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“American Recovery and Reinvestment Act"
CHANGES AFFECTING INDIVIDUALS
"Making Work Pay” Credit. The Act provides an individual tax credit in the amount of 6.2 percent of earned income not to exceed $400 for single returns and $800 for joint returns in 2009 and 2010. The credit is phased out starting with adjusted gross income (AGI) in excess of $75,000 ($150,000 for married couples filing jointly). The credit can be claimed as a reduction in the amount of income tax that is withheld from a paycheck, or through a credit on a tax return. Under the credit, workers can expect to see perhaps $13 a week less withheld from their paychecks starting around June. Next year, the extra take-home pay will go down to around $9 per week.
Economic Recovery Payment. The Act provides a one-time payment of $250 to certain individuals on fixed incomes (primarily Social Security recipients, railroad retirees and disabled veterans). Retired government workers, who generally are ineligible for Social Security, also will receive a one-time payment of $250. These payments will reduce any allowable Making Work Pay Credit.
Unemployment Compensation Exclusion. A provision temporarily suspends federal income tax on the first $2,400 of unemployment benefits received by a recipient in 2009.
Expanded Earned Income Tax Credit. The Act increases the Earned Income Tax Credit for families with three or more children and increases marriage penalty relief. The changes apply for 2009 and 2010.
Expanded Child Tax Credit. The Act increases the eligibility for the refundable child tax credit in 2009 and 2010 by lowering the threshold to $3,000 (from $8,500 in 2008).
Expanded and Revised Higher Education Tax Credit. The Act creates a $2,500 higher education tax credit that is available for the first four years of college. The credit is based on 100% of the first $2,000 of tuition and related expenses (including books) paid during the tax year and 25% of the next $2,000 of tuition and related expenses paid during the tax year. The credit phases out starting with AGI in excess of $80,000 ($160,000 for married couples filing jointly). Forty percent of the credit is refundable. The new credit temporarily replaces the Hope education credit.
Computers as an Education Expense. The Act permits computers and computer technology (including the cost of internet access) to qualify as qualified education expenses in Section 529 education plans for tax years beginning in 2009 and 2010.
Expanded Credit for First-time Home Buyers. Last year, Congress provided first-time home buyers with a refundable tax credit that was equivalent to an interest-free loan equal to 10% of the purchase price of a home (up to $75,000). The 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 over 15 years in equal installments (or earlier if the home was sold). The credit is phased out starting with AGI in excess of $75,000 ($150,000 in the case of a joint return). The new law enhances the credit by eliminating the repayment obligation for taxpayers that purchase homes on or after January 1, 2009. It also extends the credit through the end of November 2009, and increases the maximum value of the credit from $7,500 to $8,000.
Tax Break for New Car Purchasers. The Act allows taxpayers to deduct State and local sales taxes paid on the purchase (but not lease) of a new automobile, including light trucks, SUVs, motorcycles, and motor homes. The tax break phases out starting with AGI in excess of $125,000 per year ($250,000 for joint returns). The deduction is allowed to both those who itemize their deductions as well as to non-itemizers. The deduction cannot be taken by a taxpayer who elects to deduct State and local sales taxes in lieu of State and local income taxes. This deduction is effective for new cars purchased on or after February 17, 2009 and before January 1, 2010.
Alternative Minimum Tax (AMT) Patch. In order to reduce the number of taxpayers subject to the AMT, the new law increases the AMT exemption amounts for 2009 to $46,700 for single individuals and $70,950 for joint returns, and allows taxpayers to take most personal tax credits against the AMT.
Residential Energy Property Credit: The Act increases the residential energy credit from 10 percent to 30 percent, raises the maximum cap to a $1,500 aggregate amount for 2009 and 2010 and eliminates the $500 lifetime cap.
CHANGES AFFECTING BUSINESSES
Extension of Bonus Depreciation. The act extends the 50-percent bonus depreciation deduction for qualifying assets placed in service on or before December 31, 2009.
Extension of Enhanced Small Business Expensing (Section 179). In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers may elect to write off the cost of these expense in the year of acquisition in lieu of recovering these costs over time through depreciation. Last year, Congress temporarily increased the amount that small businesses could write off to $250,000 and increased the phase-out threshold to $800,000. The new law extends these temporary increases for capital expenditures incurred in 2009.
Expanded Loss Carryback of Net Operating Losses for Small Businesses. Under pre-Act law, net operating losses (NOLs) could be carried back to the two years preceding the year that the loss arose and carried forward to each of the succeeding twenty years. The new law extends the maximum NOL carryback period from two years to five years for small businesses with average gross receipts of $15 million or less.
Expansion of Work Opportunity Credit. Businesses are allowed to claim a work opportunity tax credit equal to 40% of the first $6,000 of wages paid to employees in one of nine targeted groups. The new law expands the work opportunity tax credit to include two new targeted groups: (1) unemployed veterans; and (2) disconnected youth. Individuals qualify as unemployed veterans if they were discharged or released from active duty from the Armed Forces during 2008, 2009 or 2010 and received unemployment compensation for more than four weeks during the year before being hired. Individuals qualify as disconnected youths if they are between the ages of 16 and 25 and have not been regularly employed or have not attended school in the past 6 months.
Refundable AMT and R&D Credits in lieu of Bonus Depreciation. The new law extends the provision contained in the Foreclosure Prevention Act of 2008 and allows taxpayers to take AMT and R&D credits in lieu of bonus depreciation.
Delayed Recognition of Certain Cancellation of Debt Income. To benefit certain businesses that buy their own debt at a discount in 2009 and 2010, the Act allows businesses to defer recognition of cancellation of debt income ("CODI") until 2014 and to recognize this income ratably over five years beginning in 2014.
Qualified Small Business Stock. The new law increases the exclusion for gain from the sale of certain small business stock held for more than five years from 50% to 75% for stock issued after February 17, 2009 and before 2011.
S Corp Holding Period. The Act temporarily shortens the holding period of assets subject to the built-in gains tax from 10 years to seven years.
Repeal of IRS's Built-in Loss Rules. The new law provides a prospective repeal of Notice 2008-83, the controversial IRS guidance which provided relief from the NOL limitations for corporations acquiring a financially strapped bank.
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