American Recovery & Reinvestment Act of 2009
As you know, our new President signed the American Recovery and Reinvestment Act of 2009. The following items will be continuing into 2010.
Making Work Pay
The Making Work Pay Credit is a refundable income tax credit for tax years beginning in 2009 and 2010. The credit is the lesser of (1) 6.2% of the individual’s earned income, or (2) $400 ($800 for MFJ). This credit is available, in full, to workers with a modified AGI of $75,000 ($150,000 for MFJ) or less. Above that amount, the credit will be phased out at a rate of 2%. The credit does not apply to any individual whose tax return does not include a Social Security Number.
Temporary Tax Deduction on Car Purchases
Purchasers of new vehicles will get an above-the-line deduction for the state sales taxes, local sales taxes, and excise taxes paid. To qualify, a vehicle must be newly purchased for first use by the taxpayer and must (1) be a passenger vehicle, light truck, or motorcycle with a gross weight of no more than 8,500 pounds, or (2) be a motor home. Deductible taxes cannot exceed the portion attributable to the first $49,500 of the price paid for any single vehicle. Phase-outs start for individuals with AGI greater than $125,000 ($250,000 for MFJ).
American Opportunity Tax Credit (Hope Credit)
The Hope Credit, which is being renamed to The American Opportunity Tax Credit, has been enhanced in the following ways under the new law:
• Amount increased to a maximum of $2,500 (from $1,800) per eligible student per year
• Modified rate of 100% of the first $2,000; 25% of the next $2,000, with a maximum $2,500 per
year allowed on $4,000 in qualifying payments
• Forty percent of the credit will be refundable for 2009 and 2010
• Credit will now apply for all four years of college
• Qualifying expenses will now include course materials
• Phase-out level increased to $80,000 AGI ($160,000 for MFJ)
Qualified Tuition Programs (“529 Plans”)
For 2009 and 2010, a beneficiary of a qualified tuition program can use distributions to pay for computers and computer technology (including internet). Distributions will be tax-free. Previously, these expenses were not tax-free and were included in the beneficiary’s income and subject to penalty.
Earned Income Tax Credit
For 2009 and 2010, EITC percentage will be increased to 45% of the first $12,750 of earned income for taxpayers who have three or more qualifying children. (Prior to the new law, the credit percentage was 40% of the first $12,750 for taxpayers with two or more qualifying children.) In addition, the EITC phase-out range has been adjusted upward by $1,880 to eliminate any marriage penalty for joint filers.
Child Tax Credit
For 2009 and 2010, the refundable part of the child tax credit will be increased. The income threshold will now be set at $3,000.
Residential Energy Property Credit
Under the Recovery Act, the Residential Energy Property Credit allows a credit for eligible property placed in service after December 31, 2008, and before January 1, 2011, with the following modifications to the credit that was allowed in years prior to 2008:
• Increase of residential energy property tax credit to 30% (from 10%)
• Increase of maximum cap to $1,500 aggregate amount for 2009 and 2010 installations
• Elimination of the $500 lifetime cap
Eligible Section 25C property includes insulation materials, exterior windows and doors, central air conditioners, natural gas, propane or oil water heaters and furnaces, hot water boilers, electric heat-pump water heaters, certain metal roofs and stoves, and advanced main air-circulating fans.
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