Disclaimer of Liability
The information in this e-newsletter is for general guidance only, and does not constitute the provision of legal advice, tax advice,
accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used
as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or
taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular
situation.
The author of the tax articles in this e-newsletter did not intend nor write the advice to be used to avoid any penalty imposed by a
taxing authority, nor may any user/recipient of this document use this document's written tax advice for that purpose. This document's
tax advice was written specifically to support the promotion or marketing of the transaction/matter addressed by the written tax advice.
Therefore, any user/recipient of this document should seek an independent tax professional's advice regarding the user/recipient's
particular circumstances.
The information is provided "as is" with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and
without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for
a particular purpose.
The information in this e-newsletter is for general guidance only, and does not constitute the provision of legal advice, tax advice,
accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used
as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or
taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular
situation.
The author of the tax articles in this e-newsletter did not intend nor write the advice to be used to avoid any penalty imposed by a
taxing authority, nor may any user/recipient of this document use this document's written tax advice for that purpose. This document's
tax advice was written specifically to support the promotion or marketing of the transaction/matter addressed by the written tax advice.
Therefore, any user/recipient of this document should seek an independent tax professional's advice regarding the user/recipient's
particular circumstances.
The information is provided "as is" with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and
without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for
a particular purpose.
| Serving the Central Pennsylvania area since 1981 |
| Robert A. Romako, CPA |
| INDIVIDUAL INCENTIVES IN THE STIMULUS BILL |
SPECIAL REPORT:
REVIEW OF CONGRESSIONALLY-APPROVED STIMULUS PACKAGE
This summary reflects the compromises worked out between the House and Senate versions of the stimulus package,
officially known as the American Recovery and Reinvestment Act of 2009. President Obama plans to sign the Act into
law on Tuesday, February 17. About 35% of the Act’s 1,011 pages of text relate to tax issues. To make review easier
for my readers, I have broken these down into separate sections covering individual and business provisions. Please
note that in the interest of simplicity and readability, certain details of the tax provisions have been simplified or
omitted. Readers are urged to talk to your own tax advisor to see how the new law might apply to you. And, as
always, please feel free to contact me with your questions and concerns.
Making Work Pay credit. This is the tax credit widely publicized in the media – the one that will “pay workers $14 per
week”. The actual credit applies for 2009 and 2010, and is calculated as the lesser of (1) 6.2% of an individual’s earned
income, or (2) $400 ($800 for a joint return). The credit phases out at a rate of 2% for adjusted gross income above
$75,000 for single filers, or $150,000 for joint returns. This means single filers with adjusted gross income of over
$95,000, or $190,000 on a joint return, will not receive the credit. Employees receive the credit prospectively through a
reduction in Federal tax withholding from wages. Self-employed individuals can reduce their quarterly estimated tax
payments, if desired. The IRS has been instructed to prepare revised tax withholding tables as soon as possible to
incorporate the tax credit.
$250 Economic Recovery Payment. Retired individuals on fixed incomes will receive a one-time payment of $250 in
2009, similar to the 2008 stimulus payments. The credit will be reduced and subject to phase out at adjusted gross
income levels above $75,000 for single filers and $150,000 for joint fillers is expected that the IRS will follow a mailing
distribution schedule similar to that used for the stimulus checks last year. For those receiving the Economic Recovery
Payment, it will reduce the amount of the Making Work Pay credit they may otherwise be eligible for.
American Opportunity tax credit. The HOPE credit for higher education expenses has been replaced with the new
American Opportunity tax credit for 2009 and 2010. The new credit is equal to 100% of the first $2,000 of the first $2,000
of qualified tuition and related expenses, plus 25% of the next $2,000 of tuition and expenses, for a maximum credit of
$2,500 per individual student. The credit is available for the first 4 years of post-secondary education. Eligible expenses
include tuition (but not room and board) and the cost of course materials (books). The credit phases out ratably for
taxpayers with modified adjusted gross incomes between $80,000 and $90,000 for single filers, and between $160,000
and $180,000 for joint files. A new change now proves that up to 40% of the credit can be refundable, provided the
student is not subject to the kiddie tax. Finally, if the tuition was paid in 2008 but is for a 2009 semester, the taxpayers
must follow the old HOPE credit laws. Note that tuition paid from tax-exempt Section 529 college savings plans is not
eligible for the credit.
