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Tax Season Kicks Off

Recovery Act ushers in changes for 2009.

January 2010
by Paul Bonner/Journal of Accountancy

Following a flurry of tax legislation that enacted changes for tax years beginning in 2009, this tax season requires heightened attention to make sure your clients don’t miss any of the new and extended deductions and credits to which they’re entitled.

Most of the changes for 2009 were directed at stimulating the economy and providing incentives and relief for individuals and businesses. Thus, it’s important for return preparers to double-check taxpayer materials as they come in. They should make sure organizers, client letters and other guides and checklists have covered the full gamut of considerations and that their contents were heeded and understood by clients.

The biggest single source of these changes is the American Recovery and Reinvestment Act of 2009 (ARRA), PL 111-5, enacted in February. A comprehensive guide to all the changes for 2009 is beyond the scope of this article, but the following highlights are intended to provide a reminder of provisions that could easily be overlooked. It is accompanied by a Filing Season Quick Guide (PDF) with many of the most commonly encountered return items, with changes and inflation-adjusted amounts for 2009.

New Provisions for Individuals

Some stimulus provisions could affect almost anyone, depending on basic applicability relating to adjusted gross income (AGI).

Making work pay credit. One such item affecting lower- and middle-income taxpayers is the making work pay credit. This refundable personal credit is equal to 6.2 percent of earned income (with some modifications) up to a maximum credit of $400 for single filers and $800 for joint returns. The credit phases out beginning at modified AGI of $75,000 for single filers and $150,000 for joint returns intending to offset a limited portion of an employee’s share of FICA tax withholding. Taxpayers eligible for the credit must file the new Schedule M with Form 1040 and claim the credit as a tax payment on line 63 of Form 1040 (line 40 on Form 1040A). The IRS has revised wage withholding tables to reflect the credit, but according to the Treasury Inspector General for Tax Administration, common taxpayer situations the tables don’t take into consideration could have caused an estimated 15.4 million taxpayers to withhold too little federal tax. The IRS disputes that number, but your clients could be among taxpayers with an unexpected tax liability or smaller refund than anticipated and may need to revise their withholding for 2010. Recipients of Social Security and certain other benefits who received a one-time $250 economic recovery payment in 2009 must reduce the making work pay credit by that amount.

This article has been excerpted from the Journal of Accountancy. View the full article here.