The American Recovery and Reinvestment Act of 2009 contains a number of tax changes and governmental spending provisions that will have an impact on individual taxpayers. Warner Norcross & Judd’s tax attorneys have examined this $787 billion federal stimulus package from every angle. What follows is a summary of ARRA’s significant tax provisions as they pertain to individuals. We also will be sending another e-bulletin tomorrow that reviews ARRA from a business perspective. Here is what individual taxpayers can expect:
Making Work Pay Credit
ARRA creates the Making Work Pay Credit, which is a refundable tax credit for 2009 and 2010 of up to $400 for individuals or $800 for joint filers. The credit is limited to 6.2 percent of earned income. The credit effectively eliminates FICA taxes on the first $6,452 of earnings for individuals or $12,904 for joint filers. The credit is reduced by 2 percent of the modified adjusted gross income in excess of $75,000 for individuals (with a total phase-out for individuals with modified adjusted gross income of $95,000) or $150,000 for joint filers (with a total phase-out for joint filers with modified adjusted gross income of $190,000). A taxpayer can receive the benefit of the tax credit either by reducing the amount of the taxpayer’s income tax withholdings or by claiming a tax credit on the taxpayer’s tax return. The credit is only available for those individuals who provide a Social Security number on their tax return.
Alternative Minimum Tax Patch
The alternative minimum tax (AMT) exemption amounts are increased to $46,700 for individuals, $70,950 for joint filers and surviving spouses, and $35,475 for married individuals filing separately for tax years beginning in 2009. Currently, for tax years after 2009, the AMT exemption amounts are scheduled to revert back to the amounts that applied prior to the 2001 tax year. Those amounts are $33,750 for individuals, $45,000 for joint filers and surviving spouses, and $22,500 for married individuals filing separately. ARRA also extends the AMT relief for nonrefundable personal credits to tax years beginning in 2009. This allows taxpayers to claim nonrefundable personal credits against AMT or regular tax.
ARRA excludes from gross income unemployment compensation of up to $2,400 for 2009.
Earned Income Tax Credit
The credit percentage for the Earned Income Tax Credit is increased to 45 percent from 40 percent of the first $12,570 of income earned by working taxpayers with three or more qualifying children for 2009 and 2010. ARRA also increases the phase-out amount for joint filers (regardless of the number of children) by $5,000. If a taxpayer's disqualified income (which includes interest, dividends, net rent and royalty income, capital gains net income, and net passive income) is greater than $3,100, the taxpayer is not eligible for the Earned Income Tax Credit
One-time Payment to Individuals Receiving Certain Federal Benefits
A one-time payment of $250 is provided to certain individuals eligible for Social Security benefits, Railroad Retirement benefits, veterans compensation or pension benefits, supplemental security income benefits, and certain government retirement payments. These payments will reduce an individual's Making Work Pay Credit.
Refundable Child Tax Credit
ARRA lowers the income threshold to $3,000 from $8,500 in 2009 and 2010 for the Refundable Child Tax Credit. Individuals with dependent children under age 17 are eligible to receive a tax credit of $1,000 per child through 2010. If the credit exceeds the taxpayer's tax liability, the credit is equal to 15 percent of earned income in excess of $3,000 for 2009 and 2010, up to $1,000 per child.
First-Time Homebuyer Tax Credit
ARRA expands the First-Time Homebuyer Tax Credit and liberalizes the payback rules. First-time homebuyers are now eligible to receive a tax credit equal to 10 percent of the purchase price of a home, up to $8,000, if the purchase is made after December 31, 2008, and before December 1, 2009. The credit does not have to be repaid (unlike the prior law) if the homebuyer lives in the home for at least 36 months. The First-Time Homebuyer Tax Credit begins to phase out for taxpayers with adjusted gross income greater than $75,000 for individuals or $150,000 for joint filers. The credit is available to unmarried individuals buying a house together and, under IRS Notice 2009-12, they have a great degree of flexibility as to how they allocate the credit among themselves.
