Stimulus package helping individuals, too

[Editor’s Note: This is the second installment in a three-part series on the federal stimulus law by members of CBIZ Tofias and Mayer Hoffman McCann P.C.]

In addition to the business tax relief and incentive measures we covered in our first column, the American Recovery and Reinvestment Tax Act of 2009 (ARRA) also provides a number of individual tax and incentive provisions. However, while the ARRA offers relief to countless families, wage earners, parents of college students and the unemployed, many upper-income taxpayers will only see minimal tax relief through the alternative minimum tax (AMT) patch.
• AMT patch. A patch to the alternative minimum tax (AMT) for 2009, designed to keep more middle-income taxpayers from falling into the AMT trap, raises the AMT exemption amounts slightly compared with 2008 and continues to allow most personal credits to offset or reduce AMT liability. The 2009 AMT exemption amounts are $46,700 for singles and $70,950 for joint filers.
• First-time homebuyer credit. Last year, Congress provided first-time home buyers a refundable tax credit of up to 10 percent of the purchase price of their homes, with a maximum of $7,500. This provision applied to homes purchased on or after April 9, 2008, and before July 1, 2009. It had to be repaid over 15 years in equal installments – or, if earlier, when the home was sold.
The new law eliminates the repayment obligation for first-time buyers who purchase homes after Dec. 31, 2008; increases the maximum value of the credit to $8,000; and extends the availability of the credit to homes purchased before Dec. 1, 2009. The credit must still be repaid if the house is sold within three years of purchase and it phases out for taxpayers with adjusted gross income that exceeds $75,000 for single-filers, $150,000 for joint filers).
This credit can be a tremendous break for first-time homebuyers who can buy a home during the effective dates of this provision. Potential homebuyers may get help with mortgage payments by adjusting their income tax withholding in anticipation of the credit, along with the mortgage interest and real property tax deductions, to free up more monthly cash. The credit will be taken on their 2009 tax returns, thereby reducing their overall tax liability for the year. • Sales tax deduction for new-car purchases. New-car buyers can deduct state and local sales and excise taxes for cars purchased during 2009 and after the date of enactment. For those who do not itemize deductions, the amount is added to the standard deduction. Otherwise, the amount is added to the buyer’s state and local income and property tax deductions. The provision does not apply to those who elect to deduct sales taxes in lieu of state and local income taxes. In that case, the existing rules limiting the vehicle sales and excise tax rates to the general sales tax rates still govern. The new benefit applies only to taxes on the first $49,500 of the purchase price and is phased out for taxpayers with adjusted gross income (AGI) above $125,000 ($250,000 for joint returns).
• Estimated tax relief for small-business owners. Taxpayers who report income from a small business on their personal tax returns may receive a break on the amount of estimated taxes required to be paid to avoid underpayment penalties.
For tax years beginning in 2009, individuals with more than 50 percent of their AGI coming from a small business will only be required to pay 90 percent of their prior year’s tax to avoid penalties (as opposed to 100 percent or 110 percent depending on AGI). This provision applies to taxpayers with prior year AGI of less than $500,000. A small business for this purpose is defined as any business that employed no more than 500 persons, on average, during the preceding year. • AMT relief on tax-exempt bonds. While interest income from municipal bonds is generally tax-free, certain private activity bond interest is taxable for AMT purposes. To encourage investment in these types of bonds, tax-exempt interest on private-activity bonds issued in 2009 or 2010 will not be subject to the AMT.
• Expanded child tax credit. Eligibility for the refundable child tax credit in 2009 and 2010 is increased by cutting the earned income threshold to $3,000. Eligible recipients would receive a refund of the lesser of $1,000 or 15 percent of earned income above the threshold amount. Your tax liability must be less than the otherwise allowable child tax credit for any portion of it to be refundable.
• Expanded earned income tax credit (EITC). The EITC for 2009 and 2010 is increased to 45 percent of the family’s first $12,570 of earned income for families with three or more children. The credit begins to phase out at differing income levels, depending on the number of qualifying children. The range is increased by $5,000 for married couples in each circumstance. For example, a couple that files a joint return and has one qualifying child will start to lose the credit if their combined earnings exceed $21,420.
• Computers as an education expense. Computer technology and equipment acquired in 2009 and 2010 are qualified education expenses for purposes of Section 529 plans. These expenses do not qualify for any of the education tax credits or the above-the-line tuition and fees deduction.
• Unemployment compensation exclusion. The first $2,400 of unemployment benefits received in 2009 will be tax free. •

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John S. Pope (jpope@cbiztofias.com) is a manager at CBIZ Tofias and a principal at Mayer Hoffman McCann P.C.-Tofias New England Division. Local offices are located in Newport and Providence, as well as New Bedford.