Rarer still is a landmark victory that could mean thousands in deductions for others.

But that’s exactly the double-feat nurse Lori Singleton-Clarke accomplished, winning a ruling that her nearly $15,000 in business school deductions were legitimate. This judgment makes it easier for other professionals to claim from an MBA tax deduction.

The 47 year old Maryland resident’s battle wasn’t an easy one. On her 2006 tax return, she listed a deduction for $14,787 in expenses related to getting her MBA from the online University of Phoenix. Her tax preparer told her this was legal under the IRS’s complicated and narrow definitions of deductible work-related educational expenses.

The Internal Revenue Service disagreed, and in late 2006, audited Singleton-Clarke, who conceded all of their rectifications – except the tuition deduction. On this point, she dug in her heels and fought the government agency, which barraged her with requests for forms and information; “At one point I had three requests for the same records, each with a different contact name. I had to spend hours calling to figure out who needed what,” she recounts.

The nurse eventually tried her case in Tax Court, a forum where individuals argue cases on their own behalf, unable to afford a lawyer. What she did have was an articulate, a steady resolve, and impeccable records – three qualities that go far when outnumbered in tax disputes.

The presiding judge, Stanley Goldberg, praised her: “…Ms. Singleton-Clarke was so articulate and well-prepared. Too many taxpayers are not.” And, more importantly for her and a generation of professional MBA seekers, he ruled in her favor. While decisions in small cases can’t be cited as precedent, her trial helped clarify the rules in a way that can only help those looking to lighten their tax burden as they pursue a degree.

Here’s a quick list of the more common ones: where you get them, what you do with them, and what to watch out for.

CP 21B Form

The CP21B is a form for handling the overpayment of taxes. If you already filed a tax return, and you amend it to include new deductions (like the first time home buyer’s credit), you’ll probably end up getting one of these. The good news is that, in theory at least, the IRS will give you your money in 30 days. They say you don’t need to do anything at this point.

But be careful. The CP 21B might get to you after your taxes get amended in a way that makes the money unavailable again. For example, you might be due a refund because you purchased a new home—but then find out that the IRS has decided you weren’t a first-time homebuyer after all. If you’re at all unsure, call the IRS before you start planning to spend the money (they give you a number on the form). It’s a small inconvenience that could save you big trouble later on.

HUD-1 Form

If you’ve purchased a home before, the HUD1 form might be familiar. This form summarizes all the costs and charges of buying a new home. You can view a copy of the HUD-1 form to see exactly how it works, but it’s basically a long list of small charges.

Since the value of the home determines the amount of the new home tax credit, a HUD-1 form is the simplest way to document how much of a credit you should get. So when you apply for the credit, you’ll need to have this form filled out and sent in.

Recorded Deed

A deed simply records who owns a particular home or piece of property. While it shouldn’t be strictly necessary (since the HUD-1 form also shows who bought and sold the property), the deed is redundant. More information is better, though, so sending in a copy of your deed is a good way to ensure that what you get back from the IRS is a refund, not a request for more information.

1040, 1040A, 1040EZ, or 1040X forms

You’ve probably filed a 1040 of one kind or another already. If you’re collecting the first-time buyer’s tax credit, you may need to amend it. This is one of those processes that’s best done automatically with tax preparation websites or software—there’s a lot of simple math and double-checking that you may end up needing to do, and don’t want to get wrong.

Form 5405: The First-Time Home Buyer Credit form

This is the form you can use to apply for the First Time Home Buyer’s Credit. It’s fairly straightforward—most of the information on this form will come from the other documents you’re using—but it’s absolutely critical to double- and triple-check the 5405 form to make sure it’s entirely accurate.

The good news for you is that everyone’s on your side: your realtor wants you to get the payment, because it lets you spend more money on a house; the government wants you to get the money because it’s being spent in order to raise home prices; and the company or individual who helps you with your taxes has every reason in the world to want you to get this extra cash.

