The American Recovery and Reinvestment Tax Act of 2009 (ARRTA) is loaded with various tax incentives for individuals for 2009 and 2010. Among the individual tax breaks in the new law are incentives for homeownership, help for the unemployed and employed, as well as education assistance and tax breaks for taxpayers with children. This article provides an overview of the major individual tax incentives provided by the ARRTA.

Making Work Pay Credit. The Making Work Pay credit is a new but temporary refundable credit. Qualified taxpayers will either take the credit through a reduction in the amount of income tax withheld from their paycheck (by allowing a credit against income tax in an amount equal to the lesser of 6.2 percent of the individual’s earned income or $400 ($800 for married couples filing jointly)), or in a lump sum when filing their income tax return for the tax year.

Note. Individuals who are self-employed may qualify for the credit as well, to the extent earnings from self-employment are taken into account in computing taxable income.

The credit applies retroactively to the start of 2009 and extends through 2010. Up to the maximum $400/$800 credit amount is allowed for each year.  The credit begins to phase out for individuals with modified adjusted gross income (MAGI) exceeding $75,000 ($150,000 in the case of married couples filing jointly). The credit will be phased out at a rate of 2 percent above the MAGI limits.

$250 Economic Recovery Payment. The ARRTA also provides a one-time payment of $250 to individuals on a fixed income, including railroad retirement beneficiaries, Social Security recipients, disabled veterans, as well as retired government workers who are not eligible for Social Security benefits. The $250 payment will reduce the individual’s otherwise allowable Making Work Pay credit to which they may be entitled. This payment will only be made in 2009, likely around mid-year.

New Car Deduction. Both itemizers and non-itemizers can take advantage of a new but temporary above-the-line deduction for state and local sales taxes or excise taxes paid on the purchase of a new (qualifying) motor vehicle. Both domestic and foreign vehicles qualify, as well as motor homes, including SUVs, light trucks or motorcycles, weighing no more than 8,500 gross pounds.

The deduction is allow in computing AMT, but is not available to taxpayers who elect to deduct state and local sales and uses in lieu of income taxes as an itemized deduction. The deduction begins to phase-out for taxpayers with AGI exceeding $125,000 ($250,000 for joint filers). Additionally, deductible sales/excise taxes can not exceed the portion of tax attributable to the first $49,500 of the purchase price.

Enhanced First-Time Homebuyer Tax Credit. The ARRTA raises the maximum amount of the first-time homebuyer tax credit to $8,000 (up from $7,500) and extends the credit through December 1, 2009. The ARRTA also completely eliminates any repayment requirement for purchases made after January 1, 2009 if the taxpayer does not sell or otherwise dispose of the property within 36 months from the date of purchase. However, if the taxpayer does dispose of the residence within this time, pre-ARRTA rules for recapture apply, requiring the homebuyer to repay any credit amount received to the government over 15 years in equal installments. Purchases on or after April 9, 2008 and before January 1, 2009 are still governed by the original first-time homebuyer tax credit rules enacted last year in the Housing and Economic Recovery Act of 2008.

Education Credit. The ARRTA temporarily enhances and expands the Hope college education tax credit (renaming it the American Opportunity education tax credit) for 2009 and 2010. The credit is increased in amount, to a maximum of $2,500 per year and extended to all four years of college education. Additionally, the credit is subject to more generous phase-out levels of $80,000 of AGI for individuals and $160,000 for joint filers. For 2009 and 2010, up to 40 percent of the American Opportunity credit is refundable.

Qualified Tuition Programs (“529 plans”). Distributions from qualified tuition programs (also known as “529 plans”) used to pay a beneficiary’s qualified higher education expenses are tax-free. For 2009 and 2010, ARRTA allows beneficiaries to use distributions from QTPs to pay for computers, laptops and computer technology, including internet access.

Child Tax Credit. The ARRTA increases the refundable portion of the child tax credit for both 2009 and 2010. For 2009 and 2010, the child tax credit is refundable to the extent of 15 percent of the taxpayer’s earned income in excess of $3,000.

Enhanced Earned Income Tax Credit. For 2009 and 2010, the ARRTA temporarily increases the Earned Income Tax Credit (EITC) for working families with 3 or more children. The new law: (1) increases the credit to 45 percent of a family’s first $12,570 of earned income for families with 3 or more children and (2) adjusts the start of the EITC phase-out range upwards by $1,880 for joint filers, regardless of the number of children.

AMT Patch. The ARRTA boosts alternative minimum tax (AMT) exemption amounts for 2009. The new amounts are slightly higher than last year’s exemptions but much higher than the amounts they had been set to revert to had this remedial provision not been passed.

The 2009 exemption amounts are:

  • $46,700 for individuals and heads of household; and
  • $70,950 for joint filers and surviving spouses.

The new law also provides that for 2009 nonrefundable personal credits may offset both regular tax and the AMT.

Partial Exclusion of Unemployment Benefits. The ARRTA temporarily excludes up to $2,400 of unemployment compensation from a recipient’s gross income for 2009. Unemployment benefits are otherwise includible in a recipient’s gross income for tax purposes. As such, any unemployment benefits over $2,400 in 2009 will be subject to federal income tax.

Increased Transit Benefits For Workers. Beginning in March 2009, and effective for 2009 and 2010, the ARRTA increases to $230 per month the income exclusion for transit passes and van pooling.

Energy Incentives. Code Sec. 25C provides a tax credit for energy efficient improvements made to a taxpayer’s home. The ARRTA increases the Code Sec. 25C residential energy property credit to 30 percent (up from 10 percent), raises the maximum cap to a $1,500 aggregate amount for 2009 and 2010 installations, eliminates the pre-2008 $500 lifetime cap, and makes other modifications to the credit. Taxpayers can use the credit for insulation materials, exterior windows and doors, skylights, central air conditioning, and hot water boilers, among many other energy efficient improvements.

The ARRTA also removes the individual dollar caps under the Code Sec. 25D residential energy efficient property credit for solar hot water property, wind energy property and geothermal heat pumps. Moreover, if you are interested in an environmentally-friendly car, the ARRTA modifies the credit for plug-in electric vehicles, although they are not yet on the market.

If you have any questions about the individual tax incentives in the ARRTA, please contact our office.

If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.