On February 13, Congress passed the American Recovery and Reinvestment Act to save and create jobs, get the economy moving again, and transform it for long-term growth and stability. On February 17, President Obama signed the bill into law. According to the House-Senate conference agreement, the Act will:

According to the nonpartisan Congressional Budget Office, this recovery package will be fast-acting, with 64 percent of the package invested by the end of fiscal year 2010.

This article is the second in a two-article series addressing those provisions in this historic legislation of most relevance to churches and church staff. In the May issue of Church Finance Today the following provisions were addressed:

In this month’s edition the following additional provisions will be addressed:

KEY POINT. The Act modifies more than 300 sections of the federal tax code.

The tax code imposes an alternative minimum tax (“AMT”) on individuals. The AMT is the amount by which the “tentative minimum tax” exceeds the regular income tax. An individual’s tentative minimum tax is the sum of (1) 26 percent of so much of the “taxable excess” as does not exceed $175,000, and (2) 28 percent of the remaining taxable excess. The taxable excess is so much of the alternative minimum taxable income (“AMTI”) as exceeds the exemption amount. The maximum tax rates on net capital gain and dividends used in computing the regular tax are used in computing the tentative minimum tax. AMTI is the individual’s taxable income adjusted to take account of specified preferences and adjustments.

The exemption amounts under prior law were: (1) $45,000 in taxable years beginning after 2008 in the case of married individuals filing a joint return and surviving spouses; and (2) $33,750 in taxable years beginning after 2008 in the case of other unmarried individuals. The exemption amount is phased out by an amount equal to 25 percent of the amount by which the individual’s AMTI exceeds (1) $150,000 in the case of married individuals filing a joint return and surviving spouses, or (2) $112,500 in the case of other unmarried individuals. These amounts are not indexed for inflation.

The American Recovery and Reinvestment Act provides that the individual AMT exemption amount for taxable years beginning in 2009 is $70,950, in the case of married individuals filing a joint return and surviving spouses, and (2) $46,700 in the case of other unmarried individuals.

Application to church staff. The Act’s increase in the exemption amounts will insulate all but the most highly paid church employees from the AMT. Without this temporary “patch,” the AMT would have impacted an estimated 26 million middle income taxpayers in 2009. Note that this patch is only for 2009. If Congress does not provide an additional patch for 2010, the AMT exemption amounts will revert to $45,000 for married couples filing jointly and $33,750 for single persons.

Congress faces a difficult dilemma. An outright repeal of the AMT would protect all taxpayers, but it would come at a high price. The congressional Joint Committee on Taxation estimates that the most recent patch will reduce federal tax revenues by $70 billion over ten years. An outright repeal of the AMT would be far more costly. On the other hand, failing to provide annual patches is politically risky since it would expose an ever-growing number of taxpayers to the AMT.

One more point. For taxable years beginning in 2009, the Act allows taxpayers to offset both their regular tax liability and alternative minimum tax liability by nonrefundable personal credits (such as the child credit).

The tax code allows a tax credit for the purchase of qualified solar electric property and qualified solar water heating property that is used exclusively for purposes other than heating swimming pools and hot tubs. The credit is equal to 30 percent of qualifying expenditures, with a maximum credit of $2,000 with respect to qualified solar water heating property. There is no cap with respect to qualified solar electric property.

Section 25D also provides a 30 percent credit for the purchase of qualified geothermal heat pump property, qualified small wind energy property, and qualified fuel cell power plants. The credit for geothermal heat pump property is capped at $2,000, the credit for qualified small wind energy property is limited to $500 with respect to each half kilowatt of capacity, not to exceed $4,000, and the credit for any fuel cell may not exceed $500 for each 0.5 kilowatt of capacity.

The American Recovery and Reinvestment Act eliminates the credit caps for solar hot water, geothermal, and wind property.

Application to church staff. This provision could result in hundreds or even thousands of dollars in tax savings for an individual or family. Consider the following example. A church employee installs a geothermal heat pump in her back yard at a cost of $10,000. The credit amount is 30 percent of the total cost, or $3,000. Under prior law, the maximum credit was $2,000, but the American Recovery and Reinvestment Act eliminates this cap for tax years 2009 through 2016. As a result, the employee is able to claim a credit of $3,000.