Computers as education expenses under 529 plans. For 2009 and 2010, purchases of computers, educational
software, and internet access can be paid from Section 529 education accounts.
First-time homebuyer credit. For homes purchased after December 31, 2008 but before December 1, 2009, the Act
creates a new tax credit. The credit is equal to 10% of the cost of the home, up to a maximum credit of $8,000. Unlike the
first-time homebuyer credit of 2008, this credit does not have to be repaid. The credit phases out for individual taxpayers
having adjusted gross income of between $75,000 and $95,000, or between $150,000 and $170,000 for joint filers. In
addition, if the home is sold within 36 months form the date of purchase, a portion of the credit must be recaptured. For
anyone even remotely considering a home purchase, the potential tax savings from this generous credit must be given
strong consideration in the decision process.
New car deduction. For new vehicles purchased after the date of enactment, the new Act permits a deduction for sales
or excise taxes paid on the vehicle. The deduction is “above the line”, meaning taxpayers do not have to itemize their
deductions to claim it. Eligible vehicles include cars, light trucks and motorcycles having mo more than 8,500 pounds
gross vehicle weight, and motor homes. Only the taxes on the first $49,500 of vehicle cost are eligible. The deduction is
phased out ratable for single taxpayers having between $125,000 and $135,000 of adjusted gross income, or between
$250,000 and $260,000 for joint filers. The deduction for the motor vehicle taxes is also not available if a taxpayer
chooses to deduct sales tax in lieu of state and local income taxes as an itemized deduction. Note that a provision to allow
deduction of interest on new cars purchased was dropped from the compromise bill.
AMT patch. The Alternative Minimum Tax exemption, which expired in 2008, was extended one more year to include
2009. Those who are potentially subject to the alternative minimum tax know extension of the “patch” is an annual
exercise in Congress. However, it is an important one – it keeps approximately 26 million filers from being subject to the
alternative minimum tax, at a tax cost of over $70 billion dollars per year.
Estimated tax payment reduction. Beginning in 2009, individuals with less than $500,000 in adjusted gross income
who derive more than 50% of that income from a small business, can reduce their estimated tax payments to 90% of the
prior year’s amount, rather than the current 100% of prior year safe harbor. In this context, “small business” is defined as
one having 500 or fewer employees.
Partial unemployment compensation exclusion. For 2009, the first $2,400 of unemployment benefits received will
not be taxed.
Partial COBRA subsidy. For workers involuntarily terminated from employment between September 1, 2008 and
December 31, 2009 who are eligible to purchase health insurance under COBRA, the Act provides a new 65% cost
subsidy. The subsidy would apply for a period of up to 9 months. Workers must attest that their income during the year(s)
of receiving the subsidy will be less than $125,000 for single individuals, or $250,000 for joint filers. The subsidy would
terminate upon eligibility for coverage under any new employer’s plan. For workers who were involuntarily terminated
between September 1, 2008 and the date of the Act’s enactment, but who did not elect COBRA coverage, the Act
provides a 60-day period to begin coverage. Premium subsidies are not taxable to the individual. Employers recover the
cost of the subsidy by reducing the amount remitted as payroll tax withholding (see tax provisions affecting businesses).
Child tax credit and earned income tax credit. The Act increases the refundable portions of the child tax credit for
2009 and 2010, and provides an increase in the earned income tax credit for those 2 years. Since most readers have
incomes above the thresholds for claiming the credits, they will not be discussed in detail.
Homeowner energy credits. For certain energy-efficiency expenditures made in 2009 and 2010, the Act increases the
amount of credits that individuals can claim. The new credit is 30% of the cost of expenditures, up to a maximum credit of
$1,500 for the 2009-2010 period. The types of energy expenditures eligible for the credit are those defined under the
prior energy program:
• Replacement windows, doors and insulation materials
• Metal roofs with pigmented coatings
• Heat pumps, high-efficiency water heaters, central air conditioners, and boilers
• Advanced main air circulating fans
• Stoves burning biomass fuels
The old caps for certain types of property (for example, no more than $200 for windows) have been eliminated in favor of
the overall expenditure credit. For those taxpayers that claimed the maximum credit deduction of $500 prior to 2008, that
credit is ignored under the new Act. Note that the credit can only be claimed for expenditures made on the taxpayer’s
principal residence – vacation homes and rental property do not qualify.
