Part 1 — Individual tax provisions
On Feb. 17, President Obama signed The American Recovery and Reinvestment Tax Act of 2009, which is known as the economic stimulus act. The new law contains approximately $300 billion of net tax cuts.
• Making Work Pay Credit. The centerpiece of the new law is an individual tax credit in the amount of 6.2 percent not to exceed $400 for single taxpayers and $800 for couples filing joint returns in 2009 and 2010. This credit is phased out when adjusted gross income exceeds $75,000 for single taxpayers and $150,000 for married taxpayers filing joint returns. Unlike the $600 lump-sum rebates paid last year, this credit can be claimed as a credit on a tax return or as a reduction in the amount of federal income tax that is withheld from a paycheck, which would be about $13 per week starting around June 2009.
• Economic Recovery Payment. The Making Work Pay Credit is based on wages. Because many people are not earning income, there is a one-time payment of $250 to retirees, disabled people, Social Security and SSI recipients and veterans receiving disability compensation and pensions benefits from the Department of Veterans Affairs. This payment reduces any allowable Making Work Pay Credit.
• Alternative Minimum Tax. The AMT exemption for 2009 is increased to $46,700 for individuals and $70,950 for married taxpayers filing joint returns.
• Education Credit. The HOPE credit is renamed the American Opportunity Tax Credit. The credit is raised from $1,800 to a maximum of $2,500 per year. Textbooks now are a qualifying expense, and the Stimulus Act extends the eligibility period from two years to four years. The income phaseouts are also increased to $80,000 for single taxpayers and $160,000 for married taxpayers filing joint returns. The credit is also available as a credit against the AMT.
• New Vehicle Deduction. Generally speaking, sales taxes are not deductible for individuals. Under the stimulus act, taxpayers can deduct state and local sales taxes paid when buying a new car, light truck, SUV, motorcycle or motor home. This deduction phases out for taxpayers earning $125,000 per year ($250,000 for married taxpayers filing jointly) and is limited to taxes paid on the first $49,500 of the purchase price. The deduction is available to non-itemizers as well. It applies to new vehicles purchased from the date of enactment until the end of 2009.
• Child Tax Credit. Currently, the per-child tax credit of $1,000 is refundable.
• First-Time Homebuyer Credit. In 2008, legislation provided a refundable tax credit equivalent to an interest-free loan equal to 10 percent of the purchase price of a home (up to $75,000) for first-time homebuyers.
The provision applied to homes purchased on or after April 9, 2008, and before July 1. Taxpayers who received this credit were required to repay the amount over 15 years (or when the house is sold, if earlier). It was hoped that this credit would encourage people to buy homes and reduce the excess inventory of homes on the market. However, it was not successful. According to Realtors and industry officials, it was unsuccessful largely because, unlike other tax credits, it had to be repaid over a 15-year period.
The stimulus package eliminates the repayment obligation for taxpayers who purchase homes on or after Jan. 1. This is a huge change and effectively gives cash for a down payment to first-time home buyers. It extends the credit through the end of November 2009 and increases the maximum credit from $7,500 to $8,000. If the home is sold within three years of purchase, the credit is recaptured.
• Earned Income Tax Credit. This credit is increased from 40 percent to 45 percent of the first $12,570 of income for taxpayers with three or more children. This change applies to 2009 and 2010.
• Transit Benefits. Beginning in March 2009, the exclusion for transit passes and van pooling that employers can provide to employees is increased from $120 per month to $230 per month.
• COBRA benefits. Under the Act, the employee pays 35 percent of the cost for COBRA coverage. The former employer is required to pay 65 percent of the cost, and the employer is entitled to a credit against income tax withholding and payroll tax for the 65 percent. The benefit is phased out for taxpayers with adjusted gross incomes greater than $125,000 ($250,000 for married couples filing joint returns). This provision applies to employees involuntarily separated from service between Sept. 1, 2008 and Jan. 2, 2010.
E-mail: Patti@spencerlawfirm.com