American Recovery and
Reinvestment Act of 2009
Tax Changes for Individuals
New Making Work Pay credit.
The Recovery Act provides eligible individuals with a refundable income tax credit for tax years beginning in 2009 and 2010. (Code Sec. 36A, as added by Act Sec. 1001(a)) The credit is the lesser of (1) 6.2% of an individual's earned income or (2) $400 ($800 for a joint return).
For these purposes, the earned income definition is the same as for the earned income tax credit with two modifications: (a) it does not include net earnings from self-employment which are not taken into account in computing taxable income; and (b) it includes combat pay excluded from gross income under Code Sec. 112. (Code Sec. 36A(d)(2))
The credit is phased out at a rate of 2% of the eligible individual's modified AGI (i.e., AGI increased by any amount excluded under Code Sec. 911, Code Sec. 931 or Code Sec. 933) above $75,000 ($150,000 for a joint return).
Observation: Thus, the credit phases out completely at modified AGI of $95,000 ($190,000 on a joint return).
The credit is reduced by any payment received by the taxpayer under Recovery Act Sec. 2201 or any credit allowed to the taxpayer under Recovery Act Sec. 2202 (these are recovery payments under the Veterans Administration, Railroad Retirement Board, and the Social Security Administration and credit for certain government workers, as discussed below).
An eligible individual is any individual other than: (1) a nonresident alien; (2) an individual with respect to whom another may claim a dependency deduction for a tax year beginning in a calendar year in which the eligible individual's tax year begins; and (3) an estate or trust. (Code Sec. 36A(d)(1)(A)) An individual is not eligible if he does not include his social security number on the return. For joint filers, this requirement is met if the social security number of one of the spouses is included on the return.
Any credit or refund allowed or made to an individual under this provision is not taken into account as income and is not taken into account as resources for the month of receipt and the following two months for purposes of determining eligibility of the individual or any other individual for benefits or assistance, or the amount or extent of benefits or assistance, under any Federal program or under any State or local program financed in whole or in part with Federal funds.
It is anticipated that taxpayers' reduced tax liability under the provision will be expeditiously implemented through revised income tax withholding schedules produced by IRS. These revised schedules should be designed to reduce taxpayers' income tax withheld for each remaining pay period in the remainder of 2009 by an amount equal to the amount that withholding would have been reduced had the provision been reflected in the income tax withholding schedules for the entire tax year.
Economic recovery payment to certain retirees and disabled veterans.
The Recovery Act provides a one-time payment of $250 to retirees, disabled individuals and SSI recipients receiving benefits from the Social Security Administration, Railroad Retirement beneficiaries, and disabled veterans receiving benefits from the U.S. Department of Veterans Affairs. To be entitled to the $250 payment, the individual must have been eligible for one of the four benefit programs for any month during the three-month period ending with the month which ends before the month that includes the Feb. 17, 2009 date of enactment. Thus, to be entitled to the payment, the individual must have been so eligible during November or December of 2008 or January of 2009. (Act Sec. 2201) The one-time payment is a reduction to any allowable Making Work Pay credit (see above). Treasury must begin disbursing economic recovery payments as soon as practicable, but no later than June 17, 2009 (120 days after the enactment date).
Effective Feb. 17, 2009, the Recovery Act also provides a one-time refundable tax credit of $250 in 2009 to certain government retirees who are not eligible for Social Security benefits. (Act Sec. 2202) This one-time credit is a reduction to any allowable Making Work Pay credit (see above).
Increase in earned income tax credit.
Low- and moderate-income workers may be eligible for the refundable earned income tax credit ("EITC"). Eligibility for the EITC is based on earned income, adjusted gross income, investment income, filing status, and immigration and work status in the U.S. The amount of the EITC is based on the presence and number of qualifying children in the worker's family, as well as on adjusted gross income and earned income.
New law. The Recovery Act increases the EITC credit percentage for families with three or more qualifying children to 45% for 2009 and 2010. (Code Sec. 32(b)(3), as amended by Act Sec. 1002(a)) For example, in 2009, taxpayers with three or more qualifying children may claim a credit of 45% of earnings up to $12,570, resulting in a maximum credit of $5,656.50.
