If you own a radio, television, or computer, you probably already know that Congress has recently passed, and President Obama has signed, the American Recovery and Investment Act of 2009 (“Act”). The Act is intended to stimulate the U.S. economy, by making numerous tax code changes and by dramatically increasing government spending. While you may not see any of the spending, it is likely that the tax code changes will impact your or your clients’ financial position. Key tax code changes include:
TAX CHANGES FOR INDIVIDUALS
• “Making Work Pay” Tax Credit For 2009 And 2010. The Act provides a refundable tax credit of 6.2% of earned income, up to $400 for single filers and up to $800 for married couples filing jointly. The tax credit phases out for single filers with an adjusted gross income between $75,000 and $95,000 and for married couples filing jointly with an adjusted gross income between $150,000 and $190,000. Taxpayers will receive the credit through a reduction in the income tax that is withheld from their paychecks.
• Economic Recovery Payment To Recipients Of SSI, Social Security, Veterans Disability Compensation Benefits, And Railroad Retirement. The Act establishes a one time payment of $250 to retirees from government jobs who are not eligible to claim social security benefits, disabled individuals and SSI recipients receiving benefits from the Social Security Administration, railroad retirement beneficiaries, and disabled veterans receiving benefits from the U.S. Department of Veterans Affairs. This payment will reduce any allowable “Making Work Pay” tax credit.
• Increase In Earned Income Tax Credit. In 2009 and 2010, the Act increases the earned income tax credit for families with 3 or more children to 45% (from 40%) of the families’ first $12,570 of earned income. The Act also increases the phase out range for all married recipients (regardless of the number of children) by $1,880. The credit is subject to a phase out for working families with income above $16,420 ($19,540 for married taxpayers filing jointly).
• Increase Eligibility For The Refundable Portion Of Child Credit. For 2009 and 2010, the child tax credit will be refundable to the extent of 15% of a taxpayer’s earned income in excess of $3,500 (down from $8,000 in 2008). This will allow more families to claim the credit.
• “American Opportunity” Education Tax Credit. The Act amends the Hope Credit in 2009 and 2010 to create a new “American Opportunity” tax credit equal to 100% of the first $2,000 of tuition and qualified expenses (including books) and 25% of the next $2,000 of tuition and qualified expenses. 40% of the credit will be refundable. The first four years of education are eligible for the credit, rather than just the first two years under the prior Hope Credit. The credit now phases out for singles with incomes between $80,000 and $90,000 and married taxpayers with incomes between $160,000 and $180,000.
• Refundable First Time Home Buyers Credit. In a 2008 update, we mentioned that Congress had passed a refundable credit up to $7,500 for first time home buyers. The credit was essentially equivalent to an interest free loan, because the tax credit was required to be repaid over 15 years. The credit phased out for taxpayers with income in excess of $75,000 ($150,000 for joint filers). The Act makes the following changes:
a. Increases the maximum value of the credit to $8,000;
b. Eliminates the repayment obligation for home buyers who purchase homes after January 1, 2009 and who will live in the home for 3 years. This means that the credit now functions like an $8,000 incentive payment from Congress to buy a home; and
c. Extends the credit to purchases made before December 1, 2009 (from June 30, 2009).
• Computers As Qualified Expenses Under 529 Education Plans. The Act establishes that computer equipment, computer technology, and Internet Access constitute qualified education expenses under 529 education plans in 2009 and 2010.
• Sales Tax Reduction For Vehicle Purchases. The Act creates an above-the-line deduction in 2009 for the sales tax paid on the purchase of a new car, recreation vehicle, motorcycle, or light truck up to $49,500 for taxpayers that do not claim sales taxes as an itemized deduction. The deduction is phased out for taxpayers with a gross income between $125,000 and $135,000 (between $250,000 and $260,000 for joint filers).
• Exemption For Unemployment Benefits. The Act excludes the first $2,400 of unemployment benefits in 2009 from income tax.
• Extension Of AMT Relief For 2009. The Act extends AMT relief for 2009 by increasing the AMT exemption to $70,950 for married joint filers and $46,700 for single filers.
