New Recovery Package: What’s in It for You?

The $787 billion recovery package, called the American Recovery and Reinvestment Act of 2009, contains numerous tax breaks, primarily for low- and moderate-income taxpayers. Many of the breaks run for only a year or two. Here are the breaks and the income limitations, where applicable, that apply to them:

• Making Work Pay tax credit of up to $400 ($800 for joint filers). The credit is paid to you as an increase in your take home pay (expect to see the credit amount in your paycheck soon). The credit phases out for singles with modified adjusted gross income (MAGI) above $75,000 ($150,000 for joint filers). For those receiving Social Security benefits, Railroad Retirement benefits, veterans benefits, or Supplemental Security Income (SSI) payments, there is a one-time $250 payment, regardless of overall income. The payment to Social Security recipients will be made from the Social Security Administration; if you receive your benefits via direct deposit, your $250 payment will be made this way as well (no later than June 17, 2009).
• First-time homebuyer credit for homes purchased after December 31, 2008, and before December 1, 2009. The credit amount is $8,000 ($500 higher than for those who bought homes in 2008) and there’s no repayment requirement if the home isn’t sold within 36 months. The credit phases out for singles with MAGI above $75,000 ($150,000 for joint filers).
• American Opportunity tax credit for higher education costs in 2009 and 2010. The credit, which replaces the Hope credit for these years, is 100% of the first $2,000 of qualifying expenses, plus 25% of the next $2,000 of qualifying expenses, for a top credit of $2,500. What’s more, 40% of the credit is refundable (it can be paid to you even though it’s more than your tax bill). The credit phases out for singles with MAGI above $80,000 ($160,000 for joint filers).
• Earned income credit increased for large families in 2009 and 2010. Those with three or more children have an increased credit percentage of 45% (40% applies to those with two children), which produces a larger credit for eligible taxpayers.
• Refundable child tax credit increased for 2009 and 2010. A portion of the $1,000 credit for each eligible child is refundable and the new law lowers the threshold for phasing out refundability; the threshold is only $3,000 (it had been $8,500 for 2008).
• Deduction for taxes on new car purchases on or after February 17, 2009, and before January 1, 2011. You can deduct state and local sales taxes and excise taxes on the purchase of a new car or light truck, even if you don’t itemize deductions. The purchase of a pre-owned vehicle or leasing a car does not qualify. The deduction phases out for singles with MAGI above $125,000 ($250,000 on a joint return).
• Alternative minimum tax for 2009. The exemption amounts have been increased to keep more than 20 million taxpayers from owing AMT this year. The exemption amounts are $46,700 for singles ($500 more than in 2008) and $70,950 for joint filers ($1,000 more than in 2008). Also, nonrefundable personal credits, such as the dependent care credit, can be used to offset both regular tax and AMT liability.
• Credit for home energy improvements in 2009 and 2010. A credit of up to $1,500 can be claimed for the purchase of an energy-efficient furnace, insulation, storm windows and other energy savers. There are no income limits.
• 529 savings plan withdrawals for 2009 and 2010. Withdrawals to pay for computer technology, including laptops, software, and Internet access fees, are tax free. Software for gaming or entertainment doesn’t qualify unless it is “predominately educational in nature.” There are no income limits.
• Unemployment benefits. While unemployment benefits usually are fully taxable, under the new law the first $2,400 of unemployment benefits received in 2009 are tax free. There are no income limits.
• Estimated taxes for small business owners. Sole proprietors and other owners who pay tax on their share of business income on their personal returns can reduce estimated tax payments for 2009. To qualify, AGI in 2008 cannot have been more than $500,000 and half of the owner’s income must be derived from a small business (500 or fewer employees). No estimated tax penalties will be incurred if tax payments for 2009 total at least 90% of the 2008 tax bill.