Key Tax Changes in the Final Version of the Stimulus Bill

The final version of the 1071-page American Recovery and Reinvestment Act of 2009 is due to be signed by President Obama tomorrow. My summary of the bill’s key tax items two weeks ago was not far off the mark, but there are a number of nips and tucks in the final version.

“Making Work Pay” tax credit
The refundable credit in the amount of 6.2 percent of earned income finally settled in at a limit of $400 for single returns and $800 for joint returns in 2009 and 2010. The credit starts being phased out at adjusted gross incomes (AGI) in excess of $75,000 ($150,000 for MFJ). For most taxpayers, the credit will be received as a reduction in the amount of paycheck withholding, though some (particularly those who are self-employed) will get the credit via their tax return.

The size of the credit was reduced to accommodate some of the compromises made between the initial Senate and House versions of the bill.

American Opportunity Tax Credit replaces the Hope Credit (for now)
Replacing current education credits, for 2009 and 2010 this break would provide a credit of 100% of the first $2,000 of college expenses and 25% of the next $2,000, for a total of $2,500.  The credit applies to all four years of college and would start to be phased out at $80,000/$160,000 depending on filing status.  Formerly, the credit applied only to tuition and fees (excluding nonacademic fees) required to be paid to an eligible educational institution as a condition of enrollment.  The new law includes the cost of course materials as a permissible expense

Computers allowed as 529 education expense
The cost of computers, internet access, and related technology has been added to the list of qualified education expenses that may be paid for with funds from 529 education plans.

Unemployment compensation exclusion
Taxpayers receiving unemployment benefits in 2009 can exclude the first $2,400 in benefits from federal income taxation.

Subsidy for COBRA Continuation Coverage
For workers who’ve been involuntarily terminated, the Act provides a non-taxable 65% subsidy for COBRA continuation premiums for up to 9 months.  Qualifying workers must be involuntarily terminated between Sept. 1, 2008 and Dec. 31, 2009.  The subsidy would terminate upon offer of any new employer-sponsored health care coverage or Medicare eligibility. Workers who were involuntarily terminated between September 1, 2008 and enactment but failed to initially elect COBRA because it was unaffordable receive an additional 60 days to elect COBRA and receive the subsidy.

Expanded first-time credit for first-time home buyers
First-time homebuyers (homebuyers who did not own a principal residence in the U.S. during the 3-year period before the purchase of the home to which the credit applies) can receive a tax credit of 10% of a home’s purchase price, up to a maximum credit of $8,000.  The credit phases out for individual taxpayers with modified AGI between $75,000 and $95,000 ($150,000-$170,000 for joint filers) in the purchase year.  Qualifying purchases are those made between December 31, 2008 and December 1, 2009.  As expected, the new law eliminates the repayment requirement that used to apply to this credit.  At one point, the Senate’s version of this credit went as high as $15,000, but this item was trimmed back to keep down the total cost of the bill.

Tax break for purchasers of new cars
State and local sales taxes paid on the purchase of a new automobile, including light trucks, SUVs, motorcycles, and motor homes are now deductible. The tax break starts to phase out for modified AGIs between $125,000 and $135,000 per year ($250,000-$260,000 for joint returns). The deduction is allowable both for those who itemize their deductions as well as non-itemizers but cannot be taken by a taxpayer who elects to deduct state and local sales taxes in lieu of state and local income taxes.

Another Alternative minimum tax (AMT) patch
The bill increases the AMT exemption amounts to

$46,700 (up from $46,200 in 2008) for unmarried individuals

$70,950 (up from $69,950 in 2008) for MFJ and surviving spouses

$35,475 (up from $34,975 in 2008) for married individuals filing separate returns.

Previously, there were instances in which the AMT was applied to municipal bond interest: so-called private activity bonds, bonds issued by a state or local government entity to finance the project of a private issuer, were not exempt from the AMT.  In a somewhat curious change, intended perhaps to encourage private infrastructure activity, the new bill provides that tax-exempt interest on bonds issued after Dec. 31, 2008 and before Jan. 1, 2011 will not be treated as “tax preference” items for purposes of the alternative minimum tax.

The AMT exemption amounts will still revert to 2000 levels unless Congress takes further action.  As the economy continues to look sick, Congress is more likely to avoid having the tax expand to a much larger number of taxpayers in 2010.  I doubt that a permanent solution will be reached this year, though.

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Thomas Fisher, CFP®

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