Economic Recovery and Tax Credits

The American Recovery and Reinvestment Act of 2009 contains a number of tax relief provisions that will save both individuals and families money over the next several years. In total, there are ten different provisions under this economic stimulus package that can help lower the tax burden of many Americans.

In this publication, we're going to run through the highlights of the American Recovery and Reinvestment Act of 2009. Specifically, we're going to summarize the impact this new law can have on your tax liability for the years 2009 and beyond.

Taxes and the US Economic Recovery

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On February 17, 2009, the 111th United States Congress and President Barack Obama signed into law the American Recovery and Reinvestment Act of 2009. This $787 billion federal stimulus plan hopes to pull the United States out of its economic recession by preserving and creating jobs, promoting energy efficiency, and assisting the unemployed.

A good number of these measures involve providing monetary incentives via tax credits or tax deductions. As such, the IRS has created a number of tax-related provisions to accommodate this new law. The provisions that apply to individuals are summarized below.

Making Work Pay

The Making Work Pay tax credit would reduce the tax burden in 2009 and 2010 by providing a refundable credit of up to $400 for individuals and $800 for working families. The credit is phased-out for taxpayers with adjusted gross income in excess of $75,000 or $150,000 for married couples that file a joint tax return. This benefit can be realized through a reduction in federal income tax withheld or by claiming a credit on a tax return.

Retirees

Recipients of Social Security, Supplemental Security Income (SSI), railroad retirement, and Veterans disability compensation benefits are entitled to a one-time payment of $250. Individuals receiving this payment would see a $250 reduction in the tax credit gained through the Making Work Pay program.

Federal and State Pensioners

Certain government employees that are not eligible for Social Security benefits are entitled to a one-time payment of $250 in 2009. Individuals receiving this payment would see a $250 reduction in the tax credit gained through the Making Work Pay program.

Earned Income Tax Credit

This economic recovery bill expands the current earned income tax credit to working families with three or more children in 2009 and 2010. Qualifying families will enjoy a credit equal to 45% of their first $12,570 of income ($5,657), an increase of $629 from 2008 levels.

Child Tax Credit

In 2008, taxpayers had to earn at least $8,500 before the child tax credit started to phase-in. For the tax years 2009 and 2010, the phase-in will start at $3,000, and taxpayers with earnings in excess of $6,667 are entitled to the full credit of $1,000.

American Opportunity

This higher education tax credit will provide financial assistance to individuals interested in pursuing a college education. In 2009 and 2010, this program provides taxpayers with a tax credit equal to 100% of the first $2,000 of costs related to tuition and college expenses. The next $2,000 of costs provides an additional credit equal to 25% of these expenses, bringing the total credit to $2,500.

This tax credit is phased-out for taxpayers with adjusted gross income in excess of $80,000 or $160,000 for married couples filing a joint return.

Qualified Education Expenses

The definition of qualified education expenses under the 529 education plans expands from tuition, room & board, mandatory fees and books to include computers and computer technology.

Home Buyers

In 2008, first-time home buyers enjoyed a tax credit equivalent to an interest-free loan equal to 10% of their home value, up to $7,500. This credit applied to qualifying first-time home buyers purchasing a home after April 9, 2008 and before July 1, 2009. Taxpayers receiving this credit were required to repay this credit over 15 years - or when the home was sold.

The American Recovery and Reinvestment Act eliminates the repayment obligation for taxpayers purchasing a home (unless the home is sold within three years of purchase) after January 1, 2009 and increases the maximum value of the credit to $8,000. This new law also extends the timeframe to those homes purchased before December 1, 2009.

New Vehicle Purchases

Taxpayers with adjusted gross income that's less than $125,000, or $250,000 for those filing joint returns, can deduct state and local taxes paid when buying a new car, light truck, SUV, motorcycle or even a recreational vehicle in 2009. The deduction is limited to the first $49,500 of the vehicle's purchase price.

Alternative Minimum Tax Relief

In 2009, this economic stimulus package is expected to provide additional tax relief to 26 million American families by extending the Alternative Minimum Tax (AMT) relief for non-refundable credits as well as increasing the AMT exemption amount. Specifically, the AMT exemption will rise to $45,700 for individuals and $70,950 for married taxpayers choosing to file a joint return.

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