American Opportunity Tax Credit
The legislation creates the American Opportunity Tax Credit, formerly known as the HOPE Scholarship Credit. The maximum credit for 2009 and 2010 is increased to $2,500 per student per year for qualified tuition and related expenses. Taxpayers may receive 40 percent of the credit as a refundable credit. However, the credit begins to phase out for taxpayers with an adjusted gross income of $80,000 for individuals or $160,000 for joint filers.
Qualified Tuition Programs
Under ARRA, beneficiaries of qualified tuition programs such as 529 plans are allowed to use tax-free distributions to pay for qualified education expenses, which now include computers, computer technology and Internet access.
Transit Benefits Parity
ARRA increases to $230 per month from $120 per month for 2009 and 2010 the exclusion amount for qualified transportation fringe benefits under Code Sec. 132(f), which allows an employee to exclude a portion of the cost of transit passes, van pooling, and qualified parking from an employee's income.
New Car Deduction
An individual who purchases a new car (which includes cars, SUVs, light trucks, motor homes, and motorcycles that weigh no more than 8,500 gross pounds) before January 1, 2010, is allowed to take an above-the-line deduction for state and local sales taxes or excise taxes paid with regard to the new vehicle. The deduction is limited to sales and excise taxes on the first $45,900 of the purchase price of the new vehicle. The deduction is phased out for taxpayers with an adjusted gross income greater than $125,000 for individuals or $250,000 for joint filers.
Qualified Small Business Stock
Investors can exclude 75 percent of the gain from the sale of certain small business stock acquired after the enactment of ARRA and before January 1, 2011, and held for more than five years.
Estimated Tax of Qualified Individuals
ARRA permits certain "qualified individuals" to avoid estimated tax penalties by paying 90 percent of the individual’s prior year’s tax liability. "Qualified individuals" are taxpayers with less than $500,000 of adjusted gross income on the individual’s preceding year tax return and with more than 50 percent of the gross income on that return attributable to a trade or business which employed less than 500 employees on average during the preceding year.
Tax Credits for Energy Efficient Improvements to Existing Homes
The measure increases the amount of the tax credit available to individuals for energy efficiency improvements to their homes (i.e., installing efficient electric heat pumps, central air conditioners, water heaters, wood stoves, insulation, windows, and exterior doors). The credit, which was 10 percent of the cost of installed improvements under prior law, is now 30 percent for 2009 and 2010. The maximum credit is $1,500.
Cap on Residential Energy Efficient Property Credit Eliminated
It eliminates the cap on the credit available to individuals for the cost of installing solar water heating, geothermal heat pump systems, and small wind property for years 2009 to 2016. Individuals can now claim 30 percent of the total cost of installing those systems. The credit remains available without a cap for solar electric systems. Only qualified fuel cell property continues to have a cap.
Plug-in Electric Drive Vehicle Credit
Taxpayers who purchase a qualified plug-in electric vehicle with at least 5 kilowatt hours of capacity are allowed to claim a tax credit. The minimum credit is $2,500. The credit is increased in increments of $417 up to $5,000 for each kilowatt hour of the vehicle’s battery capacity beyond 5 kilowatt hours, for a maximum credit of $7,500. Special transition rules with higher credit limits apply for vehicles purchased in 2009. The credit is not permanent — the amount of the credit will be reduced through a one-year phase-out period beginning after a manufacturer has sold 200,000 qualifying vehicles in the United States. The phase-out applies to each particular manufacturer.
Other Plug-in Electric Vehicle Credits
An alternative credit of up to $2,500 is provided for the purchase of certain electric vehicles. The credit is equal to 10 percent of the cost of two- and three-wheeled electric vehicles and low-speed electric vehicles. ARRA also allows a credit of up to $4,000 for 10 percent of the cost of converting a motor vehicle to a plug-in electric drive vehicle. Both credits are available only for purchases and conversions that occur before January 1, 2012.
We Can Help
For information regarding these tax-related provisions in the American Recovery and Reinvestment Act of 2009, contact practice group chair Paul Jackson, 231.727.2626 or firstname.lastname@example.org, on the west side of the state, Jay Kennedy, 248.784.5180 or email@example.com, on the east side of the state, or any member of Warner Norcross & Judd's Tax Law Group.
Warner's tax attorneys will send an e-bulletin tomorrow describing ARRA provisions as they pertain to businesses. Look for it in your e-mail.