Individual Income Tax Provisions of the Economic Stimulus Act

The following information came from Delta Trust Investments. We found information important and wanted to post on the web.

On February 17, 2009, President Obama signed into law the $787 billion American Recovery and Reinvestment Act of 2009 (the “Act”). Among $301 billion in tax cuts made by the Act are income tax provisions directly affecting individual taxpayers. Highlights of the major tax law provisions directly affecting individuals are set forth below.

MAKING WORK PAY TAX CREDIT

Effective for both 2009 and 2010, the Act provides a credit of up to $800 each year for marrieds filing jointly (up to $400 each year for others). Eligibility for the credit is based on earned income in the respective year. (Under the statutory formula, the maximum credit will be available only if 6.2% of earned income equals or exceeds $400 or $800, whichever is applicable.) The credit phases out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 for joint returns).

The credit will be implemented through a reduction in income tax withholding.

Estimated revenue cost: $116.199 billion

PATCH FOR INDIVIDUAL ALTERNATIVE MINIMUM TAX

The Act increases the exemption amount for 2009 from its current level ($45,000 for marrieds filing jointly and $33,750 for others) to $70,950 for marrieds filing jointly and $46,700 for others. (The new exemption amounts are based on the 2008 exemption amounts, indexed for inflation, and are estimated to prevent 26 million taxpayers from becoming subject to the alternative minimum tax.)

Estimated revenue cost: $69.759 billion

ELIMINATION OF PRIVATE ACTIVITY BONDS AS A TAX PREFERENCE ITEM.

Effective only for bonds issued in 2009 and 2010, the Act will not take private activity bond interest into account when computing alternative minimum tax. Refunding bonds otherwise subject to the alternative minimum tax will be covered by this provision only if the original private activity bond was issued after 12/31/03 and before 1/1/09, and refunded during 2009 or 2010.

Estimated revenue cost: $555 million

“AMERICAN OPPORTUNITY” EDUCATION TAX CREDIT

Effective for 2009 and 2010, the Act provides a maximum $2,500 tax credit for qualified post-secondary school tuition and related expenses incurred during each taxable year. The credit will be computed based on 100% of the first $2,000 of tuition/expense and 25% of the next $2,000 of tuition/expense — and phases out for taxpayers with adjusted gross income in excess of $80,000 ($160,000 for a joint return).

Estimated revenue cost: $13.907 billion

LIBERALIZATION OF THE $7,500 FIRST-TIME HOMEBUYER CREDIT

A maximum $7,500 credit for those filing jointly ($3,750 for others) is currently available for homes purchased on or after 4/9/08 and before 7/1/09, with a 15-year repayment provision. The Act (i) makes the credit available for 2009 homes purchased before 12/1/09; (ii) increases the maximum amount of the credit to $8,000 and (iii) eliminates the repayment requirement. Unfortunately, elimination of the repayment requirement is only available to those purchasing a first home in the qualifying period of 2009.

This will be a major disappointment to those who purchased first homes in the qualifying period of 2008.

The credit is limited to 10% of the home’s purchase price and phases out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 for a joint return).

Estimated revenue cost: $6.638 billion.

ABOVE-THE-LINE TAX DEDUCTION FOR STATE AND LOCAL SALES AND EXCISE TAX PAID ON THE 2009 PURCHASE OF A NEW CAR, LIGHT TRUCK, MOTOR HOME OR MOTORCYCLE

The deduction phases out for taxpayers with adjusted gross income in excess of $125,000 ($250,000 for a joint return).

Estimated revenue cost: $1.684 billion

PLUG-IN ELECTRIC DRIVE VEHICLE CREDIT

Effective 2010, the Act provides a base credit of $2,500 per vehicle for the purchase of plug-in electric drive vehicles. The credit phases out for purchases after the calendar quarter in which the manufacturer records its 200,000th sale of a plug-in electric drive vehicle.

Estimated revenue cost: $2.002 billion

TAX CREDITS FOR ENERGY-EFFICIENT IMPROVEMENTS TO EXISTING HOMES

The Act extends tax credits for energy-efficient improvements to existing homes through 2010, increasing the allowable credit amount to 30% of the eligible expenditure, with a $1,500 aggregate cap.

Estimated revenue cost: $2.034 billion

INCREASED ELIGIBILITY FOR REFUNDABLE PORTION OF CHILD TAX CREDIT

Effective 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. (Under prior law, the refundable credit was available only to those with earned income of $8,500 or more.)

Estimated revenue cost: $14.830 billion

TEMPORARY SUSPENSION OF TAXATION OF UNEMPLOYMENT BENEFITS

Effective for 2009 only, the Act suspends federal income tax on the first $2,400 of unemployment benefits per recipient. This provision is not subject to income phase outs.

Estimated revenue cost: $4.740 billion

FOR MORE INFORMATION

Please contact Grace Allison, ga3@ntrs.com

© 2009, Northern Trust Corporation

LEGAL, INVESTMENT AND TAX NOTICE: This information is not intended to be and should not be treated as legal advice, investment advice or tax advice. Professionals and other readers should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal or tax advice from their own counsel.

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