On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 (the “Stimulus Act”). Though it seems lost in the news coverage of all the spending programs, the Stimulus Act contains approximately $262 billion in tax cuts. Following are a few highlights.
FIRST-TIME HOMEBUYER CREDIT
Prior to the Stimulus Act, first-time homebuyers could receive a $7,500 tax credit, but that credit had to be paid back. The Stimulus Act not only raises the first-time homebuyer credit to $8,000, but it also removes the pay-back requirement. Notably, a taxpayer who owns a vacation home but has been renting a primary residence for the past 3 years (for example, an apartment on the Gold Coast) is considered a “first-time homebuyer.” Thus, that taxpayer is eligible for the $8,000 tax credit if he purchases a new home in 2009.
ENERGY EFFICIENCY TAX CREDITS
Have you been thinking of replacing those drafty windows or that 20 year-old furnace? This is the year to do it! The Stimulus Act includes tax credits for the purchase of energy-efficient furnaces, windows, doors, and insulation. It also includes a tax credit for the purchase of plug-in hybrid vehicles.
529 PLAN EDUCATION EXPENSES
For many years now, computers have been a requirement for post-secondary education. Thanks to the Stimulus Act, for 2009 and 2010, those computers are now considered education expenses eligible to be paid from 529 plans. That means your child or grandchild can use some of that 529 plan you set up for him or her to buy a computer – and pay for Internet access – when he or she heads off to college this Fall.
EXPANDED TAX CREDIT FOR COLLEGE
Furthermore, for 2009 and 2010, the existing Hope Credit for college tuition and qualified expenses is renamed the American Opportunity Tax Credit and increased to $2,500 per year per eligible student. This tax credit is phased out ratably for taxpayers with a joint modified Adjusted Gross Income (“AGI”) of between $160,000 and $180,000. Also, up to 40% of this tax credit may be refundable.
SALES TAX ON NEW CAR IS DEDUCTIBLE
For those taxpayers who choose not to deduct state and local sales tax in lieu of income taxes, the Stimulus Act contains an increased standard deduction for sales tax on the purchase of a new vehicle. This deduction is available on the sales tax of a vehicle valued up to $49,500.
TAX CREDIT
The Stimulus Act also contains a refundable income tax credit of up to $400 per worker – $800 per couple – for 2009 and 2010. This income tax credit is phased out for AGI above $75,000 – $150,000 for a joint return. Starting in June, eligible workers should see an increase in their paychecks of approximately $13 more per week as a result of this tax credit. Not much, but it may cover those trips to Starbucks.
ALTERNATIVE MINIMUM TAX PATCH
The Alternative Minimum Tax (“AMT”) was originally designed to prevent high-income taxpayers from avoiding taxes completely through deductions and tax credits. However, the point at which the AMT applies has never been indexed for inflation. That meant families making as little as $45,000 could have been hit by the AMT in 2009. Over the past few years, Congress has instituted 1 year “patches” to prevent the AMT from applying to the middle-class. The Stimulus Act includes yet another 1 year patch to the AMT, saving families of four an average of $2,300.
BUSINESS EXPENSES
The Stimulus Act also increases the limits on business expense deductions. Prior to the Stimulus Act, business expense deductions for 2009 were limited to $133,000, though phased out for investments above $600,000. Now, the business expense deduction limit is increased to $250,000, the investment ceiling (for phase out) is $800,000, and excess business expense deductions can still be carried forward. However, the business expense deductions are still capped by the amount of income generated by the business activity, though business expense deductions above the income generated by the activity can still be carried forward to next year. That means small businesses will likely be able to deduct most, if not all, of the cost of business machinery and equipment entered into service in 2009.
BONUS DEPRECIATION
In addition to the increase in business expense deductions, the Stimulus Act extends through 2009 “bonus first-year depreciation,” allowing businesses to take an additional depreciation deduction for certain equipment entered into service in 2009. This bonus depreciation is available for most types of property, including computers, but not buildings. The additional depreciation deduction is 50% of the adjusted basis.
CIRCULAR 230 DISCLOSURE: Pursuant to Regulations governing practice before the Internal Revenue Service, any tax advice contained herein is not intended or written to be used and cannot be used by a taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer.