American Recovery and Reinvestment Act of 2009

Congress Passes Massive Stimulus Bill

The new law makes over 300 changes to Internal Revenue Code

Tax Update

Tax Update

Tax Udate

Highlights:

New making Work Pay Credit

Enhanced Child Tax Credit

American Opportunity Tax Credit for Education

Expand Homebuyer Tax Credit

Extended Bonus Depreciation and Code Sec. 179 Expensing

Five-Year carryback of NOLS

Extension/Increases of many Energy Tax Incentives

Currently, unemployment benefits are included in a recipient’s gross income for federal income tax purposes. The new law temporarily excludes up to $2,400 of unemployment compensation from a recipient’s gross income for 2009.

Child Tax Credit

 The new law increases the refundable portion of the child tax credit for 2009 and 2010. The agreement does so by setting the income threshold at $3,000.

 The stimulus package allows purchasers of new vehicles for the rest of 2009 an above-the-line deduction for state and local sales taxes or excise taxes paid on the purchase. The new law puts two limits on this new deduction:

(1) Deductible sales or excise taxes cannot exceed the portion of the tax attributable to the first $49,500 of the purchase price of any one vehicle; and

(2) Any deduction will be phased out for any tax year in which the purchaser has adjusted gross income exceeding $125,000 ($250,000 for joint returns).

Any newly purchased vehicle, including cars, SUVs, light trucks or motorcycles, first used by the taxpayer that weighs no more than 8,500 gross pounds generally qualifies. Motor homes also qualify.

 The new law provides a five-year carryback of 2008 NOLs but only for qualified small businesses with average gross receipts of $15 million or less. The new law gives these businesses the choice to carry back NOLs three, four or five years. The new treatment will apply only to NOLs for any tax year beginning or ending in 2008. The normal NOL carryback period, which is two years for all businesses, returns for NOLs incurred in 2009.

 The new law temporarily shortens, from 10 to seven years, the holding period for assets subject to the built-in gains tax imposed after a C corp elects to become an S corp. This reduction applies to C corps that convert to S corps in tax years beginning in 2009 and 2010.

 The new law decreases estimated tax payments for individuals whose incomes primarily come from a small business in 2009. Rather than being required to make quarterly estimated tax payments based on 100 percent of their 2008 returns, the new law allows computation based on 90 percent. 

Making Work Pay Credit

 The Making Work Pay credit allows a credit against income tax in an amount equal to the lesser of 6.2 percent of the individual’s earned income or $400 ($800 for married couples filing jointly). The credit will apply retroactively to the start of 2009 and extend through 2010.

 The credit applies in full for individuals whose modified adjusted gross income (MAGI) does not exceed $75,000 or $150,000 in the case of married couples filing jointly. The credit is phased out at a two percent rate above that limit.

 The employer’s share of FICA, or its 6.2 percent equivalent to be more precise, would remain unchanged. Qualified taxpayers would take this credit through a reduction in wage withholding or in a lump sum when filing their returns for the tax year. Earnings from self-employment also qualify to the extent they are taken into account in computing taxable income. Individuals who do not provide a Social Security number on their return, however, are ineligible.

The new law provides onetime payments of $250 to individuals on fixed  incomes (primarily Social Security recipients, railroad retirees, and disabled veterans). Retired government workers, who generally are ineligible for Social Security, also will receive one-time payments of $250. These payments will reduce any Making Work Pay credit to which the individual would otherwise be entitled.

  The new law includes an alternative minimum tax (AMT) patch for 2009. The AMT patch for 2009 raises exemption amounts slightly above the 2008 patch levels. The 2009 AMT exemption amounts are: $70,950 for joint filers and surviving spouses (up from $69,950 in 2008); and $46,700 for singles and heads of households (up from $46,200).

  The new law extends the 50-percent first-year bonus depreciation allowed under the 2008 Economic Stimulus Act through December 31, 2009. The extension is retroactive to January 1, 2009. The new law also extends, through 2010, the additional year of bonus depreciation allowed under the 2008 Economic Stimulus Act for property with a recovery period of 10 years or longer, for transportation property (tangible personal property used to transport people or property), and for certain aircraft

Higher Caps on Vehicle Depreciation. Also extended for bonus depreciation purposes, the regular dollar cap for new vehicles placed in service in 2009 is raised again by $8,000, effective January 1, 2009. This increase mirrors the temporary 2008 cap increase. For 2008, the regular first-year depreciation dollar cap of $2,960 for autos was raised to $10,960 if bonus depreciation is elected ($11,160 for light trucks and vans).

Code Sec. 179 Expensing

  The new law extends the increased 2008 Code Sec. 179 expensing (aka, small business expensing) amounts to 2009. The 2008 Economic Stimulus Act increased the amount of Code Sec. 179 expensing for 2008 to $250,000 and increased the threshold for reducing the deduction to $800,000. Without the 2009 extension, businesses placing property in service in 2009 would have been limited to a $125,000 inflation adjusted maximum deduction with a $500,000 cap.

  The new law raises the current maximum $7,500 first-time homebuyer tax credit to $8,000, and extends it at that level through November 30, 2009. It also eliminates any required repayment to the IRS after 36 months in the home. These enhancements apply to purchases of a principal residence by a first-time homebuyer after December 31, 2008. Purchases on or after April 9, 2008, and before January 1, 2009, continue to be governed by the original first-time homebuyer credit enacted last year. The credit phase-outs that start for taxpayers with AGI in excess of $75,000 ($150,000 for joint filers) continues to apply to both years.

The new law provides a temporary increase in the Earned Income Tax Credit (EITC) for 2009 and 2010. Prior to this change, the credit percentage for the EITC for a taxpayer with two or more qualifying children was 40 percent of the first $12,570 of earned income. The new law increases the percentage to 45 percent of the first $12,570 of earned income for taxpayers with three or more qualifying children. The EITC phase-out range has also been adjusted upward by $1,880 for joint filers to eliminate any marriage penalty.

The new law temporarily enhances the existing HOPE education credit in amount (from a maximum $1,800 to $2,500 per year), in scope (extending it to all four years of college and adding course materials to qualifying expenses), and in phase-out level (to $80,000/$160,000 joint filers). The new law renames the credit the “American Opportunity Tax Credit” and makes 40 percent of the credit refundable. Under the new credit, a maximum $2,500 per year would be allowed on $4,000 in qualifying payments (100 percent of the first $2,000 and 25 percent of the next $2,000).

 Qualified tuition program (aka “529 plan”) distributions used to pay a beneficiary’s qualified education expenses are tax-free. Other distributions are included in the beneficiary’s income and are subject to a penalty. For 2009 and 2010 the new law allows beneficiaries of qualified tuition programs to use tax-free distributions to pay for computers and computer technology, including internet access.

 The new law increases the Code Sec. 25C residential energy property tax credit from 10 percent to 30 percent, raises the maximum cap to a $1,500 aggregate amount for 2009 and 2010 installations, eliminates the $500 lifetime cap, and makes several other modifications. The changes are effective for eligible property placed in service after December 31, 2008, and before January 1, 2011.