New Stimulus Tax Breaks

The American Recovery and Reinvestment Act of 2009, which was signed into law on February 17th, includes a multitude of federal income tax changes. This article summarizes some of the personal tax changes:  One-Year AMT Patch Has Two Parts

If Congress had not taken action, millions more individuals would have been forced to pay the alternative

minimum tax (AMT) for 2009. So another one-year patch was applied to prevent this from happening. The good news is the patch was put in place much earlier this year than it has been in the past, which alleviates uncertainty for many people.

As in previous years, the one-year patch has two parts:

1. Expanded Exemptions –AMT exemption amounts are expanded for 2009. To calculate taxable income under the AMT rules, subtract the exemption amount. Bigger exemptions mean less chance of being hit with the AMT. The expanded 2009 exemption amounts are:

$70,950 for married joint-filing couples and surviving spouses (up from $69,950 for 2008).

$46,700 for unmarried individuals (up from $46,200).

$35,475 for married individuals who file separately (up from $34,975).

Warning: These exemptions are phased-out for higher-income taxpayers. For married joint-filers, phase-out starts when AMT income exceeds $150,000. For unmarried individuals, the phase-out threshold is $112,500. For married individuals who file separately, the threshold is $75,000.

2. Nonrefundable Tax Credits Can Offset AMT – The second part of the patch allows you to use specified nonrefundable personal tax credits to reduce your 2009 AMT bill as well as your regular tax bill (the same as for 2008). Being able to use these credits against the AMT reduces the odds of being hit with it. You can reduce your 2009 AMT bill with nonrefundable credits including, among others:

Child credit (up to $1,000 per child).

The modified Hope Scholarship higher education credit (explained later) and Lifetime Learning credit.

Child and dependent care credit.

Adoption credit.

Two credits for energy-saving improvements and equipment installed in your residence.

Retirement saver’s credit.

Credit for elderly and disabled individuals.

Unfortunately, all but the energy credits are reduced or eliminated if income exceeds certain thresholds.

 New AMT Exemption for Private Activity Bond Interest

Interest on public purpose municipal bonds (issued by state and local governments for public projects) is tax-exempt under the regular tax and AMT rules. While interest on most qualified private activity municipal bonds (certain government bonds issued for private sector projects like sports stadiums) is tax-exempt for regular tax purposes, the interest has been taxable under the AMT rules…until now.

The new law makes interest on all qualified private activity bonds issued in 2009 and 2010 exempt from the AMT. (Interest on private activity bonds issued before 2009 will still be taxable under the AMT rules.)

 Alternative Motor Vehicle Credits Now Reduce AMT

Another change allows the existing alternative vehicle tax credits and a new credit to reduce your AMT bill as well as your regular tax. This change is effective for tax years after 2008.

The two well-known existing alternative motor vehicle credits are for qualified new hybrid gas-electric vehicles (such as the Ford Escape hybrid) and qualified new lean-burn vehicles (such as some diesel models from Mercedes and Volkswagen). The two lesser-known existing credits are for qualified new fuel cell vehicles and qualified new alternative fuel vehicles such as those that run on compressed natural gas. The new fifth alternative motor vehicle credit is for converting vehicles into qualified plug-in electric vehicles.

 New “Making Work Pay Credit”

The new law establishes a temporary Making Work Pay Credit for tax years beginning in 2009 and 2010. Specifically, the credit (before the phase-out rule explained later) equals 6.2 percent of earned income:

Up to a maximum credit amount of $400 for single taxpayers (and married filing separately).

Up to a maximum credit of $800 for a joint-filing couple.

Phase-Out Rule

The Making Work Pay Credit is phased out by 2 percent of modified adjusted gross income (MAGI) in excess of an applicable threshold of.

$75,000 for a single taxpayer. (Phase-out is complete when MAGI reaches $95,000.)

$150,000 for a joint-filing couple. (Phase-out is complete when MAGI reaches $190,000.)

Credit Payment Mechanism for 2009

The IRS will issue new federal employment tax withholding tables to allow employees to collect their credits via reduced payroll tax withholding for the rest of 2009. It will take some time for the cash to come through in the form of slightly higher paychecks. Self-employed individuals can collect credits in advance by reducing quarterly estimated tax payments.

