Bradley & Riley PC - Attorneys & Counselors in Cedar Rapids - Iowa City

Please Read Before Selecting Attorney

Choose Attorney Kelly R. Baier Kimberly H. Blankenship F. James Bradley Paul D. Burns Patrick M. Courtney Michael K. Denney Natalie K. Ditmars Jessica A. Doro Jeremy B. P. Hagan Bradley G. Hart Timothy J. Hill Maureen G. Kenney Janice J. Kerkove William T. McCartan Laura C. Mueller William J. Neppl Kevin C. Papp Michael J. Pugh Byron G. Riley Joseph E. Schmall Gregory J. Seyfer Dean A. Spina Vernon P. Squires Adam S. Tarr Donald G. Thompson Shannon P. Thompson Nancy A. Wood Joseph W. Younker

The American Recovery and Reinvestment Act of 2009

Extended Version

by Jessica Doro, Attorney

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.

Provisions Affecting Individuals

Making Work Pay Credit. One of the most publicized provisions of the Act is the Making Work Pay credit. The credit will increase the take home pay amount for certain workers. The credit is a refundable credit 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). The credit begins to phase out at a rate of 2% for: (1) individuals whose adjusted gross income exceeds $75,000 and (2) married couples filing jointly whose adjusted gross income exceeds $150,000. The credit is not available for individuals whose adjusted gross income is $100,000 or greater and married joint filers whose adjusted gross income is $200,000 or greater.

The credit is applicable for both 2009 and 2010 and is currently scheduled to be effective by April 1st. The IRS has issued new tax-withholding tables that incorporate the credit and has requested that employers start using the new tables by April 1st.

Note for Retired and Disabled Taxpayers and Social Security Recipients: Some Americans are ineligible for the Making Work Pay credit because it requires earned income. The Act also includes a one-time $250 payment to fixed income individuals, including Social Security beneficiaries, disabled individuals, and veterans receiving disability compensation and pension benefits. If such individuals have earned income, then this payment reduces any allowable Making Work Pay credit.

To qualify for the payment, the individual must have been eligible for one of the four benefit programs for any month during the 3 month period ending January 31, 2009.

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. The Act modifies the child tax credit provisions for 2009 and 2010. Specifically, it lowers the earned income threshold for the credit from $8,500 to $3,000. The formula for calculating the credit is 15% of earned income.

Earned Income Credit. The Act increases the earned income credit percentage for families with 3 or more qualifying children to 45% for 2009 and 2010.

First Time Home Buyer Provisions. Congress included incentives for certain qualified homebuyers in the Act. To be eligible for the credit under the Act, the purchase must meet the following criteria:

1. the purchase must occur after December 31, 2008 and before December 1, 2009;
2. the purchaser must not have owned a principal residence in the United States within 3 years prior to the purchase. If a married couple is purchasing the home, then both spouses must satisfy this test;
3. the credit is limited to 10% of the purchase price of the home (up to $8,000); and
4. the home cannot be sold or ceased to be used as a principal residence during the first 36 months after its purchase.

If the taxpayer or taxpayers satisfy all of the above requirements, then the credit does not need to be repaid. The phase out for the credit starts for individuals earning $75,000 or greater and married couples with joint income of $150,000.

If the home purchase occurred between April 9, 2008 and December 31, 2008, then the purchasers are governed by the provisions of the prior act. The main difference is that the prior act created a credit for first time homebuyers which must be recaptured over a fifteen year period, without interest, beginning with the second tax year after the tax year in which the home was purchased. Additionally, the prior provision capped the amount at $7,500.

New Vehicle Purchase Tax Provision. Due to sluggish car sales, Congress included a provision in the Act to provide a tax break for individuals who purchase new cars. The break comes in the form of an above-the line deduction for state and local sales taxes or excise taxes. The deduction is limited to taxes on the portion of the cost of the vehicle not in excess of $49,500.

The deduction is available to individuals who itemize their deductions and also to individuals who take the standard deduction. It is not, however, available for a taxpayer who elects to deduct state and local sales tax in lieu of state and local income tax.

The deduction is available for the purchase of a qualified motor vehicle, which includes a passenger automobile, light truck or motorcycle the gross vehicle rating of which is not more than 8,500 pounds and a motor home. The original use of the qualified motor vehicle must commence with the taxpayer, so pre-owned vehicles are not eligible.

The purchase must occur on or after February 17, 2009 and before January 1, 2010 for the taxpayer to take the deduction. The deduction begins to phase-out for individuals with income of $125,000 or above or couples with income of $250,000 or above. Finally, the deduction is limited to taxes on the portion of the vehicle’s cost not in excess of $49,500. As the Act is currently written, the deduction is only available for 2009.