1. Most cars, motorcycles, light trucks, motor homes, SUV’s and RV’s are eligible for this tax deduction, though there are some restrictions. The Gross Vehicle Weight (GVW) of the vehicle has to be less than 8500 pounds. Thus, for example, the Hummer H1 and H2 are ineligible, since their GVW’s exceed 8500 lbs, but the H3 satisfies the requirement. You can look up the GVW of your vehicle before claiming the deduction.
2. State and local sales taxes paid on up to $49,500 of the purchase price of qualifying vehicles are deductible. Leased vehicles are ineligible. In states that do not have sales taxes, there is a provision for deduction of other taxes or fees paid.
3. The vehicle tax credit has a deadline. The vehicles must be purchased on or after February 17, 2009, and on or before December 31, 2009.
4. Your eligibility for the vehicle tax credit depends on your income. Taxpayers with modified AGI of less than $125,000 (if filing singly) or $250,000 (if filing jointly) are eligible to get the full benefit. If your AGI exceeds these amounts, then the amount of deductions is phased out till $135,000 for single filers and till $260,000 for joint filers. Therefore families whose AGI exceeds these amounts should make a careful decision as to who will potentially be using the vehicle and who should be buying it, so that it may be possible to get the full benefit. Taxpayers with AGI above $135,000 (if filing singly) or $260,000 (if filing jointly) do not qualify.
5. Businesses are ineligible to claim this deduction. They can, however, capitalize the sales tax as part of the acquisition of the vehicle, and can claim Section 179 (depreciation expense).
6. Itemizing doesn’t matter. This deduction can be availed of, whether or not you itemize other deductions on your Schedule A.

The Obama administration is trying to jump start the sagging automobile sector by offering these various incentives. Earlier this year owners of used fuel-inefficient vehicles were given an incentive to trade in their vehicles for more fuel efficient ones, in the “Cash for Clunkers” program. This incentive was in the form of a voucher and did not have any AGI restrictions, and the voucher amount is non-taxable. Anyone contemplating buying a new car should look into the current offering and make a wise decision. The offer, one more time, is only for cars and other qualifying vehicles purchased on or before December 31, 2009. The IRS has more information.

There has never been a better time to purchase that new car you have been fantasizing about, and save some federal tax dollars in the process.

The Federal earned income tax credit gives money to low-income workers, to compensate them for payroll taxes. Since there was already a payroll tax cut in an earlier stimulus plan, why not just boost the Federal earned income tax credit?

There are a few reasons the earned income tax credit hasn’t been expanded:

• It isn’t targeted. The earned income tax credit doesn’t necessarily help build new infrastructure, boost home prices, or send people back to school. It may go straight into savings, which is not something stimulus plans generally try to do.
• It helps people who are still employed. With the unemployment rate likely to hit 10%, fewer and fewer people will be eligible for a tax credit that pays back payroll taxes. Instead of giving more money to people who are still working, the current stimulus plan tries to do two things: create new jobs, and reduce competition for existing jobs by sending people back to school.
• It’s harder to notice. A one-time credit giving back money that was already paid into the tax system is hard to notice. It sounds like an accounting gimmick, not a benefit (and maybe it is). But, for good reasons or for bad, it’s easier to notice having extra money if it shows up in a roundabout way, so the federal earned income tax credit doesn’t get as much attention.

The good news? The Federal earned income tax credit is one of the most common tax credits available to filers. Find out if you’re eligible!

Sounds like you did not enter the correct rebate amount from 2007 (the amount before any offsets). Any rebate calculated on your 2008 return is simply the amount you were entitled to in either 2007 or 2008 reduced by the credit received. Without knowing your specific situation, it’s very difficult to tell you what you should have been entitled to claim. However, generally it would have been $600 (single) or $1200 (joint) plus $300 for each child.
Just so you know, with over 30 million returns filed for 2007 and 2008, we are not aware of any calculation issue in this area. I would suggest you contact the IRS first to determine how they arrived at their number.
I hope this information helps.
Bob Meighan
VP, TurboTax

He later added:

I would suggest you send a letter to the IRS requesting abatement of the penalty. They are generally pretty good about eliminating the penalty when it’s for a reasonable cause. Use language like “I respectfully request abatement of the penalty because…”
… I can confidently say there is not a calculation error with the rebate. I encourage you to call the IRS to find out how they arrived at their number and then compare it what you may have entered. In every case that I’ve seen, it’s been a case where the user entered the incorrect rebate received from the prior year.

