2009 Stimulus Bill
Whether you agree or disagree with the magnitude of the recently-passed Stimulus Bill, the fact of the matter is that about $300 billion of it relates to taxes and your friends at WBL have been analyzing whether any provisions will have a serious impact to our client base. For the most part, the answer is: not enough. But let’s quickly examine the major components.Making Work Pay Credit – This is the most talked about provision. The credit equals 6.2% of an individual’s earned income, up to $400 ($800 for joint filers) and is available in 2009 and 2010. But those with “modified” adjusted gross income (AGI) of $75,000 ($150,000 for joint filers) will start losing the credit in a phase out scheme and those over $95,000 ($190,000 for joint filers) will get no credit at all. For employees, the credit is disbursed via lower payroll tax withholding beginning no later than April 1. Self-employed can simply reduce estimated tax payments. The credit will be trued up when 2009 tax returns are filed.
$250 Economic Recovery Payment – In 2009, Social Security recipients, disabled vets and certain others will be eligible for a $250 payment. But, the Making Work Pay Credit, if any, will be reduced by this $250 payment.
New Car Sales Tax Deduction – Through the end of 2009, sales tax paid on the purchase of new vehicles can be deducted “above-the-line” on an individual’s tax return. Limited to sales tax on the first $49,500 purchase price. The deduction will be phased out for purchasers with AGI exceeding $125,000 ($250,000 filing jointly).
Education Credit – For 2009 and 2010, the HOPE college credit has been improved. Maximum annual credit is $2,500 (up from $1,800); it now applies to all four years of college; it now includes course materials and the benefit now does not phase out until taxpayers reach AGI of $80,000 ($160,000 filing jointly). Plus, 40% of the credit is refundable.
Business Fixed Assets – The 50% bonus depreciation and the improved Section 179 expensing deduction for certain fixed asset acquisitions that was in effect for 2008 has been extended to 2009. So, if purchases of fixed assets are not over $800k, businesses can deduct up to $250k of such purchases if bought in 2009. If the fixed assets are not eligible for Section 179, generally 50% can still be written off in the year of acquisition under the bonus depreciation rules, but only for new assets. For vehicles, the first-year write-off is near $11,000.
NOL Carryback – A choice of a 3, 4 or 5-year carryback of 2008 net operating losses is available (rather than the 2-year rule) for qualified small businesses with average gross receipts of $15 million or less.
For the Unemployed – For 2009, up to $2,400 of unemployment compensation is tax-free. Also, certain unemployed individuals can have 65% of their COBRA medical insurance subsidized for up to nine months. In this case, the former employer pays 65% of the premium and then takes a credit against payroll taxes. Employers have strict notification rules to the former employee that must be followed.
Work Opportunity Credit – A tax credit of up to $2,400 per employee is available for businesses employing (1) certain unemployed veterans who leave active duty during 2008-2010 and (2) certain “disconnected youth” who generally have not been employed or attended school in the past 6 months. Other targeted groups whose employment could also qualify for the credit include: needy families receiving certain government assistance, qualified ex-felons, vocational rehab referrals, qualified summer youth employees and select others.
Energy Credits – Thirty percent of qualifying residential energy-saving improvements made in 2009 and 2010 can be claimed as a credit, up to $1,500. Includes insulation, exterior windows and doors, central air conditioners, natural gas, propane or oil water heaters or furnaces and others. For solar hot water property, geothermal heat pumps and wind energy property the credit is also 30% of expenses but with no cap. There are other energy incentives such as a renewable electricity production credit and a credit for certain alternative fuel property that should be considered if applicable to your situation.
AMT Changes – The AMT “patch” was made applicable for 2009 by raising the exemption amounts slightly above the 2008 “patch” levels, and therefore insulating approximately 26 million middle-income taxpayers from having to pay AMT in 2009. In addition, for bonds issued in 2009 and 2010, interest income on any private activity municipal bonds are not taxable for the alternative minimum tax.
First-Time Homebuyer Credit – First-time homebuyers with AGI of $75,000 ($150,000 for joint filers) or less can get an $8,000 credit for purchases made between January 1, 2009 and November 30, 2009. Unlike 2008 purchases where the credit has to be “paid back”, 2009’s credit is not paid back if the house is held 3 years.
And that’s not all….
Besides other less-widely applicable tax provisions in the Stimulus Bill, we have Mr. Obama’s recent 2010 budget proposal that requires some attention. While not law yet and only a proposal, it gives us a glimpse of what could be ahead if passed:
- The Making Work Pay Credit (discussed above) would be permanent.
- Federal tax rates would go up for individuals with income over $200k and joint filers with income over $250k. The top two tax brackets for these taxpayers will be 36% and 39.6% (rather than 33% and 35%). Good news: The effective date would be 2011 rather than 2009 or 2010 as feared by some.
- Maximum federal long-term capital gains rate would increase from 15% to 20% in 2011. Qualified dividends would also be taxed at a maximum rate of 20%, which is better than having them taxed at the higher ordinary income rates as once feared.
- A hidden tax increase would take the form of limits on itemized deductions, including mortgage interest and charitable contributions. The maximum federal benefit for these deductions would be 28% for those paying taxes in higher tax brackets.
- The budget calls for a 10-year “patch” for AMT as discussed above in order to eliminate the annual conflict now required in Congress. For the same reason, the R&D tax credit would be made permanent.
