Perhaps the word “STIMULUS” has never garnered more attention nor been used more frequently than in these recent difficult months. It’s the topic on the talk show circuit, at the office water coolers, and throughout homes and communities nationwide. This talk of stimulus took further shape on February 17, 2009, when President Obama signed into law the American Recovery and Reinvestment Act of 2009. Certainly there have been and will continue to be differing views about the extent and nature of the economic stimulus needed. Our goal in this month’s column is not to opine on the new law itself, but rather to summarize key provisions of the law that may relate to our clients and their families.
Making Work Pay
One of the more heavily publicized attributes of this stimulus package is the payroll tax credit available for workers in 2009 and 2010. This credit will be capped at $400 for single filers and $800 for married filers and will phase out between an adjusted gross income, or AGI, of $75,000 and $95,000 and $150,000 and $190,000, respectively. The credit will come in the form of a reduction in payroll taxes and will therefore be realized through an increase in your periodic paychecks. This benefit will begin once the IRS releases new payroll tax tables to employers. The changes are expected occur by early April. For those that are self-employed and therefore likely not receiving a steady paycheck, they can reduce the amount of their quarterly estimated payments to realize the upfront benefit.
The government hasn’t forgotten about those who no longer receive a wage. By June 17th, those receiving Social Security, Railroad Retirement, Supplemental Security Income, or veteran benefits will receive a check for $250. In addition, government retirees, who do not qualify for Social Security benefits, will receive a check for the same amount.
Health Insurance Benefits
For the workers who have experienced the brunt of this economic turmoil and have lost their job in the name of workforce reduction, there are benefits to help ride out the storm. In addition to increased unemployment benefits, the government is also going to assist in continuing the worker’s health care coverage. COBRA benefits can be an extremely expensive necessity and a heavy burden for someone facing the unemployment line. Under the new stimulus package, anyone who loses their job between August 31, 2008 and January 1, 2010 can qualify to receive some relief from the payment of the expensive premiums.
The government will be subsidizing employers to assist terminated workers with up to 65% of the premium costs for the first nine months of coverage. A person can remain on COBRA for a maximum of 18 months. If a worker was terminated anytime between September 1, 2008 and February 17, 2009 and declined coverage at the time, they have 60 days to take advantage of this benefit. The employer is required to notify those terminated employees and inform them of this option.
Purchase of a New Vehicle
While car sales have been sluggish in this difficult economic environment, this law includes special provisions for taxpayers who purchase a new vehicle between February 17, 2009 and December 31, 2009. The state and local sales tax and any excise taxes incurred upon the purchase of the vehicle will be deductible for federal tax purposes, regardless of whether taxpayers use itemized or standard deductions when filing their returns. The additional state and local sales tax and excise tax is simply added to the existing itemized or standard deduction. Note that only taxes levied on the first $49,500 of the cost of the vehicle will be deductible. The benefit of the deduction begins to phase out for married couples with AGIs over $250,000 and singles with AGIs over $125,000.
Residential Energy Property Credit
Some taxpayers were disappointed to find that no tax benefits were available in 2008 for residential energy-efficient home improvements – including new windows, doors, HVAC units, insulation, etc. Such benefits were available in 2007, yet Congress let the provision lapse in 2008. The new law once again makes the tax credit available for 2009 and 2010. The new law even goes further to increase the total lifetime maximum residential energy property credit from $500 to $1,500.
First-time Homebuyer Credit
Perhaps someone you know may be in the market for his or her first home. This law includes a special provision to incentivize first-time home buyers to purchase homes. The incentive comes in the form of an $8,000 refundable credit and applies to homes purchased between January 1, 2009 and November 30, 2009. This credit does not need to be repaid! It is important to note that this credit differs from the original first-time homebuyer credit which became available in 2008. For homes purchased between April 9, 2008 and December 31, 2008, the amount of the credit remains at $7,500, and this credit must still be repaid over a fifteen-year period.
There are also quite a few benefits for those looking for relief from the rising costs of college tuition. In previous years, taxpayers that qualified could benefit from the Hope tax credit, Lifetime Learning credit, or tuition expense deduction. In 2009 and 2010, the Hope credit will be replaced by a tuition tax credit of up to $2,500. In addition, qualified expenses now include the cost of books and the credit is available for four years of college, not just the first two. This credit does phase out depending on the taxpayer’s AGI, but the levels have been increased. It is now $80,000 for single filers and $160,000 for couples. This is also considered a partially refundable credit. This means that for taxpayers whose tax liability is less than the amount of the credit, up to 40% of it is still refundable. This will allow for more cash in the pockets of some taxpayers to alleviate such a rapidly-increasing expense. Lastly, the purchase of a computer in 2009 and 2010 is considered a qualified expense for the tax-free distribution of 529 assets.
We continue to keep a watchful eye over the pesky Alternative Minimum Tax, or AMT. The AMT continues to threaten middle-income taxpayers with each passing year forcing Congress to pass legislation annually to raise the exemption thresholds. In 2007, Congress waited until December of that year to pass the AMT patch, making tax planning quite difficult! In 2008, the patch was included in October’s Troubled Asset Relief Program or TARP bill. In 2009, the patch was included in this stimulus package. The AMT exemption amounts were increased via this law, protecting approximately 26 million taxpayers from paying the alternative minimum tax in 2009.
There are various other benefits contained within this package aimed at improving our infrastructure and local communities. Money will be dispensed to the states for improvement initiatives of their highways, water systems, and the like. In addition, states will receive additional benefits to improve their education systems, with the hope of savings hundreds of thousands of teaching jobs. The police system will also see a boost with funding intended for the hiring of police officers, development of drug tasks forces and prisoner-rehabilitation and after-school programs. Billions are also being set aside for environmental projects throughout the country.
While some of these benefits may not affect you directly, the hope is that the economy as a whole will benefit and, in turn, you will as well. If you have any questions about the provisions contained in the American Recovery and Reinvestment Act of 2009 and their application to you, please do not hesitate to contact us.
If you are not currently a client, but would like to schedule an appointment or a complimentary consultation, please contact Lisa Reynolds at (513) 792-6648 or firstname.lastname@example.org.