(Interestingly enough, this isn’t the first time Meighan has gotten involved in online discussions of Turbotax.)

But what’s really going on is this: the stimulus plan has created a very confusing situation for the average taxpayer. If they missed the stimulus one year, they could get it the next — and tax software has to take that into account. Unfortunately, there’s no easy way to set this up. TurboTax keeps track of every user’s expected refund (or expected amount owed), and had to assume either that taxpayers would get a stimulus payment (so when they said they wouldn’t, their expected refund would drop painfully), or assume that they wouldn’t (so taxpayers expecting a stimulus payment would think they owed more money for a while.

The users may be partly to blame — most people were able to figure out how to file. On the other hand, people using different tax filing software were able to file weith less confusion and fewer mistakes. Hopefully, they’ll catch any confusing issues like this by next year’s tax season

Tax Blog Roundup: The Recovery Rebate and Turbotax

• Kay Bell at Don’t Mess With Taxes publicized the story in her Tax Carnival post.

• The Sun’s Financial Diary has a first-person account, and the comments have more.

• The TurboTax blog announced the Recovery Rebate feature back in December.

• TaxGirl has a reader who ran into a similar issue, but caught it before the IRS started asking for fines.

• The Wandering Tax Pro suggests double-checking Turbotax through a calculator on the IRS website. (The correct link is here.)

Forum posts asking about the Recovery Rebate and Turbotax

• “PennyLane” gets different numbers from TaxAct and TurboTax.

• “dirtyinjersey” is extremely confused by how TurboTax does the math (and one one user’s response claims that “The IRS is verifying every return due to the screwups. 1 in 6 tax returns made a mistake on this line alone.”)

• “Susan” asks, and a TurboTax representative answers.

• “Judy” explains that other tax preparation programs have the same issue.

• Reddit.com user “Popperian” got a letter from the IRS — that blamed the IRS!: “Apparently TurboTax was following the law and one-upped the I.R.S. who had screwed up some of it’s formulas… The I.R.S., of course, didn’t admit the error, just stated “the existence of an error” on the letter, ROFL.”

The First-Time Homebuyer Credit: How It Works Now

The credit gave new homeowners 10% of the purchase price of a new home, up to $80,000. This credit was restricted to buyers with less than $75,000 in income (subject to some adjustments), with reductions for incomes up to $95,000. For married homeowners, the full credit applied to incomes of up to $150,000, with reduced amounts available for incomes up to $170,000, and nothing available beyond that. The credit expires at the end of the year.

The credit thus targets people who are likely to buy a home, but also likely to be suffering too much from the current downturn to afford a new one. Although the tax credit has encouraged new home purchases, it hasn’t been as effective as it could be: most foreclosures are in a few states with far higher median home prices, which are still high enough that this credit is an extra 5% — enough to make a difference in which homes are bought, but rarely enough to be the difference between buying a home and not.

The New Housing Credit: How It Might Work

The new plan being advocated goes something like this:

some business groups say the amount of the credit, now capped at $8,000, should be raised to $15,000 and applied to anyone who buys a home.

Other possibilities include a $3,000 credit for refinancing, or an extension of the credit to the end of 2010 and an end to the income cap. This would have a larger effect on the housing market, but in a more gradual way: a credit with a deadline encourages people to buy homes they might have bought a year or two later instead, while a credit that keeps getting extended will start to feel permanent.

Now is not the time for the average homebuyer to react to this potential plan. There’s still a lot to be decided, from the exact amounts to the income eligibility to the deadline for the credit. In fact, the current discussion should remind taxpayers that this kind of deadline doesn’t always stay firm. The best plan is still to be cautious with homebuying, and to base decisions on what homes are affordable, not just which ones have tax incentives attached.