Making Work Pay Tax Credit
For 2009 and 2010, the Making Work Pay provision of ARRA will provide a refundable tax credit of up to $400 for working individuals and $800 for married taxpayers filing joint returns. This tax credit is calculated at a rate of 6.2 percent of earned income and will phase out for those with an adjusted gross income over $75,000 or $150,000 for married couples filing jointly. The credit is available to both employees and self-employed individuals. To be eligible for the credit, taxpayers must have a valid Social Security Number (SSN). In the case of a joint filer, a valid SSN is required for one of the taxpayers. Individuals who can be claimed as a dependent on someone else’s tax return and nonresident aliens are NOT eligible for the credit. Most people will benefit immediately with a larger paycheck as a result of the changes made to the federal income tax withholding tables to implement the Making Work Pay tax credit. However, the amount of the credit still must be claimed on the individual’s income tax returns. Taxpayers who do not have taxes withheld by an employer during the year can claim the credit on their tax return.
First-time Homebuyer Credit Amended
This ARRA provision extends the existing homebuyer credit for qualifying home purchases to purchases before December 1, 2009. For purchases in 2009, taxpayers can qualify for a refundable credit of 10 percent of the purchase price up to $8,000 ($4,000 for taxpayers who are married filing separately). Generally, you do not have to repay the credit for qualifying home purchases during this period provided the house remains your main home for 36 months after the purchase date. The amount of the credit begins to phase out for taxpayers with adjusted gross income of more than $75,000 or $150,000 for taxpayers who are married and file a joint return. For purposes of the credit, you are considered to be a first-time homebuyer if you, or your spouse if you are married, did not own any other main home during the three-year period ending on the date of purchase. Form 5405, First-time Homebuyer Credit, is used to claim the credit. The instructions for the Form 5405 provide additional information on who can and cannot claim the credit, income limitations, and repayment of the credit.
Special Tax Break for Purchase of a New Vehicle
For 2009, there is an additional deduction for state and local sales and excise tax, including certain fees in states that do not have a sales tax, on the purchase of qualified motor vehicles. A qualified motor vehicle must be new and includes a passenger automobile or light truck, a motorcycle, or a motor home. Taxes and fees paid on vehicles purchased before February 17, 2009, are not eligible for this special deduction. The deduction is limited to the eligible taxes and fees paid on the first $49,500 of the purchase price of the vehicle. The deduction phases out for taxpayers with modified adjusted gross income of more than $125,000 ($250,000 on a joint return). The deduction is available to taxpayers who claim the standard deduction as well as to taxpayers who itemize deductions on Schedule A (Form 1040), Itemized Deductions.
Temporary Increase in Earned Income Tax Credit
For tax years 2009 and 2010, ARRA temporarily increases the income limits and earned income tax credit percentage allowed for working families with three or more qualifying children. The income limitations and the credit are therefore larger for qualifying families.
The EITC threshold amounts for 2009 tax returns are:
- $13,440 ($18,440 if married filing joint) if you do not have a qualifying child
- $35,463 ($40,463 married filing jointly) if you have one qualifying child
- $40,295 ($45,295 married filing jointly) if you have two qualifying children
- $43,279 ($48,279 married filing jointly) if you have three or more qualifying children)
The maximum EITC for 2009:
- $5,657 with three or more qualifying children
- $5,028 with two qualifying children
- $3,043 with one qualifying child
- $457 with no qualifying children
Temporary Increase in Refundable Portion of Child Tax Credit
ARRA reduces the minimum earned income amount used to calculate the additional child tax credit to $3,000. Reducing the amount to $3,000 allows more taxpayers to claim the additional child tax credit and increases the amount of the payments they may receive. It is a refundable credit, which means taxpayers may receive refunds even when they do not owe any tax. This change applies to tax years 2009 and 2010.
Temporary Suspension of Tax on Portion of Unemployment Benefits
For tax year 2009, each taxpayer can exclude from gross income up to $2,400 of unemployment compensation. Unemployment compensation over $2,400 is subject to federal income tax. Individuals who receive unemployment benefits in 2009 should check their withholding to ensure they are not having unnecessary tax withheld.
American Opportunity Tax Credit
For tax years 2009 and 2010, the American Opportunity Tax Credit makes temporary changes to the education credit known as the Hope Credit. It adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four years of post-secondary education instead of two. Also, a portion of the credit may be refundable.
Residential Energy Credits
ARRA provides numerous tax incentives for individuals to invest in energy-efficient products.
Extension and modification of credit for non-business energy property: The new law reinstates and increases the tax credit for homeowners who make energy efficient improvements to their existing homes. The law increases the credit rate to 30 percent of the cost of all qualifying improvements and raises the maximum credit limit to $1,500 for improvements placed in service in 2009 and 2010. The credit applies to improvements such as adding insulation, energy efficient exterior windows, and energy-efficient heating and air conditioning systems. Generally, homeowners can rely on manufacturers’ certifications in determining whether property purchased qualifies for the credit.
Modification of credit for residential energy efficient property: This nonrefundable energy tax credit will help individual taxpayers pay for qualified residential energy efficient property, such as solar hot water heaters, geothermal heat pumps, and wind turbines. The new law removes most of the previously imposed maximum amounts and maintains the 30 percent credit for the purchase of qualified property.
For more information on the American Recovery and Reinvestment Act of 2009, refer to the IRS website, www.irs.gov, or call (800) 829-1040.