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The American Recovery and Reinvestment Act of 2009

by Jessica Doro, Maureen Kenney and Patrick Courtney, Attorneys

March 2009 -- President Obama signed The American Recovery and Reinvestment Act of 2009 ("the Act") into law on February 17, 2009. The Act contains tax provisions for both individuals and businesses, some of which are highlighted below.

Continue reading for the abbreviated version of this article. For a more detailed article, click here.

Provisions Affecting Individuals

Making Work Pay Credit. The Making Work Pay Credit will increase the take home pay amount for certain workers. The credit is a refundable credit on your 2009 and 2010 income tax returns equal to the lesser of: (1) 6.2% of the individual's earned income or (2) $400 for single filers ($800 for married couples filing jointly). There are phase-out rules when adjusted gross income exceeds $75,000 ($150,000 for married couples filing jointly). New withholding tables have been issued to reduce current withholding to allow for this credit.

Economic Recovery Payment. Includes a one-time $250 payment to retirees, disabled individuals receiving benefits from Social Security, Railroad Retirement beneficiaries, Social Security beneficiaries, and veterans receiving disability compensation and pension benefits. The payment reduces any allowable Making Work Pay Credit.

The Act also provides a one time refundable credit of $250 in 2009 to certain government retirees who are not eligible for Social Security benefits.

Child Tax Credit and Earned Income Credit. The eligibility for the refundable child tax credit in 2009 and 2010 is increased by lowering the earned income threshold to $3,000. Tax relief to families with three or more children is provided by modifying the earned income credit.

First Time Home Buyer Provisions. Last year, Congress provided taxpayers with a refundable tax credit that was equivalent to an interest-free loan equal to 10% of the purchase price of a home (up to $7,500) for first-time home buyers. The provision applied to homes purchased on or after April 9, 2008, and before July 1, 2009. Individuals were required to repay any amount received back to the government over 15 years in equal installments (or earlier if the home was sold). The credit phases out for individuals with adjusted gross income in excess of $75,000 ($150,000 for married filing joint). The new law enhances the credit by eliminating the repayment obligation for individuals that purchase homes on or after January 1, 2009. It extends the credit through the end of November, 2009, and increases the credit from $7,500 to $8,000.

New Vehicle Purchase Tax Provision. Allows individuals to deduct state and local sales taxes paid on the purchase of a new automobile, including light trucks, SUVs, motorcycles, and motor homes. The tax break phases out starting with individuals with gross income of $125,000 per year ($250,000 for joint returns). The deduction is allowed for both itemizers and non-itemizers. However, the deduction cannot be taken by a taxpayer who elects to deduct state and local sales taxes in lieu of state and local income taxes.

Unemployment Compensation. Excludes the first $2,400 of unemployment benefits as income for benefits received in 2009.

Alternative Minimum Tax ("AMT"). Increases the AMT exemption amounts for 2009 to $46,700 for unmarried individuals, $70,950 for joint returns, and $35,475 for married individuals filing separate returns. The Act also allows personal credits against the AMT.

Higher Education Tax Credit. Creates a $2,500 higher education tax credit that is available for the first four years of college. The credit is based on 100% of the first $2,000 of tuition and related expenses (including books) paid and 25% of the next $2,000 of tuition and related expenses paid, subject to a phase-out for adjusted gross income in excess of $80,000 ($160,000 for joint returns). 40% of the credit is refundable. The new credit temporarily replaces the Hope credit.

Computers as an Education Expense. Permits computers and technology as qualified education expenses in 529 education plans for tax years beginning in 2009 and 2010.

Provisions Affecting Businesses

Bonus Depreciation Extension. For 2008, Congress passed legislation allowing businesses to recover the costs of capital expenditures more quickly by allowing business to write off 50% of the cost of depreciable property acquired in 2008. The Act extends this benefit and applies the bonus depreciation to property acquired and placed in service after December 31, 2008, but before January 1, 2010.

Code Section 179 Expensing Extension. Small business taxpayers may elect to write off the cost of new or used tangible personal property placed in service during the tax year in lieu of recovering these costs over time through depreciation. The Act maintains the expensing limit of $250,000 and phase-out threshold of $800,000 for 2009.

Expanded Loss Carryback of Net Operating Losses for Small Businesses. Previously, a taxpayer could carry net operating losses back 2 years from the loss year and forward 20 years. For 2008, the Act increases the carryback to 5 years for small businesses with average gross receipts of $15,000,000 or less.

Changes to Recognition of Certain Cancellation of Debt Income. The Act contains provisions which permit businesses to recognize cancellation of debt income over a period of 5 years for specified types of business debt repurchased by the business in 2009 or 2010. The election is irrevocable and the cancelled income must be recognized commencing in 2014.

S Corporation Built-In Gains. The Act temporarily shortens the holding period from 10 years to 7 years for assets subject to built-in gains imposed after a C Corporation converts to an S Corporation.

Estate and Gift Tax Update

The Act did not make any changes to the federal estate tax. Under current law, the exemption levels and rates are as follows:

Year	Estate Tax Exemption	Highest Estate Tax Rate
2009	$3,500,000	45%
2010	N/A (estate tax eliminated for 2010 only)	0%
2011	$1,000,000	60%

We anticipate a change to the schedule above prior to the end of this year.

Elimination of Required Minimum Distribution for 2009

Though not a part of the Act, an important change made late in 2008 provides that individuals who are 70 ½ and over and who have retirement plan accounts are not required to withdraw their annual minimum distribution in 2009.

For a more detailed analysis of the provisions of the Act, please click here. If you want further information, please contact us at 319-363-0101.