Tax Breaks for Individuals in 2009 Stimulus Act
Millions of consumers will have more cash in their pockets as a result of the
American Recovery and Reinvestment Act of 2009 (also known as the stimulus act or bill). The nearly $800 billion bill was signed into law by President Barack Obama on February 17.
Generally, this large economic stimulus package does not affect 2008 returns, but it does give many taxpayers immediate tax relief, including a reduction in 2009 tax withholding and estimate amounts.
Although eligible individuals will benefit from a wide variety of stimulus tax provisions, Bob Ranweiler, tax principal with LarsonAllen, summarizes what he considers to be the most noteworthy:
- Lower taxes for many on earned income
- Help for many in covering the cost of higher education
- Liberalized first-time homebuyer credit
- Write off of sales tax on new car purchases
- Extension of alternative minimum tax (AMT) relief
- Lower required estimated tax payments and reduced withholding for 2009
Break for many workers and self-employed individuals
"Making Work Pay" is a refundable tax credit that applies for both 2009 and 2010. Eligible taxpayers will not receive an advance rebate payment from the IRS as in 2008, but rather will receive the benefit in the form of lower withholding on wages and lower estimate payments for 2009.
“This new provision will increase many wage earners’ paychecks because of lower withholding requirements related to this tax cut,” explains Ranweiler.
Eligibility for Making Work Pay credit
- This credit is equal to 6.2 percent of an individual’s earned income up to a total credit of $400 for individuals and $800 on joint returns.
- Phase out of the credit occurs at 2 percent of the taxpayer’s modified adjusted gross income (AGI) exceeding $75,000 on a single return and $150,000 on a joint return; therefore, single filers over $95,000 and joint filers over $190,000 will receive no credit.
- It is not available to estates, trusts, or individuals claimed or claimable as a dependent to another.
- It applies to all eligible earned income, including wages, salaries, tips, and self-employment income; however, several special rules apply.
Break on college costs
“This tax break will provide greater benefit to offset the cost of college for many taxpayers,” says Ranweiler.
For 2009 and 2010, the "Hope" scholarship credit is extended to the first four years of college and increases to a maximum credit of $2,500 per student. Formerly, it applied to the first two years of higher education and the maximum credit totaled $1,800 per student.
The credit is computed as 100 percent of the first $2,000 of tuition and related expenses, and 25 percent of the next $2,000 of tuition and related expenses paid on an annual basis.
Phase out of the credit for single filers occurs at AGI of $80,000–$90,000 and $160,000–$180,000 on joint returns. Prior to modification, the "Hope" credit and the continuing "Lifetime Learning" credit phased out at an AGI of $50,000–$60,000 for singles and $100,000–$120,000 for joint returns.
Unlike past law, 40 percent of the credit exceeding the tax liability (both regular tax and AMT) is refundable unless the taxpayer is an 18–23 year old subject to Kiddie Tax.
The existing first-time homebuyer credit is extended for qualifying purchases prior to December 1, 2009. Additionally, the maximum credit amount is increased to $8,000 (formerly $7,500 in 2008), and the 15-year automatic recapture of the credit is waived for qualifying home purchases between January 1, 2009, and November 30, 2009.
“An $8,000 tax break that doesn’t have to be paid back comes as a welcome relief to qualifying home buyers,” states Ranweiler. In addition, he points out, “As with many provisions, the credit phases out at higher income levels, specifically AGI of $75,000–$95,000 for single filers and $150,0000–$170,000 for joint filers.”
Taxpayers may elect to treat any 2009 home purchase as occurring on December 31, 2008, and they can file a 2008 Form 1040X to claim the credit.
Recapture applies if the taxpayer disposes of the home or it ceases to be the principal residence within 36 months from the date of purchase; however, the recapture continues to be limited to the gain on the sale.
Caution:
The 15-year recapture provision continues to apply to homes purchased prior to January 1, 2009. But a 2009 credit claimed electively in 2008 is not subject to this recapture.
Break on new car purchases
From February 17, 2009, through December 31, 2009, taxpayers are allowed to take a Schedule A itemized deduction for state or local sales and excise taxes paid on the purchase of qualified motor vehicles.
This deduction is limited to the tax amount paid on the purchase price of a qualified vehicle up to $49,500. It phases out at an individual’s modified AGI between $125,000–$135,000 on a single return and $250,000–$260,000 on a joint return.
A qualified motor vehicle includes a passenger automobile or light truck with a gross vehicle weight rating of 8,500 pounds or less, as well as qualifying motorcycles and motor homes. The original use of the vehicle must commence with the taxpayer.
Taxpayers who do not itemize deductions are allowed to increase their standard deduction by the motor vehicle sales tax amount that otherwise would be allowable on Schedule A. Whether claimed as a standard or itemized deduction, the sales tax amount is allowed as a deduction for AMT purposes.
Extension of AMT relief
As part of the bill, a one-year patch to the individual AMT was extended for 2009. This assures taxpayers who were not subject to the AMT in 2008 do not become subject in 2009 under similar facts, due to the indexing.
Break on estimated tax payments
For taxable years beginning in 2009, qualified individuals are allowed to reduce the required annual estimated tax payment for 2008 to 90 percent of the tax liability shown on the 2008 return.
To qualify under this provision, the taxpayer’s AGI for 2008 must be less than $500,000 ($250,000 if married, filing separate). In addition, the taxpayer must certify that at least 50 percent of the gross income shown on the 2008 return was income derived from a small trade or business. A small trade or business is defined as any business employing no more than 500 persons, on average, during the calendar year ending in or with the preceding taxable year.
Other individual provisions
Several other provisions impacting individuals were enacted, including:
- Expanded earned income credit
- Enhanced child tax credit
- Liberalized fringe benefit rules
- One-time payment of $250 to qualified retirees
- Expanded credits for principal residence energy improvements
Business incentives
View the tax
incentives for businesses.
For more information on the individual tax credits included in the stimulus package, visit the IRS Web site or contact us.