American Recovery and Reinvestment Act of 2009

On February 17, 2009, President Obama signed into law the $787 billion American Recovery and Reinvestment Act of 2009 (the 2009 “Stimulus Act”).

The Act includes several provisions designed to offer a degree of financial assistance to individuals in the short and intermediate term, including a one-time $250 Economic Recovery Payment to individuals receiving Social Security benefits, Railroad Retirement benefits, Veteran’s benefits, or Supplemental Security Income (SSI) benefits. In addition, up to $2,400 of unemployment compensation benefits received in 2009 will be excluded from gross income for federal income tax purposes. And, for individuals who lose their jobs on or after September 1, 2008, and before January 1, 2010, the Act offers assistance in the form of subsidized COBRA premiums–those who qualify will have to pay only 35% of the COBRA premiums needed to continue their health coverage, for up to 9 months.

The Act also features new and modified tax credits and deductions, including:

• Payroll Tax Reduction A new “Making Work Pay Tax Credit” for 2009 and 2010 equal to 6.2% of earned income, up to $400 ($800 in the case of a married couple filing jointly); withholding schedules will be adjusted to increase current take-home pay to reflect the credit. The credit is phased out for individuals with modified adjusted gross income exceeding $75,000 ($150,000 for married couples filing jointly).
• Education Tax Credits A revised Hope education tax credit for 2009 and 2010, renamed as the American Opportunity Tax Credit. With an increased annual limit per student of $2,500, the credit is now available for the first four years of post-secondary education, and up to 40% of the credit is refundable. The credit is phased out for individuals with modified adjusted gross income exceeding $80,000 ($160,000 for married couples filing jointly).
• Incentive to buy a home A revised first-time homebuyer tax credit, extended to include qualifying home purchases through November of 2009. The maximum credit is increased to $8,000, and the rules requiring that the credit be repaid are waived for qualifying homes purchased after December 31, 2008, and before December 1, 2009, as long as the home continues to serve as the individual’s principal residence for 36 months. The credit continues to be phased out for individuals with modified adjusted gross income exceeding $75,000 ($150,000 for married couples filing jointly).
• Incentive to purchase autos A new standard deduction for state sales and excise tax related to the purchase of a qualified motor vehicle after February 17, 2009 and before January 1, 2010. Individuals who itemize deductions will claim the deduction as part of state and local taxes paid, reported on Schedule A of IRS Form 1040. The deduction is capped at the tax attributable to a maximum purchase price of $49,500, and is phased out for individuals with modified adjusted gross income exceeding $125,000 ($250,000 for married couples filing jointly).
• Extension of AMT Relief for 2009. The Act helps more than 26 million families in 2009 by extending AMT relief for nonrefundable personal credits and increasing the AMT exemption amount to $46,700 for individuals, $70,950 for joint filers, and $35,475 for married persons filing separately.
• Earned Income Tax Credit. The Act temporarily increases the earned income tax credit for working families with three or more children. It does so by increasing the earned income tax credit to 45% of the family’s first $12,570 of earned income for families with three or more children and increasing the beginning point of the phase-out range for all married couples filing a joint return (regardless of the number of children).
• Refundable Portion of Child Credit. For 2008, the child tax credit was refundable to the extent of 15% of the taxpayer’s earned income in excess of $8,500. The Act increases eligibility for the refundable child tax credit in 2009 and 2010 by reducing the floor for these two years to $3,000.
• Computers in 529 Education Plans. Section 529 Education Plans are tax-advantaged savings plans that cover all qualified education expenses, including tuition, room and board, mandatory fees, and books. The Act includes expenses paid or incurred in 2009 or 2010 for the purchase of any computer technology or equipment or Internet access or related services in the list of qualified education expenses. However, expenses for sports, games, etc., are excluded unless the software is “predominantly educational in nature.”
• Taxation of Unemployment Benefits. The Act suspends federal income tax for 2009 on the first $2,400 of unemployment benefits per recipient. Any unemployment benefits over $2,400 will be subject to federal income tax.