A Slew of Tax Easings Is on the Way

The American Recovery and Reinvestment Act has breaks for individuals and business alike.

By Joan Pryde, Senior Tax Editor, the Kiplinger letters

Peter Blank, Editor, The Kiplinger Tax Letter

February 18, 2009

For taxpayers, it's Christmas in February: a stimulus package with more than $300 billion in tax breaks designed to get both individuals and businesses to open their wallets and lift the economy out of its slump. Most of the cuts disappear after a year or two and almost none of them are available to filers in the highest income brackets.

Still, the new law has plenty to offer taxpayers this year.

• A payroll tax credit for wage earners and the self-employed for 2009 and 2010 -- up to $400 a year for single taxpayers and up to $800 for couples filing jointly. For singles, the credit begins phasing out at an adjusted gross income of $75,000 and dries up completely at $95,000. For couples filing jointly, the phaseout is $150,000 to $190,000 of adjusted gross income (AGI). The IRS won't mail out rebate checks. Instead, it will issue revised withholding tables in March, so the annual benefit of the credit will be crammed into nine months of paychecks. That will automatically boost paychecks for those eligible by $10-$20 a week. Self-employeds can claim the credit on the tax returns they'll file early next year. In the interim, they can reduce their estimated tax payments for 2009.
• A one-time payment to retirees, veterans and the disabled. Because the payroll tax credit only goes to employees and the self-employed, lawmakers chose a different route to spread the benefits to others: Recipients of Social Security benefits, Railroad Retirement benefits, Supplemental Security Income payments and pension and disability benefits from the Veterans' Administration will get checks for $250 no later than June 17. Government retirees, who don't get Social Security, will get a one-time refundable tax credit of $250 in 2009.
• Excluding some unemployment benefits from taxes. Folks receiving unemployment checks normally must report that money as income. For 2009, they will be allowed to exclude the first $2,400 in benefits received.
• A broader, bigger earned income credit for low-incomers. A higher trigger for the phase-out of the earned income credit means more couples who file jointly and have children will qualify. Under the stimulus package, the phase-out range starts at $21,420, an increase of $1,880 in 2008. Also this year, the amount of the credit increases, from 40% to 45% of the first $12,750 of earned income for families with three or more children. For 2009 and 2010, the child credit also covers more low-incomers: It's refundable to the extent of 15% of an individual's earned income in excess of $3,000. That figure is $5,500 lower than for 2008.
• A sweetener for buyers of new vehicles. If you purchase a new car, light truck, SUV, motorcycle or motor home after Feb. 16, 2009, you can deduct the state sales or excise tax you paid on the first $49,500 of the vehicle's cost, even if you don't itemize your deductions. Note, however, that for folks who do take the standard deduction, there will be no additional line item on Form 1040 for the vehicle sales tax. They’ll just add the tax to their standard deduction amount. Upper-incomers beware: The break gets smaller for single taxpayers with adjusted gross incomes over $125,000 and couples over $250,000 and disappears altogether at income levels of $135,000 and $260,000, respectively.
• An extra incentive for first-home purchasers. The tax package increases the current $7,500 credit for taxpayers buying their first homes to $8,000 for primary residences purchased before Dec. 1, 2009. It also eliminates the requirement that the credit be repaid, as long as the house isn't sold within three years. Buyers in 2009 can elect to claim the credit on their 2008 returns, although IRS has to revise Form 5405 to reflect the $500 hike in the maximum credit as well as the waiver of the credit repayment requirement.
• Help for students and parents paying for college. The HOPE credit for college costs rises to $2,500 for 2009 and 2010, covering 100% of the first $2,000 of tuition and related expenses per year and 25% of the next $2,000. Other changes: Making the credit available for all four years of college, instead of just two, and allowing it to be used for the cost of books. Higher phase-out triggers -- $80,000 of adjusted gross income for singles and $160,000 of adjusted gross income for married couples. And making 40% of the credit refundable, so low-incomers who pay little or no taxes will actually get money back. Also…allowing tax-free distributions from Sec. 529 college savings plans to cover computer purchases.
• A bigger incentive to make energy-saving home improvements. The 10% tax credit for energy-saving home improvements climbs to 30% and extends through 2010. Another change: All qualifying properties are subject to a $1,500 cap on the credit rather than the different caps for different types of properties which had been the law. As now, improvements that qualify for the credit include energy-efficient skylights, windows and outer doors, along with energy-saving water heaters, central air conditioners and biomass stoves.
• And a higher exemption threshold for the alternative minimum tax (AMT). To keep millions of middle-income taxpayers from being forced to pay the alternative minimum tax in 2009, the minimum tax exemptions rise to $70,950 for couples filing jointly and $46,700 for single filers. Without congressional action, the exemptions would have topped out at just $45,000 for couples and $33,750 for singles.

Businesses will also get their share of the tax pie. Among the breaks:

• Bonus depreciation. Lawmakers revived the special 50% first-year bonus depreciation provision which had ended with 2008, making it applicable to assets bought and placed in service during 2009.
• Credits in lieu of bonus depreciation. Firms that don't take bonus depreciation can elect to use a portion of their AMT and research and development (R&D) credit carryovers for assets placed in service in 2009. The amount of credit that can be accelerated is capped at $30 million or 6% of a firm's historic AMT and R&D credits, whichever is less.
• Extension of expensing rules. Another revival by Congress: The higher $25,000 limit on expensing assets by small businesses under Sec. 179 continues through 2009. As before, full expensing can be used until $800,000 of assets are placed in service during the year.
• Loss carrybacks. Businesses that averaged $15 million or less in gross receipts over the past three years will be allowed to carry back 2008 losses for five years instead of two.
• Discharge of indebtedness. Certain firms that buy back their debt at a discount will be allowed to defer tax on the forgiven debt for four or five years. After that, they can report the income evenly over five years -- 20% a year. The relief applies to debt repurchased in 2009 and 2010.
• Extending renewable energy credits. The credits for solar, geothermal, biomass, landfill gas, etc., are continued through 2013.The credit for electricity derived from wind is extended through 2012.
• A new 30% manufacturing investment tax credit for putting capital into advanced energy facilities, such as those that make components for producing renewable energy, advanced battery technology and the like.
• An expansion of the Work Opportunity Credit to cover businesses that hire out-of-work youths between the ages of 16 and 25 or unemployed veterans.