Credit Is Reduced by Other New Payments

The 2009 Making Work Pay credit is reduced by the $250 economic recovery payment and the $250 tax credit allowed to eligible government retirees, both explained below.

Some taxpayers are ineligible for the credit, including:

Nonresident aliens.

Anyone who can be claimed as a dependent on another taxpayer’s return.

Estates and trusts.

 One-Time $250 Economic Recovery Payment Mainly for Retirees

The new law grants a one-time $250 economic recovery payment to these government program recipients.

Adults eligible for Social Security benefits or Railroad Retirement benefits.

Individuals of any age who are eligible for Supplemental Social Security Income (SSI) benefits (other than those who receive them while in a Medicaid institution).

Adults eligible for veteran’s compensation or pension benefits.

Specifically, to receive a payment, you must have been eligible for one of the four benefit programs listed above for at least one month during the three-month period that includes November and December of 2008 and January of 2009. Government agencies will determine who qualifies. Only individuals whose current address is in one of the 50 states, the District of Columbia, Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa, or the Northern Mariana Islands are eligible.

Economic recovery payments do not count as income for federal income tax purposes.

The IRS will devise a way to get these economic recovery payments underway within 120 days after the 2/17/09 enactment date for the new law. However, although the IRS is responsible for disbursing the funds, the economic recovery payment isn’t technically a tax provision. It’s simply government money for eligible individuals.

 One-Time $250 Refundable Credit for Government Retirees

Some government retirees have no earned income and are therefore ineligible for the Making Work Pay credit. They also may not qualify for the economic recovery payment. The new law includes a comparable payment for them.

It comes in the form of a one-time 2009 $250 refundable tax credit for each eligible individual or $500 for joint filers when both spouses are eligible.

To be eligible, individuals must receive pension or annuity dollars during 2009 for service as an employee of the U.S. or any state or instrumentality for work that was not covered by Social Security tax withholding at the time. In addition, they must be ineligible for the aforementioned economic recovery payment and report a Social Security Number (SSN) on their 2009 tax returns.

The credit is refundable. That means it can be used to offset your federal income tax bill (including AMT) and you can collect any leftover credit in cash.

 Liberalized First-Time Homebuyer Credit for 2009 Purchases

Legislation enacted in 2008 ushered in a temporary tax credit for “first-time homebuyers.” The Recovery Act extends the deal for another five months to cover qualified home purchases through the end of November. The new law also makes the refundable credit a bit more generous and eliminates an earlier requirement to repay it over 15 years.

For a qualified home purchase between January 1 and November 30, 2009, the maximum credit equals the lesser of:

10 percent of the purchase price of a principal residence or

$8,000 or $4,000 for those who use married filing separate status (up from $7,500 and $3,750 under the old rules that apply to 2008 purchases between April 9 and December 31, 2008).

Eligibility for the credit is limited to those who haven’t owned a principal residence in the U.S. during the three-year period that ends on the purchase date. In the case of a married couple, both spouses must pass this test (even if they don’t file jointly). So you don’t really have to be a first-time homebuyer.Nonresident aliens are ineligible.

For a newly constructed home, the purchase date is considered the move-in date. To qualify, the residence cannot be bought from a spouse, parent, grandparent, child, or certain other related parties.

The credit is reduced or eliminated if modified adjusted gross income (MAGI) is too high. The phase-out range for single filers and married individuals who file separately is between MAGI of $75,000 and $95,000. For joint filers, it is between MAGI of $150,000 and $170,000.

Credit Must Sometimes Be Repaid

Under the old rules, the homebuyer was generally required to repay the credit over 15 years. The new law eliminates the 15-year repayment rule for purchases between January 1 and November 30, 2009.

However, even under the new liberalized rules that apply in 2009, buyers may have to repay the credit if they sell or stop using the home as their principal residence within three years of the purchase date. In such cases, the credit must generally be repaid by remitting it with the tax return for the year the triggering event occurs. However, the amount due cannot exceed the gain from selling the home. For gain calculation purposes, the basis of the home is reduced by the credit amount.

