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Cash In on the Recovery Act

Understanding provisions of the stimulus plan means payoffs for your clients.

June 1, 2009
Sponsored by Gear Up Mid-Year Tax Update

After much haggling and negotiations, Congress and the Administration emerged on February 14 with a final stimulus plan. Designed to spur growth in the U.S. economy by kick-starting individual and business spending and investment, The American Recovery and Reinvestment Act of 2009 (Act) was signed into law by President Obama on February 17.

“The final version scales back some tax-saving provisions but will nonetheless afford taxpayers numerous tax breaks,” says Jim Seidel, chief tax analyst from the Tax & Accounting business of Thomson Reuters. The Act includes a number of beneficial, though temporary, tax changes for individuals. In other words, these tax breaks will apply in 2009 only (or in some cases, in 2009 and 2010).

As an accounting professional, you should understand the key provisions of the Act that may benefit your clients:

Making Work Pay Credit — Instead of mailing lump-sum stimulus checks to individuals and families like the federal government did last year, this Act will give all empl — oyed individuals a refundable credit of the lesser of 6.2 percent of their earned income or $400 ($800 MFJ). This will be issued in the form of adjusted withholding by employers so that employees receive more take-home pay in their paychecks.

The credit will be phased out for individuals with AGI (adjusted gross income) between $75,000 and $95,000 ($150,000 – $190,000 MFJ (married, filing jointly)). The IRS issued new wage withholding tables on March 17, and some employees may have already noticed that the amount of federal income tax withheld from their paychecks has decreased.

Economic Recovery Payment — This is a $250 one-time credit in 2009 to retirees, disabled individuals and Social Security recipients who receive benefits from the Social Security Administration, Railroad Retirement beneficiaries and the U.S. Department of Veterans Affairs.

First-Time Homebuyer Credit — This credit amends the Housing Recovery Act of 2008, which provided a tax “credit” to first-time homebuyers that had to be repaid to the federal government over a period of 15 years. The new credit, which has been raised to $8,000, does not have to be repaid as long as the home is not sold within three years. The credit is phased out for individuals with AGI between $75,000 and $95,000 ($150,000 – $170,000 MFJ).

To qualify, individuals must have either: 1) never owned a home before or 2) not owned or co-owned a home during the three years preceding the closing date. The home must be used as a principal residence — and beware: individuals who sell, transfer or stop using the home as their primary residence may trigger a recapture of the entire remaining unpaid balance of the refundable credit.

American Opportunity Tax Credit — The Act renamed the HOPE education credit and expanded tax breaks for college education. In 2009 and 2010, individuals can receive a tax credit of up to $2,500 of the cost of tuition and related expenses paid during the tax year. It is available to cover the first four years of post-secondary education in a degree or certificate program, with 40 percent of the credit refundable. The credit is phased out for individuals with AGI between $80,000 and $90,000 ($160,000 – $180,000 MFJ).

Sales Tax Deduction for Vehicle Purchases — Individuals will receive a deduction for state and local sales and excise taxes paid on the purchase of new cars, light trucks, RVs and motorcycles bought before January 1, 2010. The deduction is limited to the tax paid on up to $49,500 of the purchase price, and is phased out for individuals with AGI between $125,000 and $135,000 ($250,000 – $260,000 MFJ). Note that this deduction is generally available regardless of whether taxpayers itemize or claim the standard deduction.

Expansion of Refundable Child Tax Credit — Previously, the $1,000 credit taxpayers receive for each qualifying child under the age of 17 was refundable only to a limited extent. The Act reduces the earned income threshold from $8,500 to $3,000 in 2009 and 2010, which will result in the credit being refundable for more individuals and families.

Extension of AMT Relief — Two provisions of the Act will help shield more than 26 million families from having to pay the AMT this year: 1) increasing the AMT exemption amount by $46,700 for individuals ($70,950 MFJ) in 2009, and 2) allowing nonrefundable credits to offset AMT as well as regular tax.

Suspension of Tax on Unemployment Benefits — Federal taxes on the first $2,400 of unemployment benefits will be suspended in 2009 — but remind your clients that the amount of unemployment benefits in excess of $2,400 will be taxable.

Larger Earned Income Tax Credit (EITC) — Families with three or more qualifying children can claim an EITC of 45 percent of earnings up to $12,570 in 2009, resulting in a maximum credit of $5,656.50.

Refundable Credit for Government Retirees — Certain federal and state government retirees who aren’t eligible for Social Security benefits will receive a one-time refundable tax credit of $250 in 2009.

Federal Subsidy for COBRA Continuation Coverage for the Unemployed — The federal government will provide involuntarily terminated workers with a 65 percent COBRA (Consolidated Omnibus Budget Reconciliation Act) premium subsidy for up to nine months. In other words, these individuals can continue to participate in their former employers’ group health plans at a cost of only 35 percent of their normal COBRA premium.

Keep in mind for your business clients that the former employer is required to pay the remaining 65 percent of the COBRA premium. The amount the employer pays is credited against the income tax withholding and payroll taxes they remit to the federal government.

To qualify, an individual must have been involuntarily terminated from his or her job between September 1, 2008 and December 31, 2009. Note, however, that recipients who have AGI greater than $125,000 ($250,000 MFJ) must pay back all or part of the subsidy when their file their income tax returns.

Personal Energy Property Credit — The Act provides a non-refundable credit in 2009 and 2010 equal to 30 percent of the cost of certain energy efficiency upgrades (insulation, doors, windows, electric heat pumps, etc.) and renewable energy systems (e.g., solar, wind, geothermal). The previous 10-percent credit was scheduled to expire in 2009.

Published in the May 2009 issue of the CPE & Training Solutions ezine, a new free digital magazine available from the Tax & Accounting business of Thomson Reuters. Copyright © May 2009. To learn more about Gear Up, visit trainingcpe.thomson.com/GearUp.