Residential energy efficiency property credit. Certain energy efficiency property is eligible for additional credits
beyond the $1,500 credit cap described above. The following property qualifies for a 30% credit with no caps through
2017:
• Solar water heating property
• Small wind energy property
• Qualified geothermal heat pump property
As with the homeowner energy credits, these only apply to expenditures made for a principal residence.
Plug-in electric vehicles. Beginning in 2009, there was a new credit available for vehicles that operated through
rechargeable batteries. The Act expands and modifies this credit to take into account certain low-speed vehicles,
motorcycles, and three-wheeled vehicles that did not meet the original criteria for the credit. Since the availability of these
plug-in vehicles is not widespread, readers are advised to consult with the dealer or a tax professional to obtain the
complete details.
REVIEW OF CONGRESSIONALLY-APPROVED STIMULUS PACKAGE
This summary reflects the compromises worked out between the House and Senate versions of the stimulus package,
officially known as the American Recovery and Reinvestment Act of 2009. President Obama plans to sign the Act into
law on Tuesday, February 17. About 35% of the Act’s 1,011 pages of text relate to tax issues. To make review easier
for my readers, I have broken these down into separate sections covering individual and business provisions. Please
note that in the interest of simplicity and readability, certain details of the tax provisions have been simplified or
omitted. Readers are urged to talk to your own tax advisor to see how the new law might apply to you. And, as
always, please feel free to contact me with your questions and concerns.
Making Work Pay credit. This is the tax credit widely publicized in the media – the one that will “pay workers $14 per
week”. The actual credit applies for 2009 and 2010, and is calculated as the lesser of (1) 6.2% of an individual’s earned
income, or (2) $400 ($800 for a joint return). The credit phases out at a rate of 2% for adjusted gross income above
$75,000 for single filers, or $150,000 for joint returns. This means single filers with adjusted gross income of over
$95,000, or $190,000 on a joint return, will not receive the credit. Employees receive the credit prospectively through a
reduction in Federal tax withholding from wages. Self-employed individuals can reduce their quarterly estimated tax
payments, if desired. The IRS has been instructed to prepare revised tax withholding tables as soon as possible to
incorporate the tax credit.
$250 Economic Recovery Payment. Retired individuals on fixed incomes will receive a one-time payment of $250 in
2009, similar to the 2008 stimulus payments. The credit will be reduced and subject to phase out at adjusted gross
income levels above $75,000 for single filers and $150,000 for joint fillers is expected that the IRS will follow a mailing
distribution schedule similar to that used for the stimulus checks last year. For those receiving the Economic Recovery
Payment, it will reduce the amount of the Making Work Pay credit they may otherwise be eligible for.
American Opportunity tax credit. The HOPE credit for higher education expenses has been replaced with the new
American Opportunity tax credit for 2009 and 2010. The new credit is equal to 100% of the first $2,000 of the first $2,000
of qualified tuition and related expenses, plus 25% of the next $2,000 of tuition and expenses, for a maximum credit of
$2,500 per individual student. The credit is available for the first 4 years of post-secondary education. Eligible expenses
include tuition (but not room and board) and the cost of course materials (books). The credit phases out ratably for
taxpayers with modified adjusted gross incomes between $80,000 and $90,000 for single filers, and between $160,000
and $180,000 for joint files. A new change now proves that up to 40% of the credit can be refundable, provided the
student is not subject to the kiddie tax. Finally, if the tuition was paid in 2008 but is for a 2009 semester, the taxpayers
must follow the old HOPE credit laws. Note that tuition paid from tax-exempt Section 529 college savings plans is not
eligible for the credit.
Computers as education expenses under 529 plans. For 2009 and 2010, purchases of computers, educational
software, and internet access can be paid from Section 529 education accounts.
First-time homebuyer credit. For homes purchased after December 31, 2008 but before December 1, 2009, the Act
creates a new tax credit. The credit is equal to 10% of the cost of the home, up to a maximum credit of $8,000. Unlike the
first-time homebuyer credit of 2008, this credit does not have to be repaid. The credit phases out for individual taxpayers
having adjusted gross income of between $75,000 and $95,000, or between $150,000 and $170,000 for joint filers. In
addition, if the home is sold within 36 months form the date of purchase, a portion of the credit must be recaptured. For
anyone even remotely considering a home purchase, the potential tax savings from this generous credit must be given
strong consideration in the decision process.
