Key Tax Provisions of the American Recovery and Reinvestment Act of 2009

February 18, 2009

Yesterday, President Obama signed the American Recovery and Reinvestment Act of 2009. Below are summaries of some of its key tax provisions. A separate alert containing a summary of the employee benefits provisions will be forthcoming.
 
Individual provisions
 
"Making work pay credit" of up to $400 ($800 on joint returns)
The "making work pay credit" will be available to eligible individuals for tax years that begin in 2009 and 2010. The
amount of the credit is the lesser of: (i) 6.2% of the taxpayer's earned income; or (ii) $400 ($800 for a joint return).
This credit is "refundable," meaning that a taxpayer can receive a credit that exceeds his or her total tax liability prior
to applying the credit. The IRS will implement this credit by revising its withholding schedules so that taxpayers
should realize the benefit of this credit throughout 2009 in the form of lower withholding. This tax credit begins to
phase out at modified adjusted gross incomes of $75,000 for individuals, and $150,000 for joint returns.
 
One-time $250 payment for recipients of social security, SSI, railroad retirement, and veterans disability or pension
benefits
The Act provides for one-time $250 economic recovery payments to adults eligible for social security benefits, adults eligible for railroad retirement benefits, adults eligible for veterans compensation or pension benefits, and individuals of any age eligible for supplement security income (SSI) benefits other than individuals who receive SSI while in a Medicaid institution. To receive an economic recovery payment, the individual must have been eligible for one of the above four benefit programs during November or December of 2008, or January of 2009.
 
First-time homebuyer credit of $8,000 (or $4,000 for married individuals filing separately)
The first-time homebuyer credit applies to principal residences purchased after December 31, 2008 and before December 1, 2009. The credit is $8,000, or $4,000 for married individuals filing separately. Taxpayers may take this credit either on their 2008 or 2009 returns. The credit generally must be repaid if the residence is sold or ceases to be used as a principal residence within 36 months of purchase. For purposes of this credit, a "first-time homebuyer" is a taxpayer who has not owned a principal residence within the previous three years.
 
Deduction for sales and excise taxes on new vehicle purchases
State or local sales or excise taxes on certain new vehicles purchased between February 17, 2009 and December 31, 2009 are deductible either as part of the standard deduction or as an itemized deduction. The deduction is limited to those taxes attributable to the first $49,500 of the vehicle's purchase price. This deduction begins to phase out at modified adjusted gross incomes of $125,000 for individuals, and $250,000 for joint returns. This deduction is not allowed for taxpayers who elect to deduct state sales tax in lieu of state income tax.
 
$2,400 of unemployment compensation not taxable
For tax years that begin in 2009, recipients of unemployment compensation will not have to pay 2009 income tax on the first $2,400 of such payments.
 
"Hope" higher education credit increased and expanded
The Hope tax credit has been renamed the "American Opportunity tax credit." For tax years that begin in 2009 and 2010, the maximum credit amount is increased to $2,500 per eligible student per year for "qualified tuition andrelated expenses," which have been expanded to include course materials.The credit is allowed for the first four years of a student's post-secondary education in a degree or certificate program. The modified adjusted gross income range at which the credit is phased-out is increased and the credit is permitted to be claimed against alternative minimum tax liability. 40% of the credit is refundable (that is, up to 40% of the credit can be refunded even if in excess of the taxpayer's tax liability prior to applying the credit).
 
Higher education expenses under 529 plans now include computer technology, equipment, and Internet access
Expenses paid or incurred in 2009 or 2010 for certain computer technology and equipment, Internet access and related services, are qualified higher education expenses under 529 plans
 
Refundable portion of child tax credit is increased
For 2009 and 2010, the child tax credit generally is refundable to the extent of 15% of the taxpayer's earned income
in excess of $3,000.
 
Changes to earned income tax credit rules
For tax years that begin in 2009 and 2010, the earned income tax credit percentage is increased to 45% for certain low-income families with three or more qualifying children. Also, to provide marriage penalty relief, the threshold earned income tax credit phase-out amounts for married couples filing joint returns are increased by $5,000 over the corresponding amounts for non-joint filers for 2009, with an additional inflation adjustment for 2010.
 
Alternative minimum tax exemption amounts increased
For tax years that begin in 2009, the alternative minimum tax exemption amounts are as follows: $46,700 for unmarried individuals, $70,950 for married couples filing jointly, and $35,475 for married couples filing separately. These exemptions begin to phase out at higher income levels.
 
Business provisions
 
Net operating loss (NOL) carryback period for 2008 NOLs increased for electing small businesses
Generally, NOLs may be carried back two years and forward 20 years. Certain small business may now elect a three-, four-, or five-year carryback period for 2008 NOLs instead of the usual two year carryback period.
 
S corporation built-in gain holding period shortened
When a C corporation elects to become an S corporation any built-in, unrecognized gains on corporate assets existing at the time of the election will be taxed at the highest corporate rate if such built-in gains are later recognized during a defined "recognition period." For S corporation tax years beginning in 2009 and 2010, this "recognition period" is shortened to seven years. Therefore, no tax will be imposed on net unrecognized built-in gain if the seventh tax year in the "recognition period" precedes the 2009 and 2010 tax years.
 
New markets tax credit national limit is increased
The new markets tax credit nationwide limitation for qualified equity investments in qualified community development entities is $5 billion for each of calendar years 2008 and 2009. The increase in the 2008 credit limit must be allocated to community development entities that submitted an allocation application for calendar year 2008 and either did not receive an allocation during that year, or received less than requested. 

If you would like more information on the content of this alert, please contact Christine Burke Worthen, a shareholder and Chair of Eaton Peabody's Tax Practice Group, or Rodney A. Lake. 

This alert is provided as general information, and is not a substitute for legal or other professional advice.