The American Recovery and Reinvestment Act of 2009

By Sheila Clark, Director, The Income Tax School www.theincometaxschool.com

Congress has approved and President Obama has signed new economic stimulus legislation, The American Recovery and Reinvestment Act of 2009.  The IRS is implementing tax-related provisions of this new program as quickly as possible.

One key question is could the new legislation affect 2008 tax returns?  Unfortunately, the new legislation does not have a major impact for the vast majority of individuals preparing their 2008 tax returns which are due April 15.  Instead, these changes will largely impact 2009 tax returns filed next year, in 2010.  Taxpayers should continue to prepare their 2008 tax returns as they normally would.

There are a few limited areas in the legislation that could impact 2008 tax returns.  For example, for some small businesses, changes in the net operating loss provisions could affect 2008 tax returns.  More details on this and other changes — such as the first-time homebuyer’s credit — will be available soon.

Tax Relief for Individuals and Families

“Making Work Pay” Tax Credit

The bill would cut taxes for more than 95% of working families in the United States.  For 2009 and 2010, the bill would provide a refundable tax credit of up to $400 for working individuals and $800 for taxpayers who are Married Filing Joint.  This tax credit would be calculated at a rate of 6.2% of earned income and would phase out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 for married couples filing jointly). 

For taxpayers who receive a paycheck and are subject to withholding, the credit will typically be handled by their employers through automated withholding changes in early spring.  These changes may result in an increase in take-home pay. The amount of the credit must be reported on the employee's 2009 income tax return filed in 2010. Taxpayers who do not have taxes withheld by an employer during the year can also claim the credit on their 2009 tax return.

It is not necessary to submit a Form W-4 to get the automatic withholding change.  However, an employee with multiple jobs or married couples whose combined incomes place them in a higher tax bracket may elect to submit a revised Form W-4 to ensure enough withholding is held to cover the tax for his or her combined income.

The following will not be eligible for this tax credit:

• Nonresident aliens,
• Anyone who is eligible to be claimed as a dependent by someone else, or
• Estates or trusts.

Economic Recovery Payment to Recipients of Social Security, SSI, Railroad Retirement and Veterans Disability Compensation Benefits.

The bill would provide a one-time payment of $250 to retirees, disabled individuals and SSI recipients receiving benefits from the Social Security Administration, Railroad Retirement beneficiaries, and disabled veterans receiving benefits from the U.S. Department of Veterans Affairs.  The one-time payment is a reduction to any allowable Making Work Pay credit.

Ineligible taxpayers include an individual who:

• Receives SSI while in a Medicaid institution,
• Is in prison,
• Is a fugitive,
• Is a probation or parole violator,
• Has committed fraud, or
• Is no longer lawfully present in the United States

Nearly 55 million Social Security and SSI recipients will receive the one-time payment of $250 each.  The Social Security Administration expects everyone who is entitled to this payment to receive it by late May 2009 and no later than the first week of June 2009.  No action is required by eligible recipients.  The one-time payment will not be included in the recipients monthly benefit payment.

The one-time payment will be delivered in the same manner as the recipient currently receives his monthly benefit payment.  If the recipient receives his payment by mail, he must have an address of record in one of the 50 states, the District of Columbia, Puerto Rico, Guam, the US Virgin Islands, America Samoa or the Northern Mariana Islands.

Refundable Credit for Certain Federal and State Pensioners

The bill would provide a one-time refundable tax credit of $250 in 2009 to certain government retirees who are not eligible for Social Security benefits.  This one-time credit is a reduction to any allowable Making Work Pay credit.

Increase in Earned Income Tax Credit

The bill would temporarily increase the earned income tax credit for working families with three or more children. Under current law, working families with two or more children currently qualify for an earned income tax credit equal to forty percent (40%) of the family’s first $12,570 of earned income. This credit is subject to a phase-out for working families with adjusted gross income in excess of $16,420 ($19,540 for married couples filing jointly).  The bill would increase the earned income tax credit to forty-five percent (45%) of the family’s first $12,570 of earned income for families with three or more children and would increase the beginning point of the phase-out range for all married couples filing a joint return (regardless of the number of children) by $1,880.

Increase Eligibility for the Refundable Portion of Child Credit

The bill would increase the eligibility for the refundable child tax credit in 2009 and 2010. For 2008, the child tax credit is refundable to the extent of 15 percent of the taxpayer’s earned income in excess of $8,500.  The bill would reduce this floor for 2009 and 2010 to $3,000.

“American Opportunity” Education Tax Credit

The bill would provide financial assistance for individuals seeking a college education. For 2009 and 2010, the bill would provide taxpayers with a new “American Opportunity” tax credit of up to $2,500 of the cost of tuition and related expenses paid during the taxable year.  Under this new tax credit, taxpayers will receive a tax credit based on one hundred percent (100%) of the first $2,000 of tuition and related expenses (including books) paid during the taxable year and twenty-five percent (25%) of the next $2,000 of tuition and related expenses paid during the taxable year.  Forty percent (40%) of the credit would be refundable.  This tax credit will be subject to a phase-out for taxpayers with adjusted gross income in excess of $80,000 ($160,000 for married couples filing jointly).