The Recovery Act also increases the threshold phase-out amounts for married couples filing joint returns to $5,000 above the threshold phaseout amounts for singles, surviving spouses, and heads of households) for 2009 and 2010 (subject to a further increase in 2010 for inflation). (Code Sec. 32(b)(3)) For example, in 2009, the maximum credit of $3,043 for one qualifying child is available for those with earnings between $8,950 and $16,420 ($21,420 if married filing jointly). The credit begins to phase down at a rate of 15.98% of earnings above $16,420 ($21,420 if married filing jointly). The credit is phased down to $0 at $35,463 of earnings ($40,463 if married filing jointly).
Refundable child credit eased.
Currently, a taxpayer receives $1,000 tax credit for each qualifying child under the age of 17. To the extent the child credit exceeds the taxpayer's tax liability, the taxpayer is eligible for a refundable credit (the additional child tax credit) equal to 15% of earned income in excess of a threshold dollar amount (the earned income formula). Under pre-Act law, for 2009, the earned income formula for the determination of the refundable child credit was 15% of earned income in excess of $12,550 (as indexed for inflation).
New law. The Recovery Act modifies the earned income formula for the determination of the refundable child credit to apply to 15% of earned income in excess of $3,000 for tax years beginning in 2009 and 2010.
Observation: The change to $3,000 for 2008 will result in a larger credit for many taxpayers.
New American Opportunity Tax Credit for higher education costs.
Under pre-Act law, individuals may claim a nonrefundable credit, the Hope credit, of up to $1,800 (for 2009) per eligible student per year for qualified tuition and related expenses paid for the first two years of the student's post-secondary education in a degree or certificate program. The Hope credit rate is 100% of the first $1,200 of qualified tuition and related expenses, and 50% of the next $1,200 of qualified tuition and related expenses. The Hope credit that a taxpayer may otherwise claim is phased out ratably for taxpayers with modified AGI between $50,000 and $60,000 ($100,000 and $120,000 for joint filers) for 2009.
New law. The Recovery Act modifies the Hope credit for tax years beginning in 2009 or 2010. (Code Sec. 25A(i), as amended by Act Sec. 1004(a)) The modified credit, called the American Opportunity Tax Credit, is up to $2,500 per eligible student per year for qualified tuition and related expenses paid for each of the first four years of the student's post-secondary education in a degree or certificate program. The modified credit rate is 100% on the first $2,000 of qualified tuition and related expenses, and 25% on the next $2,000 of qualified tuition and related expenses. The definition of qualified tuition and related expenses is expanded to include course materials.
The credit is phased out ratably for taxpayers with modified AGI between $80,000 and $90,000 ($160,000 and $180,000 for joint filers). (Code Sec. 25A(i)(4)) The credit may be claimed against AMT.
Subject to an exception, forty percent of a taxpayer's otherwise allowable credit is refundable. No portion of the credit is refundable if the taxpayer claiming the credit is a child subject to the kiddie tax under Code Sec. 1(g).
Increased transit and vanpool transportation fringe benefit.
An employee can exclude qualified transportation fringe benefits provided by an employer from his gross income and from his wages for payroll tax purposes. These include parking, transit passes, vanpool benefits, and qualified bicycle commuting reimbursements. For 2009, up to $230 per month of parking benefits and up to $120 per month of transit and vanpool benefits (as indexed for inflation) are excludable from income.
New law. For months beginning on or after Mar. 1, 2009 and before Jan. 1, 2011, the Recovery Act increases the monthly exclusion for employer-provided transit and vanpool benefits to the same level as the exclusion for employer-provided parking.
Computers as education expenses under 529 plans.
A person can make nondeductible cash contributions to a qualified tuition program (QTP, or 529 plan) on behalf of a designated beneficiary. The earnings on the contributions build up tax-free and distributions from a QTP are excludable to the extent used to pay for qualified higher education expenses (tuition, fees, books, supplies, equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution, expenses for special needs services and room and board costs (subject to a limit) for students who are at least half-time).
