Tax News E-Alert

Volume 2, Issue 1, February, 2009

Impact of New Tax Law on Individuals and Families

On February 17, 2009, President Obama signed into law the “American Recovery and Reinvestment Act of 2009” (the 2009 economic stimulus act). The purpose of this newsletter is to inform you of how this act will affect individuals and families.

This act provides incentives to low and moderate-income wage earners, families with college expenses, new car purchasers, and first-time home buyers.  Please see below for a brief overview:

"Making Work Pay" Credit.  The new law provides an individual tax credit in the amount of 6.2 percent of earned income, not to exceed $400 for single returns and $800 for joint returns, in 2009 and 2010. The IRS will adjust the payroll tax withholding tables to take the new tax credit into account starting around June. The credit is phased out at adjusted gross income (AGI) in excess of $75,000 for individuals and $150,000 for joint filers.

Economic Recovery Payment.  The new law provides for a $250 one-time payment to certain individuals receiving benefits from the Social Security Administration and Railroad Retirement beneficiaries; and also to veterans receiving disability compensation and pension benefits from the U.S. Department of Veterans' Affairs. This one-time payment reduces any allowable Making Work Pay credit (see above).

Refundable Credit.  The new law provides for a $250 one-time refundable tax credit in 2009 to certain government retirees who are not eligible for Social Security benefits. Again, this one-time credit reduces any allowable Making Work Pay credit.

Unemployment Compensation Exclusion.  There is no federal income tax on the first $2,400 of unemployment benefits received by a recipient in 2009.

Earned Income Tax Credit.  For 2009 and 2010, earned income tax credit is expanded to families with three or more children and increases the marriage penalty relief.

Child Tax Credit.  The Act makes it easier to get child tax credit refunded.  Now, the child tax credit is refundable to the extent of the greater of (1) 15% of earned income above $3,000 (reduced from $8,500 in 2008), or (2) for a taxpayer with three or more qualifying children, the excess of his social security taxes for the tax year over his earned income credit for the year.

Higher Education Tax Credit. The new law creates a $2,500 higher education tax credit that is available for the first four years of college. The credit is based on 100% of the first $2,000 of tuition and related expenses (including books) paid during the tax year, and 25% of the next $2,000 of tuition and related expenses paid during the tax year, subject to a phase-out for AGI in excess of $80,000 ($160,000 for married couples filing jointly). Forty percent (40%) of the credit is refundable. The new credit temporarily replaces the Hope credit.

Planning Tip: If the parent's AGI is too high and the student has taxable income, it may be beneficial for the student to pay the tuition and take the credit.

Computers as an Education Expense.   A provision treats funds paid out of Section 529 education plans for computers and computer technology as qualified education expenses for tax years beginning in 2009 and 2010.

First-Time Home Buyer Credit.  Last year, Congress provided taxpayers with a refundable tax credit that was equivalent to an interest-free loan equal to 10% of the purchase of a home (up to $75,000) by first-time home buyers. The provision applied to homes purchased on or after April 9, 2008 and before July 1, 2009. Taxpayers receiving this tax credit were required to repay any amount received under this provision back to the government over fifteen years in equal installments (or earlier if the home was sold). This credit phases out for taxpayers with adjusted gross incomes in excess of $75,000 ($150,000 in the case of a joint return). The new law enhances the credit by eliminating the repayment obligation for taxpayers that purchase homes on or after January 1, 2009. It also extends the credit through the end of November 2009, and bumps up the maximum credit from $7,500 to $8,000.

Sales and Excise Tax Deduction for New Vehicle Purchases.  The new law allows taxpayers to deduct State and local sales taxes, and excise tax paid, on the purchase of new cars, light trucks, SUVs, motorcycles, and motor homes. The deduction only applies to taxes on the first $49,500 of the vehicle's price.  The tax break is phased out for taxpayers earning over $125,000 per year ($250,000 for joint returns). The deduction is allowed to both those who itemize their deductions as well as to non-itemizers. This deduction is not available for taxpayers who elect to deduct State and local sales taxes in lieu of State and local income taxes.

Extending the Alternative Minimum (AMT) Relief for 2009.  For 2009, the AMT exemption amounts are increased to $46,700 for individuals and $70,950 for joint returns.  Also, the personal credits are allowed against the AMT.

I hope this information is helpful.  Please feel free to contact me at 310-697-1501 or rwelling@rwac.com if you would like more details about this or any other aspect of the new law. 

Best regards,

Richard Welling

Richard Welling & Co., LLP

3625 Del Amo Blvd., Suite 290

Torrance, CA 90503

(310) 697-1500

www.rwac.com

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