Note that a credit is a dollar-for-dollar reduction in tax liability, so it results in greater tax savings than a deduction or exclusion. This enhanced credit, when added to the cost savings realized from the use of a geothermal device, are intended to contribute to energy independence by promoting the use of such devices, thereby reducing reliance on fossil fuels to heat and cool homes.

For 2009, a credit is available for each qualified plug-in electric drive motor vehicle placed in service. A qualified plug-in electric drive motor vehicle is a motor vehicle that has at least four wheels, is manufactured for use on public roads, meets certain emissions standards, draws propulsion using a traction battery with at least four kilowatt-hours of capacity, and is capable of being recharged from an external source of electricity.

The base amount of the plug-in electric drive motor vehicle credit is $2,500 for a vehicle with a battery capacity of at least four kilowatt hours, plus another $417 for each kilowatt-hour of battery capacity in excess of four kilowatt hours. The maximum credit for qualified vehicles weighing 10,000 pounds or less is $7,500. This translates into a battery capacity of at least 16 kilowatt hours (not coincidentally, the estimated battery capacity of the Chevrolet Volt).

In general, the credit is available to the vehicle owner, including the lessor of a vehicle subject to lease.

Once a total of 250,000 credit-eligible vehicles have been sold for use in the United States, the credit phases out over four calendar quarters. Regardless of the phase-out limitation, no credit is available for vehicles purchased after 2014.

To the extent a vehicle is eligible for credit as a qualified plug-in electric drive motor vehicle, it is not eligible for credit as a qualified hybrid vehicle under section 30B of the tax code.

The American Recovery and Reinvestment Act makes the following changes to this credit, beginning in 2010:

Application to church staff. This credit was created to encourage the purchase of plug-in electric cars. The financial incentive it creates is significant. Consider the following examples.

Example. Jan would like to purchase a qualifying plug-in electric car in 2010, but is concerned about the $35,000 price tag. The car she would like to purchase has a lithium ion battery with a capacity of 16 kilowatt hours. This qualifies for the full $7,500 tax credit (base credit of $2,500 plus $417 x 12 kilowatt hours of capacity in excess of four kilowatt hours). A $7,500 credit will reduce Jan’s federal tax liability by $7,500. It is much more valuable than a deduction that reduces taxable income. To illustrate, if Jan is in the 25 percent tax bracket, a $7,500 tax deduction would lower her tax liability by $1,875. But a $7,500 credit reduces her tax bill by $7,500. If Jan’s tax liability is less than $7,500 for 2010, the unused credit cannot be carried over to the following year (the Act limits the credit to federal income taxes incurred in the year the vehicle is purchased).

Example. Jim would like to purchase a plug-in electric car in 2010 that has a battery capacity of three kilowatt hours. No credit is available since the car has a battery capacity of less than four kilowatt hours.

There is currently only one plug-in electric vehicle with a battery capacity of at least 4 kilowatt hours (the high-priced Tesla roadster, with a 54 kilowatt hour battery pack), but many more are on the way. Beginning in 2010, several new models will be introduced, most of which will have a battery capacity of at least 16 kilowatt hours, qualifying for the full $7,500 tax credit.

Qualified transportation fringe benefits provided by an employer are excluded from an employee’s gross income for income tax purposes and from an employee’s wages for payroll tax purposes. Qualified transportation fringe benefits include parking, transit passes, vanpool benefits, and qualified bicycle commuting reimbursements. Up to $230 (for 2009) per month of employer-provided parking is excludable from income. Up to $120 (for 2009) per month of employer-provided transit and vanpool benefits are excludable from gross income. These amounts are indexed annually for inflation.

Qualified transportation fringe benefits also include a cash reimbursement by an employer to an employee. However, in the case of transit passes, a cash reimbursement is considered a qualified transportation fringe benefit only if a voucher or similar item which may be exchanged only for a transit pass is not readily available for direct distribution by the employer to the employee.

The American Recovery and Reinvestment Act increases the monthly exclusion for employer-provided transit and vanpool benefits to the same level as the exclusion for employer-provided parking. This provision is effective from March of 2009 through 2010.

