March, 2009 Tax Newsletter

Tax Provisions of The American Recovery and Reinvestment Act of 2009

On February 17, 2009, President Obama signed into law the $787 billion American Recovery and Reinvestment Act of 2009 (Act).  The designed purpose of the Act is to offer financial assistance primarily to individuals, but also to businesses in the short and intermediate ter,

This month’s Newsletter provides a brief summary of the more prominent tax provisions in the Act that apply to individuals and businesses.  The primary beneficiaries of the Act are wage earners, upper-middle-income families, seniors, the working poor, and small businesses.

Making Work Pay Credit - For 2009 and 2010 there will be a tax credit equal to 6.2% of earned income, up to $400 ($800 for married couples filing jointly).  Withholding schedules will be adjusted to increase current take-home pay to reflect the credit.  The new withholding should occur around April1, 2009.  There is a phase out for individuals with modified adjusted gross income (MAGI) exceeding $75,000 ($150,000 for joint filers).  Earnings from self-employment also qualify to the extent they are taken into account in computing taxable income.  Self-employed individuals will take the credit on their 2009 returns.  An individual who may be claimed as a dependent on another’s return will not receive the credit.

$250 Economic Recovery Payment - A one-time payment of $250 will be made to individuals on social security and other fixed incomes.  Retired government workers who are generally ineligible for Social Security also will receive this payment,  This payment will reduce the Making Work Pay credit to which the individual would otherwise be entitled.  In all likelihood, the $250 dollar payment will be distributed in the same manner as the 2008 stimulus payments.

First-Time Homebuyer Tax Credit - An extended version of the homebuyer tax credit enacted in 2008 allows a maximum $8,000 tax credit for qualifying home purchases through November 30, 2009.  Importantly, unlike the 2008 credit which was essentially an interest-free loan as it had to be repaid over time, this credit does not have to be repaid as long as the home continues to be the individual’s principal residence for 36 months.  The credit is phased out for individuals with MAGI exceeding $75,000 ($150,000 for joint filers).

New Car Deduction - Purchasers of new vehicles from February 17, 2009 through December 31, 2009 who are non-itemizers will be able to deduct the related state and local sales and excise taxes as an “above the line” deduction.  Those who itemize will claim the deduction as part of state and local taxes paid on Schedule A of their return.  The deduction is capped at the tax attributable to a maximum purchase price of $49,500 and will be phased out for those with MAGI exceeding $125,000 ($250,000 for joint filers).

Alternative Minimum Tax Patch - Congress annually has been extending this expiring break.  The 2009 patch will help approximately 26 million taxpayers avoid higher taxes for 2009.   It raises AMT exemption amounts to $$46,700 ($70,950 for joint filers); slightly above those for 2008.

Education Credit - The HOPE education credit, which had been limited to the first two years of college, has been extended to all four years of college, and course materials have been added as qualifying expenses.  The credit has been increased to a maximum of $2,500 per year from $1,800.  The phase-out level has been increased to $80,000 ($160,000 for joint filers).  The enhanced credit is retroactive to January 1, 2009 and applies through December 31, 2010.

Child Tax Credit and Earned Income Credit - The Act increases the refundable portion the child tax credit or 2009 and 2010.  It does so by setting the income threshold at $3,000.  It also temporarily (for 2009 and 2010) increases the earned income tax credit.  The percentage for these two years is 45% of the first $12,570 of earned income for taxpayers with three or more qualifying.  The phase-out range has been adjusted upward.  The prior law percentage was 40% of the first $12,570 earned income for a taxpayer with two or more qualifying children.

Sec. 179 Depreciation - The Act extended the $250,000 expensing (rather than depreciating) of business equipment to 2009.  In addition, it increased the threshold for reducing the deduction to $800,000 of new purchases.

Bonus Depreciation - The 50% first year bonus depreciation on new property has been extended through December 31, 2009 and is retroactive to January 1, 2009.