New law. Under the Recovery Act, expenses paid or incurred in 2009 or 2010 for the purchase of any computer technology or equipment or Internet access or related services qualify as qualified education expenses under QTPs if such technology, equipment, or services are to be used by the QTP beneficiary or his family during any of the years the beneficiary is enrolled at an eligible educational institution. Expenses for computer software designed for sports, games or hobbies do not qualify under Code Sec. 529(e)(3)(A)(iii) unless the software is predominantly educational in nature.
Liberalized first time homebuyer credit.
Under pre-Act law, for qualifying purchases of principal residences in the U.S. after Apr. 8, 2008 and before July 1, 2009, eligible first-time homebuyers may claim a refundable tax credit equal to the lesser of 10% of the purchase price of a principal residence or $7,500 ($3,750 for married individuals filing separately). A taxpayer is considered a first-time homebuyer if he (or spouse, if married) had no present ownership interest in a principal residence in the U.S. during the 3-year period before the purchase of the home to which the credit applies. Eligible first-time homebuyers who purchase a principal residence after Dec. 31, 2008, and before July 1, 2009, may elect to treat the purchase as made on Dec. 31, 2008. The first-time homebuyer credit phases out for individual taxpayers with modified AGI between $75,000 and $95,000 ($150,000-$170,000 for joint filers) for the year of purchase.
Under pre-Act law, the credit for new homebuyers is recaptured ratably over fifteen years, with no interest charge, beginning with the second tax year after the tax year in which the home is purchased.
New law. The Recovery Act extends the credit so that it applies to purchases before Dec. 1, 2009. In addition, it generally waives the recapture of the credit for qualifying home purchases after Dec. 31, 2008. This waiver of recapture applies without regard to whether the taxpayer elects to treat the purchase in 2009 as occurring on Dec. 31, 2008, which is allowed under Code Sec. 36(g). If the taxpayer disposes of the home or the home otherwise ceases to be the principal residence of the taxpayer within 36 months from the date of purchase, the pre-Act rules for recapture of the credit apply. The Recovery Act also increases the maximum homebuyer credit to $8,000.
The Recovery Act also provides that no D.C. homebuyer credit is allowed to any taxpayer with respect to a 2009 residence purchase if a first-time homebuyer credit is allowable to the taxpayer under Code Sec. 36.
Partial exclusion of unemployment compensation.
An individual generally must include in gross income any unemployment compensation benefits received under the laws of the U.S. or any State. However, under the Recovery Act, up to $2,400 of unemployment compensation benefits received in 2009 are excluded from gross income by the recipient.
New temporary deduction for sales and excise taxes on car purchases.
Taxpayers who itemize deductions may elect to deduct state and local general sales and use taxes instead of state and local income taxes, for tax years beginning before 2010.
New law. For purchases on or after Feb. 17, 2009 and before Jan. 1, 2010, the Recovery Act provides a deduction for qualified motor vehicle taxes. It expands the definition of taxes allowed as a deduction to include qualified motor vehicle taxes paid or accrued within the tax year. The deduction generally is allowed to itemizers. It also is allowed to those claiming the standard deduction.
Qualified motor vehicle taxes are State or local sales or excise taxes imposed on the purchase of a qualified motor vehicle. A qualified motor vehicle is a (1) passenger automobile, light truck or motorcycle the gross vehicle rating of which is not more than 8,500 pounds and (2) a motor home. The original use of the motor vehicle must commence with the taxpayer. Only taxes on that portion of the cost of qualified motor vehicle not exceeding $49,500 ($24,750 for a married person filing separately) may be deducted. The amount of sales or excise taxes that may be treated as qualified motor vehicle taxes is phased out ratably for a taxpayer with modified AGI between $125,000 and $135,00 ($250,000 and $260,000 on a joint return).
The deduction for qualified motor vehicle taxes is not available to a taxpayer who elects to deduct state and local sales and uses in lieu of income taxes as an itemized deduction.
The deduction for qualified motor vehicle taxes is allowed in computing the AMT.