A divorce-related home transfer for which the credit was claimed won’t trigger the repayment rule. Instead, the spouse who winds up owning the home takes over any repayment obligation. If a homebuyer dies, any repayment obligation is eliminated.

Election to Claim Credit for 2009 Purchase on 2008 Return

If you make a qualified 2009 home purchase by the November deadline, you can choose to act as if it occurred in 2008. Then, you can claim the credit on your 2008 return and get the benefit quicker. If you make this choice, the 15-year repayment rule won’t apply even though you’re claiming the credit on your 2008 return.

 Better Tax Credit for Higher Education Costs

For 2009 and 2010, the new law makes taxpayer-friendly modifications to the rules for the Hope Scholarship higher education tax credit, which has been temporarily renamed the American Opportunity credit.

The credit equals 100 percent of the first $2,000 of qualified post-secondary education expenses paid during the year plus 25 percent of the next $2,000. So the maximum annual credit is now $2,500. (Under the old rules, the maximum Hope credit for 2009 would have been $1,800.)

Qualified Expenses and Eligibility Rules

The new credit covers tuition, fees, and course materials (but not room and board) for the first four years of post-secondary education in a degree or certificate program. In other words, the credit is unavailable after the student has logged in four years of academic hours. (Under the old rules, the Hope credit was only available for the first two years of post-secondary education, and course materials were not a qualified expense.)

The credit is only allowed for a year when the student carries at least half of a full-time load for at least one academic period beginning in that year (same as under the old-law rules).

While this higher education credit is still phased out above specified income levels, the phase-out ranges are considerably higher. For single taxpayers, the phase-out range is between MAGI of $80,000 and $90,000. For joint filers, it is between MAGI of $160,000 and $180,000.

Partial Refundability Rule

The American Opportunity Credit can be used to offset regular federal income tax and AMT. In addition, up to 40 percent can be refundable, which means part of any leftover credit can be collected in cash after your federal tax bill (including AMT) has been reduced to zero. However, the partial refundability privilege is not allowed for taxpayers affected by the Kiddie Tax (which can tax unearned income at parents’ higher rates).

Key Point: The new law doesn’t change the rules for the Lifetime Learning tax credit, which can be as high as $2,000. This credit can be used to help offset college undergraduate tuition after the first four years, graduate school tuition, and tuition for non-degree education (such as career-related courses and professional certification courses). For 2009, the Lifetime credit is phased out between MAGI of $50,000 and $60,000 for single taxpayers ($120,000 and $160,000 for joint filers).

 Section 529 Plans and Computer/ Internet Costs

For 2009 and 2010, the new law counts computer costs (including peripheral equipment and software) and Internet access and related costs as qualified higher education expenses for purposes of receiving federal-income-tax-free distributions from Section 529 plan accounts. The expenses must be for the account beneficiary (the student) during any year he or she is enrolled in an eligible educational institution. There is no problem if the student’s family also uses the computer and Internet access. The cost of software designed for sports, games, and hobbies doesn’t qualify unless it is mainly educational in nature.

 Relaxed Estimated Tax Payments for Those with Small Business Income

In general, an individual taxpayer will not be assessed an interest charge penalty if his or her estimated tax payments for the current year equals at least:

90 percent of the current-year federal income tax liability.

100 percent of the tax liability on the preceding year’s return.

110 percent of the tax liability shown on the preceding year’s return if adjusted gross income (AGI) for the year exceeded $150,000.

However for estimated tax payments due for the 2009 tax year only, the new law allows a qualified individual to avoid an interest penalty if his or her estimated tax payments equal at least:

90 percent of the current-year federal income tax liability.

90 percent of the tax liability shown on the preceding year’s return (meaning the return for the tax year beginning in 2008).

To be a qualified individual, you must pass two tests.

1. Your return for the preceding year (the year beginning in 2008) must show AGI of less than $500,000 ($250,000 for married filing separately).

2. You must certify that more than 50 percent of the gross income shown on your return for the preceding year was from a small business (with 500 or fewer employees).