Unemployment Compensation. The Act excludes the first $2,400 of unemployment benefits from income tax for benefits received in 2009.

Alternative Minimum Tax. The Act increases the Alternative Minimum Tax (“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. The result of these changes is individuals are subjected to the AMT in 2009.

American Opportunity Tax Credit. The Act contains some changes in an attempt to make college education more affordable for middle-income and low-income students. Specifically, the Act makes the following changes to the credit (previously referenced as the Hope Credit):

1. increases the maximum credit per eligible student per year from $1,800 to $2,500;
2. makes the credit available for the first four years of the student’s post-secondary education (up from two years previously);
3. includes the costs of textbooks and course materials;
4. makes 40% of the credit refundable; and
5. increases the phase-out level from $50,000 to $80,000 for single individuals and from $100,000 to $160,000 for joint filers.

The credit is 100% of the first $2,000 of qualifying expenses and 25% of the next $2,000, so the maximum credit amount of $2,500 is reached if the student has qualifying expenses of $4,000 or more. These changes are effective for both 2009 and 2010.

529 Plans. The Act expands the permissible use of funds in 529 plans for the years 2009 and 2010. Specifically, 529 plan funds can now be used to cover purchases of computers, computer technology, and internet access, provided that the purchased items are used by the 529 account beneficiary during any of the years the beneficiary is enrolled at an eligible educational institution.

COBRA Benefit Subsidy. The Act provides a subsidy for a portion (65%) of payments for COBRA continuation premiums. The subsidy is available for up to 9 months for workers who have been involuntarily terminated and also for the qualified dependents of any such worker. The subsidy is not taxable.

This subsidy is available for workers who were involuntarily terminated (except for gross misconduct) between September 1, 2008 and December 31, 2009. It terminates when the individual is offered any new employer-sponsored health care coverage or upon Medicare eligibility. The subsidy begins to phase out for individuals earning more than $125,000 individually or $250,000 jointly.

Workers who were involuntary terminated on September 1, 2008 or after and who are not currently enrolled in COBRA can elect COBRA during a special election period that began on February 17, 2009. Such workers have a 60 day time period from the date they receive notice from their employer of this right to elect COBRA coverage.

Provisions Affecting Corporate Taxpayers

Bonus Depreciation Extension. In 2008, Congress passed legislation temporarily allowing businesses to recover the costs of capital expenditures made in 2008 more quickly than the ordinary depreciation schedule 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.

The bonus depreciation option applies to qualified property, which includes most types of new property other than buildings, provided the original use of the property began with the taxpayer after December 31, 2007.

No Alternative Minimum Tax (AMT) depreciation adjustment applies for the entire recovery period of the property. Furthermore, the property’s adjusted basis is reduced by the additional (bonus) depreciation amount before computing the regular depreciation amount. The result is that the taxpayer receives the 50% deduction plus the regular depreciation deduction computed on the reduced basis for the property.

A taxpayer can elect out of the additional depreciation. If the taxpayer makes such an election, then the election applies to all property in that class placed into service during that tax year. Electing out also subjects the property to the Alternative Minimum Tax (AMT) depreciation rules.

Code Section 179 Expensing Extension. Code Section 179 permits a taxpayer to deduct as an expense, rather than to depreciate, up to a specified amount of the cost of new or used tangible personal property placed in service during the tax year in the taxpayer’s trade or business. Congress previously increased the amount that could be expensed pursuant to this section and increased the level at which the phase-out for this amount began. 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 to 2 years before the year that the loss arose and carry forward losses to each of the succeeding 20 years after the year that the loss arose. The Act increases the carryback period to 5 years for tax years ending after December 31, 2007. This is only available for small businesses which are defined as a sole proprietorship, corporation, or partnership with average gross receipts of $15,000,000 or less for the 3 tax period immediately preceding the loss year.

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

Corporation 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 conversts to an S Corporation. This provision applies to 2009 and 2010.

Estate and Gift Tax Update

The Act did not make any changes to the exemption levels for the federal estate tax, nor make any changes to the current estate tax rates. 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 above schedule prior to the end of this year.

Change to Required Minimum Distribution Rules in 2009

Though not a part of the Act, an important change made late in 2008 applies to certain individuals for 2009. The change, which was a part of the Worker, Retiree, and Employer Recovery Act was passed at the end of 2008. It applies in 2009 to individuals who are 70 ½ and over and who have retirement plan accounts. It permits such individuals to refrain from taking their required annual minimum distribution withdrawals from such accounts in 2009.