New car deduction. For new vehicles purchased after the date of enactment, the new Act permits a deduction for sales
or excise taxes paid on the vehicle. The deduction is “above the line”, meaning taxpayers do not have to itemize their
deductions to claim it. Eligible vehicles include cars, light trucks and motorcycles having mo more than 8,500 pounds
gross vehicle weight, and motor homes. Only the taxes on the first $49,500 of vehicle cost are eligible. The deduction is
phased out ratable for single taxpayers having between $125,000 and $135,000 of adjusted gross income, or between
$250,000 and $260,000 for joint filers. The deduction for the motor vehicle taxes is also not available if a taxpayer
chooses to deduct sales tax in lieu of state and local income taxes as an itemized deduction. Note that a provision to allow
deduction of interest on new cars purchased was dropped from the compromise bill.
AMT patch. The Alternative Minimum Tax exemption, which expired in 2008, was extended one more year to include
2009. Those who are potentially subject to the alternative minimum tax know extension of the “patch” is an annual
exercise in Congress. However, it is an important one – it keeps approximately 26 million filers from being subject to the
alternative minimum tax, at a tax cost of over $70 billion dollars per year.
Estimated tax payment reduction. Beginning in 2009, individuals with less than $500,000 in adjusted gross income
who derive more than 50% of that income from a small business, can reduce their estimated tax payments to 90% of the
prior year’s amount, rather than the current 100% of prior year safe harbor. In this context, “small business” is defined as
one having 500 or fewer employees.
Partial unemployment compensation exclusion. For 2009, the first $2,400 of unemployment benefits received will
not be taxed.
Partial COBRA subsidy. For workers involuntarily terminated from employment between September 1, 2008 and
December 31, 2009 who are eligible to purchase health insurance under COBRA, the Act provides a new 65% cost
subsidy. The subsidy would apply for a period of up to 9 months. Workers must attest that their income during the year(s)
of receiving the subsidy will be less than $125,000 for single individuals, or $250,000 for joint filers. The subsidy would
terminate upon eligibility for coverage under any new employer’s plan. For workers who were involuntarily terminated
between September 1, 2008 and the date of the Act’s enactment, but who did not elect COBRA coverage, the Act
provides a 60-day period to begin coverage. Premium subsidies are not taxable to the individual. Employers recover the
cost of the subsidy by reducing the amount remitted as payroll tax withholding (see tax provisions affecting businesses).
Child tax credit and earned income tax credit. The Act increases the refundable portions of the child tax credit for
2009 and 2010, and provides an increase in the earned income tax credit for those 2 years. Since most readers have
incomes above the thresholds for claiming the credits, they will not be discussed in detail.
Homeowner energy credits. For certain energy-efficiency expenditures made in 2009 and 2010, the Act increases the
amount of credits that individuals can claim. The new credit is 30% of the cost of expenditures, up to a maximum credit of
$1,500 for the 2009-2010 period. The types of energy expenditures eligible for the credit are those defined under the
prior energy program:
• Replacement windows, doors and insulation materials
• Metal roofs with pigmented coatings
• Heat pumps, high-efficiency water heaters, central air conditioners, and boilers
• Advanced main air circulating fans
• Stoves burning biomass fuels
The old caps for certain types of property (for example, no more than $200 for windows) have been eliminated in favor of
the overall expenditure credit. For those taxpayers that claimed the maximum credit deduction of $500 prior to 2008, that
credit is ignored under the new Act. Note that the credit can only be claimed for expenditures made on the taxpayer’s
principal residence – vacation homes and rental property do not qualify.
Residential energy efficiency property credit. Certain energy efficiency property is eligible for additional credits
beyond the $1,500 credit cap described above. The following property qualifies for a 30% credit with no caps through
2017:
• Solar water heating property
• Small wind energy property
• Qualified geothermal heat pump property
As with the homeowner energy credits, these only apply to expenditures made for a principal residence.
Plug-in electric vehicles. Beginning in 2009, there was a new credit available for vehicles that operated through
rechargeable batteries. The Act expands and modifies this credit to take into account certain low-speed vehicles,
motorcycles, and three-wheeled vehicles that did not meet the original criteria for the credit. Since the availability of these
plug-in vehicles is not widespread, readers are advised to consult with the dealer or a tax professional to obtain the
complete details.
FEBRUARY 16, 2009
| Robert A. Romako, CPA Phone:717.774.3047 |