Stimulus Bill — tax relief for individuals and families

On Tuesday Feb. 17, 2009, President Obama signed The American Recovery and Reinvestment Act of 2009 into law.

This $787 billion economic stimulus package has tax relief for most Americans and is geared towards helping our economy improve and providing new jobs. Among the highlights of the new bill are:

• “Making work pay” Tax Credit — The bill allows for up to $400 for working individuals and $800 for working families during 2009 and 2010. The credit would be calculated at 6.2 percent of earned income and would phase out for taxpayers with adjusted gross income (AGI) in excess of $75,000 ($150,000 for married couples filing jointly.) Taxpayers can receive this credit through a reduction in their paycheck withholding, or by claiming the credit on their tax returns. An individual worker would need to earn about $6,452 of annual income to receive the full $400 credit.

• Economic Recovery Payment — A onetime payment of $250 will be made 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.

• Refundable First-time Home Buyer Credit — During 2008, Congress provided taxpayers with a refundable tax credit of up to $7,500 for first-time home buyers. Taxpayers were required to repay the credit back to the government over 15 years or earlier when the home is sold. The new bill increases the credit to $8,000. The repayment obligation for taxpayers that purchase their homes between Jan. 1 and Dec. 31, 2009, is eliminated, unless the home sells within three years. The credit phases out for taxpayers with AGI in excess of $75,000 ($150,000 for married couples filing jointly).

• Tax Credits for Energy-Efficient Improvements to Existing Homes — Under current law, individuals were allowed a 10 percent tax credit of the amount paid for any advanced main air circulating fan ($50 cap), $150 for any qualified natural gas, propane, oil furnace or hot water boiler ($150 cap), and $300 for any item of energy-efficient building property. For 2009 and 2010, the bill increases the amount of credit from 10 percent to 30 percent for qualified energy improvements and eliminates the property-by-property dollar caps. There is now just an aggregate cap of $1,500 on all property qualifying for the credit.

• Sales Tax Deduction on Purchase of New Vehicles — To get the auto industry rolling again, for 2009 the bill provides all taxpayers with a deduction for State and local sales and excise taxes paid on the purchase of new cars, light trucks, RVs, and motorcycles. This is an above the AGI line deduction so you don’t have to itemize to claim it. The deduction is available until Dec. 31, 2009, and phases out for taxpayers with AGI in excess of $125,000 ($250,000 for married couples filing jointly).

• Increase in Refundable portion of Child Tax Credit — The bill would increase the eligibility for the refundable child tax credit in 2009 and 2010. Currently the child tax credit is refundable to the extent of 15% of earned income greater than $8,500. The new bill would reduce this floor for 2009 and 2010 to $3,000.

• 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 40 percent of the family’s first $12,570 of earned income. This credit is subject to a phaseout for working families with adjusted gross income in excess of $16,420 ($19,540 for married couples filing jointly). For families of three or more children, the bill would increase the earned income tax credit to 45 percent of the first $12,570. The phaseout range would also be increased.

• Unemployment Relief — Currently all unemployment benefits are taxable. For 2009, the new law temporarily suspends federal taxes on the first $2,400 of unemployment benefits per recipient. Unemployment benefits over $2,400 will still be subject to federal income tax.

There is also a 65 percent subsidy which will provide up to nine months for COBRA continuation of health care coverage for families that have experienced job loss. This subsidy also applies to health care continuation coverage if required by states for small employers. To qualify for premium assistance, a worker must be involuntarily terminated between Sept. 1, 2008, and Dec. 31, 2009. The subsidy terminates upon offer of any new employer-sponsored health care coverage or Medicare eligibility.

• American Opportunity Education Tax Credit — For 2009 and 2010, the bill would provide financial assistance up to $2,500 for those working on a college education. A tax credit of 100 percent of the first $2,000 of tuition and related expenses (including books) is available and 25 percent of the next $2,000 is also available. Forty percent, or $1,000 of the credit, is refundable, which means that you would get the credit even if you didn’t have a tax liability.

• Extension of Alternative Minimum Tax (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.

More information is available in the full summary of the new stimulus bill at http://finance.senate.gov/press/Bpress/2009press/prb021209.pdf.

Ask your local certified public accountant (CPA), enrolled agent, accountant or other tax practitioner for guidance on how to take full advantage of this new tax relief.