A Summary of the American Recovery and Reinvestment Act of 2009

The recently enacted “American Recovery and Reinvestment Act of 2009” (the stimulus package) contains a wide range of tax provisions that includes tax relief for individuals and businesses. Below is an overview of some of the more widely applicable tax changes affecting individuals and businesses. 

- Making Work Pay Tax Credit

 

The Making Work Pay credit allows a credit against income tax inan amount equal to the lesser of 6.2% of an individual’s earned income or $400 ($800 for married couples filing a joint return). The credit phases out for individuals with adjusted gross income between $75,000and $95,000 ($150,000 and $190,000 for married couples filing a joint return). Most individuals will receive the credit through reduced payroll withholding although the credit can also be claimed on an individual’s tax return. The credit applies for both 2009 and 2010.  

 

- $250 Economic Recovery Payment

 

The new law provides a one-time payment of $250 to certain individuals on fixed incomes (primarily Social Security recipients, railroad retirees and disabled veterans). This payment will only be made in 2009. If an individual receiving this payment is otherwise eligible for the Making Work Pay credit, the Making Work Pay credit will be reduced.

 

- First-Time Homebuyer Tax Credit

 

A refundable credit of up to $8,000 is provided for first-time homebuyers. To be eligible, a new homebuyer must purchase their residence by November 30, 2009. So long as the taxpayer stays in the residence for at least 3 years, the taxpayer is not required to repay the credit. (Under prior law, a credit of up to $7,500 was available. The taxpayer, however, was required to repay the credit over15 years.) First-time homebuyers purchasing a house in 2009 are allowed to claim the credit on their 2008 or 2009 tax returns. The credit phases out for individuals with adjusted gross income above $75,000($150,000 for married couples filing a joint return). 

 

- New Car Deduction

 

Individuals purchasing new vehicles for the rest of 2009 are allowed an above-the-line deduction for state and local sales taxes or excise taxes paid on the purchase. Sales or excise taxes attributable to any portion of the purchase price above $49,500 are not deductible. Further, the deduction is phased out for individual taxpayers with adjusted gross income in excess of $125,000 ($250,000 for married couples filing joint returns).

 

- Education Credit

 

For 2009 and 2010, the law effectively replaces the existing Hope Scholarship Credit with a more generous American Opportunity Tax Credit. The American Opportunity Tax Credit will provide a benefit of up to $2,500 per student per year (formerly up to $1,800) and up to 40% of the credit will be refundable. The credit can be claimed for the first four years of post-secondary study in a degree or certificate program. The credit phases out for individual taxpayers with adjusted gross income between $80,000 and $90,000 ($160,000 and $180,000 for married taxpayers filing a joint return).

 

- AMT Patch

 

The new law includes an alternative minimum tax (AMT) patch for2009. The AMT patch for 2009 raises exemption amounts slightly above the 2008 patch levels.

 

- Extension of Bonus Depreciation

 

The new law extends the 50% depreciation bonus for qualifying property purchased and placed in service in 2009.   The 50% depreciation bonus is in addition to the regular depreciation for the year the property is placed in service.

 

- Net Operating Losses

 

The net operating loss carry back is extended to 5 years from 2years for small businesses with gross receipts of $15 million or less. This carry back only applies to net operating losses for any tax year beginning or ending in 2008. In 2009, the net operating loss carry back reverts to 2 years.

 

- Delayed Recognition of Certain Cancellation of Debt Income

 

For certain businesses that repurchase their own debt at a discount in 2009 and 2010, the new law allows the businesses to recognize cancellation of indebtedness income over 10 years. The tax on the cancellation of indebtedness income can be deferred for the first four or five years and then the income is recognized ratably and taxed over the next five years.

 

- Extension of Enhanced Small Business Expensing under Section 179

 

Section 179 permits small business taxpayers to elect to write off the cost of certain capital expenses in the year of acquisition in lieu of recovering the costs over time through depreciation. In 2008, the amount that small businesses could write off was increased to $250,000and increased the phase out threshold to $800,000. The new law extends these temporary increases for 2009.

 

For more information on these and other tax provisions found in the American Recovery and Reinvestment Act, please contact Julia Turkat (312) 840-7033/ jturk@burkelaw.com or Greg Winters at (312) 840-7059/ gwinters@burkelaw.com.

Circular 230 Disclosure: Any tax advice contained in this message was not intended or written to be used, and cannot be used (i) by any taxpayer for the purpose of avoiding any penalties that may be imposed on the taxpayer, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein.