Stimulus Act Eases Taxes for Individuals, Small Businesses

[ILLUSTRATION OMITTED] With the enactment of the American Recovery and Reinvestment Act of 2009 on Feb. 17, Congress delivered a smorgasbord of tax relief items to individual taxpayers and small businesses. While the specifics of those measures were the subject of whirlwind conference negotiations in Congress, the outcome reflects an attempt to give targeted tax benefits to the broad middle class and less-affluent Americans. At the same time, it seeks to stoke the engine of economic recovery by allowing small businesses to accelerate depreciation and carry back operating losses and by encouraging them to hire veterans and youths. Tax Breaks for Individuals College students and their families, homebuyers, and buyers of new cars are among the act's potential beneficiaries, but so too are low-income Americans, with the act's continuation and expansion of such tax breaks as a higher eligibility limit for the earned income tax credit. Higher education. The American opportunity tax credit is a temporary (for tax years beginning in 2009 and 2010) increase and expansion of the Hope scholarship credit (IRC [section] 25A(i)). It increases the maximum credit per student from $1,800 to $2,500 and extends its availability from the first two years of postsecondary education to four years. Nonrefundable under prior law, the credit now becomes 40% refundable. The phaseout range is increased from the current $50,000 to $60,000 for single fliers to $80,000 to $90,000. The joint filer phaseout, currently $100,000 to $120,000, increases to $160,000 to $180,000. Expenses for course materials, such as textbooks, are added to the definition of qualified tuition and related expenses eligible for the credit. It's going to involve a tremendous amount of planning for CPAs, particularly where families with college students might be liable for the recently expanded kiddie tax, said Art Auerbach, CPA, a tax director at Goodman & Co. LLP in Tysons Corner, Va., and a member of the AICPA's Individual Tax Resource Panel. If you could get the college student perhaps on their own standing and claiming their own exemption, the fact that part of this credit is refundable is a real benefit. Homebuyer's credit. The act increases the maximum amount of the IRC [section] 36 first-time homebuyer's credit from $7,500 to $8,000 and eliminates the repayment requirement for houses purchased in 2009. The credit, added by the Housing Assistance Tax Act of 2008, PL 110-289, is refundable, but for homes purchased between April 9, 2008, and Dec. 2008, it must be recaptured ratably over 15 years, or earlier if the home is sold. The stimulus act waives the recapture requirement for homes purchased after Jan. 1, 2009, and extends the sunset of the credit from June 30, 2009, to Dec. 1, 2009. The amount of the credit remains 10% of the purchase price of a principal residence of a taxpayer who has not owned a U.S. principal residence in the previous three years. Recapture still applies if the taxpayer disposes of the home or no longer uses it as a principal residence within three years after purchase. The waiver of recapture isn't retroactive to before 2009, Auerbach noted. I feel really badly for the people who ran out under the old provision and settled on a house before Dec. 31, Auerbach said. So they got a $7,500 credit, but they have a payback that starts in Making work pay credit. Intended to partially offset an employee's portion of Social Security payroll taxes, this temporary credit is 6.2% of earned income up to a total credit of $400 for individuals and $800 for joint fliers (IRC [section] 36A). It is retroactive to the beginning of 2009 and is set to expire at the end of 2010. It begins phasing out at a rate of 2% of modified adjusted gross income (MAGI) above $75,000 for individuals and $150,000 for joint tilers. New car sales tax deduction. …