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Saturday, October 9, 2010

Will the Stimulus Act Benefit You and Your Family?

On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (ARRA). The nearly $800 billion act provides hundreds of millions of dollars of tax cuts expected to benefit 95% of taxpayers.

Because of adjusted gross income (AGI) phaseouts and other limitations, you may not qualify for many of the new or expanded tax breaks ARRA provides. But even if you don’t, your children, parents or other loved ones might, so you’ll want to be familiar with the act’s tax provisions. ARRA also provides help to laid-off workers that may benefit your family.

New Tax Breaks for Many

ARRA includes a couple of new tax breaks that will benefit many taxpayers:

New relief for most workers, retirees and other Social Security recipients. For 2009 and 2010, ARRA creates the Making Work Pay credit of up to $800 for joint filers and $400 for other filers. The credit generally is phased out for joint filers with AGIs exceeding $150,000 and for other filers with AGIs exceeding $75,000. Unlike last year’s “recovery rebate,” which was distributed via checks mailed to taxpayers, the new credit will generally be “paid” through a reduction in income tax withholding.

The act also provides a one-time payment of $250 to:

  • Retirees, disabled individuals and SSI recipients receiving benefits from the Social Security Administration
  • Railroad Retirement beneficiaries
  • Disabled veterans receiving benefits from the U.S. Department of Veterans affairs

New sales tax deduction for vehicle purchases. To both help individual taxpayers and spur sales for the beleaguered auto industry, ARRA creates a new above-the-line deduction for state and local sales and excise taxes paid on the purchase of new cars, light trucks, motorcycles and recreational vehicles. This means that taxpayers can benefit from the deduction even if they don’t itemize.

The deduction is available for vehicles purchased from Feb. 17, 2009, through Dec. 31, 2009. The deduction is not, however, available for tax attributable to vehicle value in excess of $49,500. The deduction phase out begins for joint filers with AGIs exceeding $250,000 and for other filers with AGIs exceeding $125,000.

Other Breaks Expanded

The bulk of the tax relief for individuals involves expanding existing breaks including the following:

Credit for first-time homebuyers. Last year, a refundable credit equal to 10% of the purchase price of a principal residence was made available to qualified first-time homebuyers. This credit was set to expire July 1, 2009, but ARRA extends its availability to purchases made before Dec. 1, 2009. For qualifying purchases made after Dec. 31, 2008, the act also increases the maximum credit from $7,500 to $8,000.

Perhaps most significant, the act eliminates the repayment obligation for taxpayers whose qualifying purchase occurs after Dec. 31, 2008 — except in situations where a home is sold within three years of purchase. For purchases before 2009 that qualified for the credit the taxpayer must repay the credit received, generally over a 15-year period but with no interest. So in those cases this break is more of an interest-free loan from the government than a genuine tax credit.

For purposes of the credit, a first-time homebuyer is someone who has had no ownership interest in a principal residence in the United States during the prior three-year period. The credit starts to phase out for joint filers with AGIs exceeding $150,000 ($75,000 for single filers). It’s completely eliminated for joint filers with AGIs exceeding $170,000 ($95,000 for single filers). There are certain other limitations as well.

Planning Point - Even if you don’t qualify, your adult children might. So if you’ve been thinking about making a gift to help them fund a down payment, now may be a great time to do it. In addition to benefiting from the credit, they also can take advantage of low housing prices and low interest rates.

American Opportunity education credit (previously called the Hope credit). For 2009 and 2010, ARRA expands this credit to cover 100% of the first $2,000 of tuition and related expenses (including books) and 25% of the next $2,000 of such expenses. The maximum credit is $2,500 per year for the first four years of postsecondary education. (The maximum Hope credit was $1,800 and applied to only the first two years of postsecondary education.) The credit phases out for joint filers with AGIs exceeding $160,000 and for other filers with AGIs exceeding $80,000.

529 savings plans. Taxpayers can use these tax-advantaged savings plans to fund college expenses. For federal purposes, contributions aren’t deductible, but 529 plan distributions used to pay qualified education expenses — tuition, room, board, mandatory fees and books — are tax free. For expenses paid in 2009 and 2010, ARRA expands the definition of qualified education expenses to include computers and computer technology.

529 plan owners with students who are in college this year or will be next year may find it wise to use plan funds to purchase computers as soon as they are eligible, in case the expanded definition isn’t extended beyond 2010.

AMT Relief Granted Early this Year

ARRA provides a one-year “patch” that increases the AMT exemption. For married couples filing jointly, the 2009 exemption is $70,950. For singles and heads of households, it’s $46,700, and for married filing separately, it’s $35,475. These amounts are up slightly from 2008 but are significantly higher than what they would have been for 2009 without the patch — $45,000, $33,750 and $22,500, respectively.

The patch also expands the AMT income ranges over which the exemptions phase out and only partial exemptions are available. The 2009 phase out ranges are now $150,000 to $433,800 for married filing jointly, $112,500 to $299,300 for singles and heads of households, and $75,000 to $216,900 for married filing separately. The exemption is completely phased out if AMT income exceeds the top of the applicable range.

Additionally, ARRA extends a provision through 2009 that allows certain nonrefundable personal tax credits to provide a benefit against the AMT. These include the dependent care credit, the American Opportunity credit and the Lifetime Learning credit. (The child credit and the adoption credit were already allowed for AMT purposes.)

Despite these provisions, many taxpayers will continue to be subject to the AMT until more substantial changes are made. So projecting whether you could be subject to the AMT this year or next is very important. With proper planning, you may be able to time income and deductions to avoid the AMT, or at least reduce its impact.

Help Given to Laid-off Workers

Although much of ARRA focuses on working Americans, it also provides some relief for laid-off workers:

Unemployment benefits. For 2009, the act:

  • Extends emergency unemployment compensation, which provides up to 33 additional weeks of benefits to workers who’ve exhausted their regular benefits
  • Increases unemployment compensation by $25 per week
  • Suspends federal income tax on the first $2,400 of unemployment benefits per recipient — without this provision, 100% of benefits would be included in a recipient’s taxable income

COBRA premium assistance. ARRA provides a 65% subsidy for health coverage continuation under COBRA for up to nine months. To be eligible, a worker must be involuntarily terminated between Sept. 1, 2008, and Dec. 31, 2009. Eligible workers who were terminated after Sept. 1 but before Feb. 17, 2009, and failed to elect COBRA coverage because it was too expensive have an additional 60 days to elect coverage and receive the subsidy. Workers who are married filing jointly must attest that their income won’t exceed $250,000 ($125,000 for other filers).

Make the Most of this Complex New Law

ARRA is a huge piece of legislation, and we’ve only touched the surface of the most important provisions affecting individuals. Many of the rules are complex, and the act also contains numerous tax breaks and other provisions affecting businesses. So please contact us to learn which provisions you — or your business — may benefit from, and how you can make the most of them.


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