Our Summary of the Individual Tax Provisions of the 2009 Federal Stimulus Bill

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The American Recovery and Reinvestment Act of 2009, which was signed into law last week by the President contains many federal income tax provisions impacting individuals and small businesses. Below is our summary of those provisions which may impact the clients of Nienow & Company, LLP.

Higher education: The American opportunity tax credit is a temporary (for tax years beginning in 2009 and 2010) increase and expansion of the Hope scholarship credit (IRC § 25A(i)). It increases the maximum credit per student from $1,800 to $2,500 and extends its availability from the first two years of postsecondary education to four years. Nonrefundable under prior law, the credit now becomes 40% refundable. The phaseout range is increased from the current $50,000–$60,000 for single filers to $80,000–$90,000. The joint filer phaseout, currently $100,000–$120,000, increases to $160,000–$180,000. Expenses for course materials, such as textbooks, are added to the definition of qualified tuition and related expenses eligible for the credit.

Homebuyer’s credit: The act increases the amount of the IRC §36 first-time homebuyer’s credit from $7,500 to $8,000 and eliminates the repayment requirement for houses purchased in 2009. The credit, added by the Housing Assistance Act of 2008, P.L. 110-289, is refundable, but for homes purchased between April 9, 2008, and Dec. 31, 2008, it must be recaptured ratably over 15 years, or earlier if the home is sold. The stimulus act waives the recapture requirement for homes purchased after Jan. 1, 2009, and extends the sunset of the credit from June 30, 2009, to Dec. 1, 2009.

The amount of the credit remains 10% of the purchase price of a principal residence of a taxpayer who has not owned a U.S. principal residence in the previous three years. Recapture still applies if the taxpayer disposes of the home or no longer uses it as a principal residence within three years after purchase. The waiver of recapture isn’t retroactive to before 2009, Auerbach noted.

Making work pay credit: Intended to partially offset an employee’s portion of Social Security payroll taxes, this temporary credit is 6.2% of earned income up to a total credit of $400 for individuals and $800 for joint filers (IRC § 36A). It is retroactive to the beginning of 2009. It begins phasing out at a rate of 2% of modified adjusted gross income (MAGI) above $75,000 for individuals and $150,000 for joint filers.

New car sales tax deduction: Buyers of new cars and light trucks may deduct the portion of state and local sales and excise taxes attributable to the first $49,500 of the vehicle’s purchase price (IRC §164(b)(6)). This is an above-the-line deduction and is allowed against alternative minimum tax (AMT). The deduction will be phased out for single taxpayers with MAGI in excess of $125,000 for the tax year ($250,000 for joint filers). Taxpayers who elect under section 164(b)(5) to take the state and local sales tax deduction in lieu of deducting state and local income tax cannot also take the new car sales tax deduction.

AMT patch: For 2009, the AMT exemption is increased to $46,700 for singles and $70,950 for joint filers (IRC §55(d)).

Section 529 plans may buy computers: For 2009 and 2010, the cost of computers and related technology qualifies as higher education expenses for purposes of the rules governing distributions from a section 529 qualified tuition plan, as long as the beneficiary of the plan is enrolled at an eligible educational institution. Internet access charges are also covered, as well as software, so long as it’s not for sports, games or hobbies (unless the software is predominantly educational in nature).

Qualified transportation fringe benefit increase: Another reason to vanpool or take public transit to work arrived with a near doubling of the exclusion amount for a transportation fringe benefit from $120 to $230 per month (the same as the qualified parking amount) (IRC §132(f)). This higher limit is effective starting March 2009 and through 2010 with an annual inflation adjustment.

Child tax credit and other items: The act extends for 2009 and 2010 the lower, $3,000 income threshold for refundability of the section 24 child credit, meaning more of it is refundable to low-income taxpayers. Other items directly benefiting less-affluent taxpayers or those in financial distress include a temporary increase in the earned income tax credit for 2009 and 2010, a one-time $250 payment to persons on fixed incomes not eligible for the making work pay credit and a temporary exclusion of $2,400 of unemployment benefits from taxable income for 2009.

Excerpted from The Journal of Accountancy.

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