AMERICAN RECOVERY AND REINVESTMENT ACT OF 2009

William E. Hesch, Esq, CPA, PFS

William E. Hesch CPAs, LLC

March 8, 2009

www.heschcpa.com

Introduction

• The roughly $800 billion stimulus act, contains nearly $300 billion in tax relief.  The tax bill was signed on February 17, 2009. 

• The new law sets in motion a wave of direct spending and tax incentives to jump start the U.S. economy out of recession.

• In all, the new law makes over 300 changes to the Internal Revenue Code.

• Most of the tax incentives in the new law are retroactive to January 1, 2009.  What’s more, over $280 billion in tax relief is concentrated within the next two years.

A.   Making Work Pay Credit

• The new law includes President Obama’s signature provision aimed at individual tax relief: the 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 applies retroactively to the start of 2009 and will be repeated again in 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.

• Only individuals with earned income would qualify for the Making Work Pay credit, which would effectively offset an individual’s share of FICA payroll taxes for the first $6,452 in earnings ($12,904 for couples).

• First-Time Homebuyer Tax Credit

• 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) continue to apply to both years.

• The effective date for the new law’s no pay-back provision is keyed to “residences purchased after December 31, 2008.” A purchase takes place when title closes rather than when a contract of sale is executed.

• New Car Deduction

• A surprise provision arriving late in drafting 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:

 (a) 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

(b) Any deduction will be phased out to the extent 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.

• Both domestic and foreign made vehicles qualify. However, sales taxes paid on a lease agreement are not included. Assuming a four percent sales tax on a $40,000 vehicle, the above-the-line deduction would equal $1,600.

• The new car deduction is effective only for purchases “on or after date of enactment,” which is when President Obama signed the legislation on February 17, 2009.

• Education Credit

• The new law temporarily enhances the existing HOPE education credit–for 2009 and 2010 only– 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, the 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).

• Although this credit would be made retroactive to January 1, 2009, it does not automatically apply to a college semester that begins in 2009. Tuition paid late in 2008 for an upcoming 2009 semester qualifies only for a 2008 credit under existing rules.

• Residential Energy Property Credit

• 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.

• Higher energy costs should accelerate the “pay-back” period for qualifying home improvements. The credit was in effect in prior years through 2007, but Congress allowed it to lapse for 2008. Pre-2008 credits are not counted toward the new $1,500 maximum.

• Improvements eligible for the Code Sec. 25C credit include insulation materials, exterior windows including skylights, exterior doors, central air conditioners, natural gas, propane or oil water heaters or furnaces, hot water boilers, electric heat pump water heaters, certain metal roofs and stoves, and advanced main air circulating fans.

• Other Tax Savings Provisions

• Child Tax Credit
• Earned Income Credit
• Unemployment Compensation
• Transit Benefits Party
• Qualified Tuition Programs

Conclusion:

For more information on these and other tax savings provisions, see our Tax Guide Online at www.heschcpa.com and simply follow these instructions:

1. Click "Taxes" heading at top of the Home Page and click the "Tax Planning Guide." 

2. Opt in with contact information.

3. A summary of the Tax Relief Highlights for individuals can be found by clicking the Individuals tab and then the What's New tab of the Tax Guide Online.