The American Recovery and Reinvestment Act makes a slight change in the payment of estimated taxes. Under current law, taxpayers who do not pay their income taxes and Social Security taxes through withholding must pay their taxes using the estimated quarterly tax procedure. This involves estimating the total amount of income taxes and Social Security taxes that will be due during the current year, and the payment of one- fourth of the total estimate in four quarterly installments. To avoid an underpayment penalty, taxpayers must pay the lesser of 90 percent of the tax shown on their tax return for the current year, or 100 percent of the tax shown on the return for the prior year (110 percent if the adjusted gross income for the preceding year exceeded $150,000).

The tax code provides exceptions from the underpayment penalty for taxpayers who did not have a tax liability in the preceding year, taxpayers whose tax liability for the current year, reduced by withholding, is less than $1,000, or, in some cases, taxpayers who are recently retired or disabled and meet a reasonable cause test.

The American Recovery and Reinvestment Act changes the exception from the under- payment penalty for taxpayers whose estimated tax payments in the current year are at least 100 percent of the taxes paid in the prior year by reducing the 100 percent of the prior year’s tax liability to 90 percent. However, this exception only pertains to “qualified individuals,” defined as taxpayers (1) with adjusted gross income for the previous year of less than $500,000, and (2) with at least 50 percent of the gross income shown on their prior year’s tax return coming from a small trade or business (defined as any trade or business that employed no more than 500 persons, on average, during the preceding year). This provision takes effect immediately.

Application to church staff. Ministers are exempt from tax withholding, and as a result must prepay their federal income taxes and self-employment taxes (i.e., Social Security taxes for persons, such as ministers, who are classified by the tax code as self-employed for Social Security) using the quarterly estimated tax procedure unless they elect voluntary tax withholding. As a result, many ministers are directly affected by most changes in the payment of estimated taxes. However, the change recently enacted by Congress in the American Recovery and Reinvestment Act will affect very few ministers.

The American Recovery and Reinvestment Act directs the Secretary of the Treasury to disburse a one-time Economic Recovery Payment of $250 to adults who were eligible for various government programs including Social Security benefits, veteran’s compensation or pension benefits, or Supplemental Security Income (SSI) benefits (excluding individuals who receive SSI while in a Medicaid institution). Only individuals who were eligible for one or more of these programs for any of the three months prior to February of 2009 are eligible to receive an Economic Recovery Payment.

Economic Recovery Payments are not taxable income, and are not taken into account as resources for the month of receipt and the following 9 months, for purposes of determining the eligibility of such individual for benefits or assistance.

The Secretary of the Treasury is directed to begin making payments as soon as possible, but no later than June of 2009. No Economic Recovery Payments will be made after December 31, 2010.

The American Recovery and Reinvestment Act provides for premium reductions and additional election opportunities for health benefits under the Consolidated Omnibus Budget Reconciliation Act of 1985, commonly called COBRA. COBRA gives workers who lose their jobs, and thus their health benefits, the right to purchase group health coverage provided by the plan under certain circumstances. If the employer offers a group health plan, the employee (and his or her family) can retain their group health coverage for up to 18 months by paying group rates. The COBRA premium may be higher than what the individual was paying while employed but generally the cost is lower than private, individual health insurance coverage.

Under the American Recovery Reinvestment Act, eligible individuals pay only 35 percent of their COBRA premiums and the remaining 65 percent is reimbursed to the employer through a payroll tax credit. The premium reduction applies to periods of health coverage beginning on or after February 17, 2009 and lasts for up to nine months. Eligible individuals are employees who are eligible for COBRA continuation coverage at any time between September 1, 2008 and December 31, 2009; elect COBRA coverage; and are eligible for COBRA as a result of their involuntary termination between September 1, 2008 and December 31, 2009.

Application to church staff. The following types of group health plans are not subject to the COBRA rules:

Congress was asked by representatives of several church pension plans to expand the 65 percent payroll tax credit to self-funded group health plans maintained by churches. This initiative failed.

This article only addresses the federal COBRA law. All 50 states have their own legislation that provides for continuation of group health coverage. Church leaders should consult with a local attorney to determine the application of such a law to church plans.

This article first appeared in Church Finance Today, July 2009.