The American Recovery and Reinvestment Act of 2009
Richard R. Hammar, J.D., LL.M., CPA
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:
Create and save 3.5 million jobs.
Make us more globally competitive and energy independent.
Give 95 percent of American workers an immediate tax cut.
Invest in roads, bridges, mass transit, energy efficient buildings, flood control, clean water projects, and other infrastructure projects.
Restore science and innovation as the keys to new American-made technology, preventing and treating disease, and tackling urgent national challenges like climate change and dependence on foreign oil.
Invest quickly into the economy.
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. Here is a summary of ten of the key changes.
ProvisionWhat it means
“making work pay” credit
Eligible individuals can claim a refundable income tax credit for two years (taxable years beginning in 2009 and 2010). The credit is the lesser of (1) 6.2 percent of an individual’s earned income, or (2) $400 ($800 in the case of a joint return).
Taxpayers can receive this benefi t through a reduction in the amount of income tax that is withheld from their paychecks, or through claiming the credit on their tax returns.
The credit is phased out at a rate of two percent of the eligible individual’s modified adjusted gross income above$75,000 ($150,000 in the case of a joint return). For most persons, modifiedadjusted gross income is the same as adjusted gross income.
earned income tax credit
The Act temporarily increases the earned income tax credit for working families with three ormore children. Under current law, working families with two or more children currently qualify for an earned income tax credit equal to 40 percent of the family’s first $12,570 of earned income. This credit is subject to a phase-out for working families with adjusted gross income in excess of $16,420 ($19,540 for married couples filing jointly).
The Act increases the earned income tax credit to 45 percent of the family’s first $12,570 of earned income for families with three or more children and would increase the beginning point of the phase-out range for all married couples filing a joint return (regardless of the number of children) by $1,880.
The Act also increases the threshold phase-out amounts for married couples filing joint returns to $5,000 above the threshold phase-out amounts for singles, surviving spouses, and heads ofhouseholds for 2009 and 2010.
child tax credit
An individual may claim a tax credit for each qualifying child under the age of 17. The amountof the credit per child is $1,000 through 2010, and $500 thereafter. The credit is phased out for individuals with income over certain threshold amounts. 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 percent of earned income in excess of a threshold dollar amount (the “earned income” formula). Under prior law, the threshold dollar amount was $12,550 (for 2009), and was indexed for inflation.
The Act modifies the earned income formula to apply to 15 percent of earned income in excessof $3,000 for taxable years beginning in 2009 and 2010.
Last year, Congress provided taxpayers with a refundable tax credit that was equivalent to aninterest-free loan equal to 10 percent of the purchase of a home (up to $7,500) by first-time home buyers. This provision applied to homes purchased on or after April 9, 2008 and before July 1, 2009. Taxpayers receiving this tax credit were required to repay any amount received under this provision back to the government over 15 years in equal installments, or, if earlier, when the home is sold. The credit phased out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 in the case of a joint return).
The Act eliminates the repayment obligation for taxpayers that purchase homes after January 1,2009, increases the maximum value of the credit to $8,000, and extends the availability of the credit for homes purchased before December 1, 2009. The Act retains the credit recapture if the house is sold within three years of purchase.
American Opportunity Tax Credit
The Act modifies the Hope credit for taxable years beginning in 2009 or 2010. The modified credit is referred to as the American Opportunity Tax credit. The allowable modified 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 percent on the first $2,000 of qualified tuition and related expenses, and 25 percent on the next $2,000 of qualified tuition and related expenses. For purposes of the modified credit, the definition of qualified tuition and related expenses is expanded to include course materials.
The modified credit is available with respect to an individual student for four years, provided that the student has not completed the first four years of post-secondary education before the beginning of the fourth taxable year. As a result, the modified credit, in addition to other modifications, extends the application of the Hope credit to two more years of post-secondary education.
The modified credit is phased out for taxpayers with modified adjusted gross income between $80,000 and $90,000 ($160,000 and $180,000 for married taxpayers filing a joint return). • Forty percent of the allowable modified credit is refundable. However, no portion of the modified credit is refundable if the taxpayer claiming the credit is a child under age 18 or any child under age 24 who is a student providing less than one-half of his or her own support, who has at least one living parent and does not file a joint return.
motor vehicle taxes
The Act provides an above-the-line deduction for qualified motor vehicle taxes. qualified motor vehicle taxes include any state or local sales or excise tax imposed on the purchase of a qualified motor vehicle. A qualified motor vehicle means a passenger automobile, light truck, or motorcycle which has a gross vehicle weight of not more than 8,500 pounds, that is acquired for use by the taxpayer after February 17, 2009 and before January 1, 2010, the original use of which begins with the taxpayer. Motor homes also qualify.
The deduction is limited to the tax on up to $49,500 of the purchase price of a qualified motor vehicle. The deduction is phased out for taxpayers with modified adjusted gross income between$125,000 and$135,000 ( $250,000 and$260,000 in the case of a joint return).
alternative minimum tax
• The Act provides more than 26 million families with tax relief in 2009 by increasing the AMTexemption amount to $70,950 for joint filers and $46,700 for individuals.
economic recovery payment
This is a one-time payment of $250, for 2009 only.
These payments will be made only to persons on fixed incomes such as Social Security.
Taxpayers who qualify for the “making work pay credit” (see above) must reduce that credit by the amount of their economic recovery payment.
plug-in vehicle credit
Taxpayers who purchase a plug-in electric vehicle can claim a tax credit of $2,500, plus an additional $417 for each kilowatt hour of battery capacity in excess of four kilowatt hours, up to a maximum credit of $7,500.
Once a manufacturer sells 200,000 plug-in electric vehicles for use in the United States, the credit phases out over four calendar quarters.
This credit takes effect for vehicles purchased through the end of 2009. This is an interesting credit, since there are no plug-in electric vehicles currently on the market, at least from any of the major car makers.
The tax code contains rules that require group health plans to allow employees to continue to participate in the plan following their termination or certain other events. These rules are often referred to as “COBRA continuation coverage” or “COBRA,” which is a reference to the acronym for the Comprehensive Omnibus Budget Reconciliation Act of 1985 that added the coverage rules.
The Act provides that certain employees whose employment is involuntarily terminated between September 1, 2008 and December 31, 2009, can elect to continue their group insurance for 12 months and pay only 35 percent of the premiums, with their employer paying the balance.
Some kinds of group health plans are not subject to the COBRA rules, and these include a plan established for its employees by a church or by a convention or association of churches, or a plan maintained by an employer that normally employed fewer than 20 employees on a typical business day during the preceding calendar year.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
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