In Massachusetts, for example, the tax rate is 5% rate, which would amount to $654. The stimulus bill reduction would reduce taxable income on the purchase by that much.
Other Ways to Reduce Tax
These tax breaks are only two ways to reduce your taxes. There are two other basic methods of minimizing what you must pay the government each year: you can reduce your taxable income and increase your deductions. Various tax credits reduce your tax. For example, tax credits are available for college expenses, for retirement savings programs, and even for child adoption.
Although not many people may be suited to adopting a child, however generous the tax credits, just about anyone can benefit from taking some college courses, which do not even have to be connected to your career.
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