• Estimated Tax Payment Relief. An individual who makes less than $500,000, and who derives over 50% of his or her income from a business with 500 employees or less, will not be subject to estimated tax penalties if, through withholding and estimated tax, the individual pays at least 90% of last year’s income tax liability.
• Exclusion Of “Private Activity Bonds” From AMT. Currently, interest on “private activity bonds” is generally subject to the federal AMT. This reduces the marketability of these bonds and forces state and local governments to issue the bonds at higher rates. In 2008, Congress excluded one category of private activity bonds (tax exempt housing bonds) from the AMT. The Act excludes all remaining private activity bonds from the AMT if the bond is issued in 2009 or 2010.
• Tax Credits For Energy Efficient Improvements To Existing Homes. The Act extends and increases the tax credits for improvements to energy-efficient existing homes through 2010. The Act increases the amount of the tax credit to 30% (previously 10%) of the amount paid or incurred by the taxpayer for qualified energy efficiency improvements. The Act further eliminates the existing property-by-property dollar caps and provides an aggregate $1,500 cap on all property qualifying for the credit.
TAX INCENTIVES FOR BUSINESSES
• Extension Of Bonus Depreciation. In 2008, a special bonus depreciation provision permitted businesses to immediately expense one-half of the cost of eligible property, while the other half was depreciated using the normal rules. The Act extends this to property placed in service in 2009.
• Extension Of Section 179 Expensing. To help small businesses quickly recover the cost of capital expenses, Section 179 allows small businesses to expense the purchase of equipment and other capital assets in the year of acquisition. In 2008, Congress increased the amount that small businesses may expense under Section 179 to $250,000 (which is reduced by the amount of qualifying property over $800,000). The Act extends the 2008 limits to 2009.
• Five Year Carry-Back Of Net Operating Losses For Small Businesses. Prior to the Act, net operating losses (NOLs) could be carried back for two tax years to obtain refunds against taxes already paid. For 2008, the Act extends the NOL carry-back period to 5 years for business taxpayers with gross receipts under $15 million. The Act further provides a minimum 60 day period after the date of enactment to amend a previously made election.
• Tax Deferral Of Certain Cancellation Of Debt Income. The Act allows a taxpayer to elect to have debt cancellation income from the reacquisition of an applicable debt instrument in 2009 and 2010 included in gross income ratably over 5 tax years, beginning in 2014 (unless the taxpayer has a short tax year).
• Temporary Reduction Of S Corporation Built-In Gain Holding Period From 10 Years To 7 Years. Under current law, if a C corporation converts to a S corporation, that corporation must hold its assets for 10 years to avoid paying tax on the built-in gains which existed at the time of the conversion. The Act specifies that the built in gain will not apply for 2009 and 2010 if conversion to an S corpotation occurred more than 7 years earlier.
• Reduction In Tax On Small Business Capital Gains. Currently, the Code excludes 50% of the capital gains from the sale of qualifying small business stock held by an individual for more than 5 years. The Act increases the exclusion to 75% for stock issued between the date the bill was enacted and January 1, 2011. A “qualified small business” is a C corporation which has $50 million or less of aggregate gross assets (with some exceptions), meets an active business requirement, and meets certain other reporting and business requirements.
• Incentives To Hire Unemployed Veterans And Disconnected Youth. Under current law, businesses may claim the “Work Opportunity Credit” equal to 40% of the first $6,000 of wages paid to employees in one of nine targeted groups. The Act creates two new targeted groups of prospective employees: (1) unemployed veterans; and (2) disconnected youth. An individual qualifies as an “unemployed veteran” if he or she was discharged from active duty during the five year period prior to his or her hiring and the individual received unemployment compensation for 4 or more weeks during the year before they were hired. A “disconnected youth” is an individual who is between the ages of 16 and 25 and has not been regularly employed or who has not attended school in the past 6 months.
• Election To Accelerate Recognition Of Historic AMT/R&D Credits In 2009. In 2008, Congress allowed businesses to accelerate the recognition of a portion of their historic AMT or research and development (R&D) credits in lieu of bonus depreciation. The portion of the credits that businesses may accelerate is based on the amount that each business invests in property that would otherwise qualify for bonus depreciation. This amount is capped at the lesser of six percent (6%) of historic AMT and R&D credits or $30 million. The Act extends this temporary benefit through 2009.