American Recovery and Reinvestment Act of 2009

President Barack Obama signed the 1,073 page “stimulus” act into law on February 17, 2009-the American Recovery and Reinvestment Act of 2009.

The cost of the entire stimulus act is nearly $800 billion. The tax provisions represent approximately $300 billion of that total cost. This blog update focuses on the individual tax changes in the new law.

Making Work Pay Credit
By far, the most costly tax provision is the “Making Work Pay Credit” at an estimated cost of $116 billion. This refundable credit is available for both 2009 and 2010. The credit is equal to the lesser of 6.2% of earned income of the taxpayer, or $400 for a single person or $800 in the case of a joint return. The credit is limited when modified adjusted gross income exceeds $75,000 for a single person or $150,000 for a married person. The credit is phased out at a 2% rate above those levels. For example, the credit is fully phased out for a single individual with modified adjusted gross income of $95,000. Individuals who may be claimed as a dependent are not eligible for the credit. Qualified taxpayers would either receive the credit by a reduction in their income tax withholding or can claim the credit as a lump sum when they file their tax return.

$250 Economic Recovery Payment
The new law also provides for a one-time payment of $250 to Social Security recipients, railroad retirees, disabled veterans, and retired government workers. This payment will reduce the amount of the “Making Work Pay Credit” to which a recipient might otherwise be entitled.

Alternative Minimum Tax “Patch”
The new law includes an alternative minimum tax patch for 2009 at a cost of $70 billion. The AMT patch for 2009 raises exemption amounts for joint filers to $70,950 and to $46,700 for single filers. This AMT patch will relieve about 26 million taxpayers from AMT exposure.

First-Time Home Buyer Credit
The first-time home buyer tax credit is increased from $7,500 to $8,000 for homes purchased from January 1, 2009, though November 30, 2009. There is no required repayment for a home acquired in 2009 after 36 months in the home. The credit begins to phase out for single taxpayers with adjusted gross incomes in excess of $75,000 and in excess of $150,000 for joint filers. A first-time home buyer is defined as someone who has not owned a present interest in a principal residence within 3 years of the purchase date. An eligible taxpayer can elect to take this refundable credit based on a 2009 purchase of a home on his or her 2008 tax return.

New Car Tax Deduction
If a taxpayer purchases a new vehicle between February 17, 2009, and December 31, 2009, he or she will be eligible for an “above-the-line” deduction for state and local sales taxes or excise taxes paid on the purchase. This means taxpayers will achieve the tax deduction even if they do not itemize their deductions. This rule applies to the first $49,500 of the purchase price of any one vehicle. The deduction will be phased out for a purchasers who have adjusted gross incomes exceeding $125,000 for single taxpayers or $250,000 for joint returns. Newly purchased foreign and domestic vehicles qualify, including cars, light trucks, motorcycles, and motor homes with a gross vehicle weight of not more than 8,500 pounds. The sales tax on leased vehicles is not included. Also, a taxpayer is not eligible if he or she elects to deduct sales and use taxes as an itemized deduction.

American Opportunity Tax Credit
The American Opportunity Tax Credit is essentially a modification and renaming of the existing Hope Scholarship Tax Credit. A credit of up to $2,500 for the first 4 years of higher education expenses would be available. The credit would be calculated based upon 100% of the first $2,000 of qualified tuition and related expenses, plus 25% of the next $2,000 of such expenses. The credit would begin to phase out at $80,000 of modified AGI for a single taxpayer and $160,000 for married taxpayers. Up to 40% of the credit would be refundable. The American Opportunity Tax Credit would also be allowed for the Alternative Minimum Tax.

Tax Relief for Families with Children
Tax relief in the form of larger refunds or reduced income tax withholding for families with children is provided for by temporary increases for 2009 and 2010 in the earned income tax credit for families with three or more children and the refundable portion of the child tax credit.

Unemployment Compensation
The new law excludes up to $2,400 of unemployment compensation from income for 2009. Amounts in excess of $2,400 are taxable.

Tax-Free Transportation Fringe Benefits
Qualified transportation fringe benefits, including transit passes, van pooling, and qualified parking, are tax free up to $230 per month for 2009 and 2010 with an inflation adjustment.

Qualified “529 Plan” Tuition Programs
Distributions from a “529 Plan” for qualified education expenses are tax free. Qualified education expenses now include computers, computer technology, and Internet access. After losing, on average, one-third of the value in 2008, it might be time to put your plan to work.

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