Last month, we focused in broad terms on the pending economic stimulus bill proposed by President Obama, along with the version passed by the House of Representatives. At that time, the Senate had not yet weighed in and nobody knew what the final law would be, just that a bill would ultimately be passed and signed into law.
On February 17, 2009, the President signed into law The American Recovery and Reinvestment Tax Act of 2009 (ARRA) and as promised, it was massive. According to the Joint Committee on Taxation, the effect of the law is to reduce income taxes by approximately $301 billion and provide approximately $25 billion in assistance to unemployed workers and their families to pay for COBRA continuation of health insurance. Let’s take a look at some of the provisions affecting individuals.
The provision that will have the largest effect on tax receipts in the next two years is the Making Work Pay Credit. The refundable credit is based on 6.2% of earned income and is capped at $400 per individual and $800 per married couple filing jointly. The credit, which applies to income taxes for 2009 and 2010, normally would not have an effect until taken on your tax return in 2010 and 2011, but to accelerate the availability of cash to the economy, withholding tables will be adjusted to allow employees to keep more cash now. This means the take home pay of the average married couple will increase by approximately $65 per month. This credit will reduce tax receipts approximately $116 billion.
The second largest impact on individuals will come from a patch to the Alternative Minimum Tax. Originally intended to be sure the very wealthy paid taxes, inflation has increased household income to the point where the AMT now affects millions of Americans it was never intended to apply to. ARRA will increase the individual exemption to $46,700 and ‘married filing jointly’ exemption to $70,950 for 2009. This is expected to reduce taxes by approximately $70 billion over current law.
In an effort to stimulate home sales, the first-time homebuyer credit will be increased to a maximum of $8,000 ($4,000 for a married individual filing separately) for homes purchased from December 31, 2008 to December 1, 2009. The credit is refundable and can be claimed on the buyer’s 2008 income tax return, even if the home is purchased in 2009. A first-time homebuyer is defined as an individual who has not had ownership interest in a principal residence in the United States during the three-year period prior to the purchase of the home to which the credit applies. A taxpayer will not have to repay the credit if he or she remains in the home for 36 months. This provision is estimated to reduce income taxes by $6.6 billion.
Under prior law, unemployment benefits were fully taxable. The 2009 law excludes the first $2,400 of unemployment insurance benefits from tax for 2009. Additionally, a deduction for sales taxes on the first $49,500 for the purchase of new cars, light trucks, motorcycles and motor homes will be available in 2009. The deduction is above the line, which means it won’t be subject to limitations on itemized deductions, but the vehicle must be new and not used. Taken together, these two provisions will reduce tax receipts by approximately $6.4 billion over the next three years.
So far, we have discussed tax provisions that will reduce income taxes by $199 billion for individuals and families over the next ten years. ARRA will also reduce the threshold for the refundable portion of the child tax credit to $3,000 in 2009 and 2010, increase the earned income tax credit, and increase HOPE scholarship credit (renamed American Opportunity Tax Credit) for 2009 and 2010 to $2,500 (40% of which will be refundable). Taken together, these provisions are expected to save taxpayers $33.4 billion. All-in-all, ARRA is expected to reduce taxes on individuals and families by approximately $232 billion over the next ten years.
In addition to individual tax provisions, the law will provide incentives for investment in energy related improvements to homes and vehicles. Provisions that affect individuals will reduce taxes by approximately $4.55 billion.
Retired individuals also have something to gain from ARRA. Those receiving Social Security, supplemental security income, railroad retirement benefits and veterans’ disability compensation or pension benefits can expect a check for $250 from the government. Federal and State retirees who are not eligible for Social Security will also receive $250. The total cost of these provisions is approximately $14.4 billion.
One of the greatest concerns for Americans who lose their jobs is the loss of employer subsidized health coverage. While present law requires certain employers to offer continuation of coverage to qualifying individuals, the cost can be prohibitive. To help individuals keep coverage, ARRA provides that assistance-eligible employees will be treated as having paid the full COBRA premium if they pay at least 35% of the normal COBRA cost for up to 9 months. The employer or plan eligible to be reimbursed for the remaining 65% can take it as a credit against payroll taxes or will be reimbursed by the government directly. To be eligible, an employee must have lost his or her coverage as the result of an involuntary termination after September 1, 2008 and before January 1, 2010. The combined estimated reduction in tax receipts and/or increase in governmental outlays is $24.7 billion.
While the effect of ARRA on the overall economy will be hotly debated over the next several years, the effect on individual tax bills will not. The American Recovery and Reinvestment Tax Act of 2009 will have far-reaching effects on individuals and families in the short-term and long-term. The provisions are complex, but don’t wait until next year to take advantage of some of its benefits. You can adjust withholdings or reduce quarterly payments now to take some of the tax reductions into account. Give us a call if you have any questions. We’ll be glad to help you make maximum use of the new law’s benefits.
Happy St. Patrick’s Day.