Computers as Qualified Education Expenses in 529 Education Plans

Section 529 Education Plans are tax-advantaged savings plans that cover all qualified education expenses, including: tuition, room & board, mandatory fees and books. The bill provides that computers and computer technology qualify as qualified education expenses.

Refundable First-time Home Buyer Credit

Last year, Congress provided taxpayers with a refundable tax credit that was equivalent to an interest-free loan equal to 10 percent of the purchase of a home (up to $7,500) by first-time home buyers.  The provision applies to homes purchased on or after April 9, 2008 and before July 1, 2009.  Taxpayers receiving this tax credit are currently required to repay any amount received under this provision back to the government over 15 years in equal installments, or, if earlier, when the home is sold.  The credit phases out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 in the case of a joint return).  The bill eliminates the repayment obligation for taxpayers that purchase homes after January 1, 2009, increases the maximum value of the credit to $8,000, and removes the prohibition on financing by mortgage revenue bonds, and extends the availability of the credit for homes purchased before December 1, 2009.  The provision would retain the credit recapture if the house is sold within three years of purchase.

Sales Tax Deduction for Vehicle Purchases

The bill provides all taxpayers with a deduction for State and local sales and excise taxes paid on the purchase of new cars, light truck, recreational vehicles, and motorcycles through 2009.  This deduction is subject to a phase-out for taxpayers with adjusted gross income in excess of $125,000 ($250,000 in the case of a joint return).

Temporary Suspension of Taxation of Unemployment Benefits

Under current law, all federal unemployment benefits are subject to taxation. The average unemployment benefit is approximately $300 per month. The proposal temporarily suspends federal income tax on the first $2,400 of unemployment benefits per recipient. Any unemployment benefits over $2,400 will be subject to federal income tax. This proposal is in effect for taxable year 2009.

Extension of AMT Relief for 2009

The bill would provide more than 26 million families with tax relief in 2009 by extending AMT relief for nonrefundable personal credits and increasing the AMT exemption amount to $70,950 for joint filers and $46,700 for individuals.

Assistance for Families & Unemployed Workers

Extension of Emergency Unemployment Compensation

Through December 31, 2009, the bill continues the Emergency Unemployment Compensation program, which provides up to 33 weeks of extended unemployment benefits to workers exhausting their regular benefits.

Increase in Unemployment Compensation Benefits

The bill increases unemployment weekly benefits by an additional $25 through 2009.

Unemployment Compensation Modernization

The bill provides one-time grants to reward and encourage States enacting specific reforms designed to increase Unemployment Compensation coverage among low-wage, part-time and other jobless workers, as well as provides an additional $500 million in administrative funding to all States.

Additional Unemployment Provisions

Additional provisions extend unemployment compensation for 13 weeks to railroad workers, who are not included in the Federal/state unemployment system and provide temporary federal assistance to states for the administration of the Extended Benefits program.

Health Insurance Assistance

Premium Subsidies for COBRA Continuation Coverage for Unemployed Workers

Recession-related job loss threatens health coverage for many families.  To help people maintain coverage, the bill provides a 65% subsidy for COBRA continuation premiums for up to 9 months for workers who have been involuntarily terminated, and for their families.  This subsidy also applies to health care continuation coverage if required by states for small employers.  With COBRA premiums averaging more than $1000 a month, this assistance is vitally important. 

To qualify for premium assistance, a worker must be involuntarily terminated between September 1, 2008 and December 31, 2009.  The subsidy would terminate upon offer of any new employer-sponsored health care coverage or Medicare eligibility.  Workers who were involuntarily terminated between September 1, 2008 and enactment, but failed to initially elect COBRA because it was unaffordable, would be given an additional 60 days to elect COBRA and receive the subsidy.  To ensure that this assistance is targeted at workers who are most in need, participants must attest that their same year income will not exceed $125,000 for individuals and $250,000 for families.  The Joint Committee on Taxation estimates that this provision would help 7 million people maintain their health insurance by providing a vital bridge for workers who have been forced out of their jobs in this recession.

Extension of Enhanced Small Business Expensing (Section 179)

In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers may elect to write off the cost of these expenses in the year of acquisition in lieu of recovering these costs over time through depreciation.  Last year, Congress temporarily increased the amount that small businesses could write off for capital expenditures incurred in 2008 to $250,000 and increased the phase-out threshold for 2008 to $800,000.  The new law extends these temporary increases for capital expenditures incurred in 2009.

Expanded Loss Carryback of Net Operating Losses for Small Businesses

Under pre-Act law, net operating losses (NOLs) may be carried back to the two years before the year that the loss arises and carried forward to each of the succeeding twenty years after the year that the loss arises.  For 2008, the new law extends the maximum NOL carryback period from two years to five years for small businesses with gross receipts of $15 million or less.