American Recovery and Reinvestment Act has Tax Relief for Individuals and Families
Last week, Congress passed and the President signed into law the American Recovery and Reinvestment Act (the “Act”). This Act provides many tax incentives for individuals, families, and businesses. Discussed below are the key provisions enacted to assist individuals and families.
I. Income Related Provisions
“Making Work Pay” Tax Credit. This credit is effective for tax years 2009 and 2010 and provides a refundable tax credit of 6.2% of earned income (up to $400 for working individuals and $800 for working families). The credit is phased out at a rate of 2% of the taxpayer’s modified adjusted gross income (“AGI”) above $75,000 ($150,000 for joint returns). Therefore, the credit is completely phased out and unavailable for taxpayers with modified AGI of $95,000 ($190,000 for joint filers). The credit is reduced by any money received under Sections 2201 (Economic Recovery Payment to Recipients of Social Security, SSI, Railroad Retirement and Veterans Disability Compensation Benefits, providing a $250 credit to certain benefit recipients) and 2202 (Refundable Credit for Certain Federal and State Pensioners, providing a $250 credit to certain government retirees) of the Act. This credit is only available to non-dependent U.S. resident taxpayers.
Exclusion of Unemployment Compensation from Gross Income. The Act changes existing law, under which unemployment compensation was fully taxable, by making up to $2,400 of unemployment compensation excludable from gross income.
II. Child Related Provisions
Increase in Earned Income Tax Credit. The Earned Income Tax Credit is temporarily increased for working families with three or more children. The credit is equal to 45% of the family’s first $12,060 of earned income. The Act also increases the beginning point of the phase-out for married couples filing a joint return to $21,420 (regardless of the number of children).
Increase Eligibility for the Refundable Portion of Child Credit. The Refundable Child Tax Credit is temporarily increased. In 2008, the child tax credit was refundable up to 15% of the taxpayer’s earned income in excess of $8,500. The Act makes the Child Tax Credit refundable for up to 15% of the taxpayer’s income in excess of $3,000 for tax years 2009 and 2010.
III. Education Related Provisions
“American Opportunity” Tax Credit. The Act expands on the Hope Scholarship Credit to create the new “American Opportunity” Tax Credit providing financial assistance for individuals paying for and enrolled in college during tax years 2009 and 2010. The tax credit gives taxpayers a credit of 100% of the first $2,000 of tuition and related expenses (including books) paid during the taxable year and 25% of the next $2,000 of tuition and related expenses paid during the taxable year. Therefore, the maximum amount of the credit is $2,500. 40% of the credit is refundable, and the credit is subject to a phase-out for taxpayers with adjusted gross income in excess of $80,000 ($160,000 for married couples filing jointly). This tax credit applies to the first 4 years of Post-Secondary education, unlike the Hope Scholarship Credit, which applied only for the first 2 years of Post-Secondary education. Also, this credit may be claimed against Alternative Minimum Tax (“AMT”).
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 Act now includes computers, computer software that is predominately educational in nature, and Internet services as qualified education expenses.
IV. Purchase Related Provisions
Refundable First-time Home Buyer Credit. Last year, Congress provided taxpayers with a refundable tax credit equal to 10% of the purchase of a home (up to $7,500 for married filing jointly and up to $3,750 for singles) by first-time home buyers. Though termed a credit, this provision essentially acted as an interest-free loan because taxpayers receiving the tax credit were required to repay the credit over 15 years in equal installments, or, earlier, if the home was sold. The credit phased out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 in the case of a joint return). The Act eliminates the repayment obligation for taxpayers that purchase homes after January 1, 2009 so long as the home is not sold within 3 years of purchase, increases the maximum value of the credit to $8,000 for married filing jointly and $4,000 for singles, and extends the availability of the credit for homes purchased before December 1, 2009, rather than the previously established July 1, 2009 deadline.
Sales Tax Deduction for Vehicle Purchases. The Act provides all taxpayers with a deduction for State and local sales and excise taxes paid on up to $49,500 of the purchase price of new cars, light trucks, recreational vehicles, and motorcycles. This deduction is available for all such vehicles purchased in 2009 and 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). This deduction only applies to vehicles purchased in 2009 and is not available to taxpayers who choose to take a deduction for local sales taxes paid in lieu of local income taxes, as the sales and excise taxes paid would be taken into account in that deduction.
V. Alternative Minimum Tax
Extension of AMT relief for 2009. The Act extends through 2009 AMT relief for nonrefundable personal credits and increases the AMT exemption amount from $69,950 to $70,950 for joint filers and from $46,200 to $46,700 for individuals.
Please contact one of our tax attorneys to discuss how these and other provisions in the American Recovery and Reinvestment Act may benefit you.