Situation: You have received a barrage of telephone calls from your clients asking how the new stimulus package might affect them.
Solution: On Feb. 17, President Obama signed into law the American Recovery and Reinvestment Act of 2009. This new law is intended to jump-start the U.S. economy through direct spending and tax incentives.
Most of the tax incentives are retroactive to Jan. 1, 2009.
The individual incentives included in the law are as follows:
1. Making Work Pay Credit
This allows a credit against income tax in an amount equal to the lesser of 6.2% of the individual’s earned income or $400. The credit applies in full for individuals whose modified adjusted gross income does not exceed $150,000, married filing jointly, or $75,000, filing single. This credit effectively offsets an individual’s FICA payroll taxes.
2. $250 economic-recovery payment
This is a one-time payment of $250, for 2009 only, to individuals on fixed incomes; i.e.,
Social Security recipients, railroad retirees and disabled veterans.
3. AMT patch
The 2009 alternative minimum tax exemption amounts are $70,950 for joint filers and surviving spouses and $46,700 for singles and heads of household.
4. First-time homebuyer tax credit
The current credit is increased to $8,000, from $7,500, and extends the eligible use until Nov. 30, 2009. It also eliminates any required repayment to the
Internal Revenue Service after 36 months in the home. This credit applies to purchases made after Dec. 31, 2008. The credit phases out at $75,000 for single filers and $150,000 for joint filers.
5. New-car deduction
This allows for an above-the-line deduction on purchases of new vehicles for state and local sales taxes or excise taxes paid on the purchase. There are two limits on the deduction:
1. 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
2. Any deduction will be phased out to the extent the purchaser has adjusted gross income exceeding $125,000 for single filers and $250,000 for joint filers.
This deduction is allowed only on purchases made after Feb. 17, 2009.
6. Education credit
The HOPE Education Credit has been renamed the American Opportunity Tax Credit. The credit has been increased from a maximum of $1,800 to $2,500 and also makes 40% of the credit refundable.
7. Child Tax Credit
The income threshold has been set at $3,000, thus effectively increasing the refundable portion of the credit for 2009 and 2010.
8. Earned Income Tax Credit
This credit has been increased to 45% of the first $12,570 of earned income for taxpayers with three or more qualifying children.
9. Unemployment compensation
For 2009, $2,400 of unemployment compensation will be excluded from gross income.
10. Transit benefits parity
Currently, $120 per month of qualified transportation fringe benefits are excluded from gross income. The new law increases that amount to $230 per month.
11. Qualified tuition programs (Section 529 college savings plans)
Historically, under the qualified tuition program, beneficiaries of a 529 plans would be taxed on distributions that were not used to pay qualified education expenses. For 2009 and 2010, the new law allows beneficiaries tax-free distributions to pay for computers and computer technology, including Internet access.
The business incentives included in the law are as follows:
1. Bonus depreciation
The new law extends the 50% first-year bonus depreciation that was allowed under the 2008 Economic Stimulus Act through Dec. 31, 2009.
There is also a higher cap on vehicle depreciation ($8,000).
2. Internal Revenue Code Section 179 expensing
The new law retains the 2008 Section 179 expensing amounts of $250,000 and $800,000 for the cost threshold on purchases.
3. Net operating loss carry-back
The new law provides a five-year carry-back of 2008 NOLs but only for qualified small businesses with average gross receipts of $15 million or less. The new law gives these businesses the choice to carry back NOLs three, four or five years.
4. Work Opportunity Tax Credit
Two new categories of targeted groups have been created: unemployed veterans and disconnected youth. According to a February Government Accountability Office report, disconnected youth are those “14 to 24 who are not in school and not working, or who lack family and other support networks.”
5. Cancellation of indebtedness
The new law will allow certain businesses to elect to recognize cancellation of indebtedness income over five years, beginning in 2014, for specific types of business debt purchased by the business after Dec. 31, 2008, and before Jan. 1, 2011.
6. Qualified small-business stock
Investors may exclude 75% of the gain from the sale of certain small-business stock after Feb. 17, 2009 and before Jan. 1, 2011.
7. S corporation built-in-gain period
The new law shortens the holding period for assets subject to the built-in-gains tax imposed after a C corporation elects to convert to an S corporation to 7 years, from 10. This applies to C corporations that convert to S status in tax years beginning in 2009 and 2010.
8. Estimated taxes
Individuals whose income is primarily from small business in 2009 may calculate their estimated tax payments on 90% of their 2008 tax liability.
9. COBRA Benefits
Individuals involuntarily separated from employment between Sept. 1, 2008, and Jan. 1, 2010, may elect to pay 35% of COBRA coverage and have it treated as paying the full amount.
The former employer will be required to pay the remaining 65% but will be reimbursed by crediting those amounts against income tax withholding and payroll taxes it is otherwise required to remit to the federal government.
Your client should consult their tax advisers prior to implementing any of the provisions in the American Recovery and Reinvestment Act of 2009.
