The Stimulus Act and You
February 18, 2009 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (the 2009 “Stimulus Act”). The legislation carries a projected cost of $787 billion, and contains hundreds of provisions. Key provisions that may be relevant to you include:
- New Making Work Pay Tax Credit–The Act establishes a new refundable income tax credit for 2009 and 2010 equal to 6.2% of earned income, up to $400 ($800 in the case of a married couple filing jointly); withholding schedules will be adjusted to increase current take-home pay to reflect the credit. The credit is phased out for individuals with modified adjusted gross income exceeding $75,000 ($150,000 for married couples filing jointly).
- Earned Income Tax Credit–The earned income tax credit percentage for families with three or more qualifying children increases from 40% to 45% for 2009 and 2010. The income thresholds at which the credit phases out for married couples filing joint returns also increases for 2009 and 2010.
- Child Tax Credit–For 2009 and 2010, the refundable portion of the child tax credit increases to 15% of earned income in excess of $3,000.
- Hope Credit–For 2009 and 2010, the Hope credit is renamed the American Opportunity Tax Credit, the annual limit per eligible student increases to $2,500 and the credit is now available for the first four years of post-secondary education. Up to 40% of the credit is refundable. The definition of qualified expenses now includes course materials, and the credit can be claimed against alternative minimum tax (AMT) liability. The income levels at which the credit phases out also increase significantly.
- Tax Credit for First-Time Homebuyers–The existing first-time homebuyer credit now applies to qualifying home purchases made before December 1, 2009, and the maximum credit amount is now $8,000 ($4,000 for married individuals filing separately). In addition, the recapture rules (requiring that the credit be paid back) are waived for qualifying homes purchased after December 31, 2008, and before December 1, 2009, provided that the home continues to be the taxpayer’s principal residence for 36 months.
- Deduction for Qualified Motor Vehicles–State sales tax and excise tax related to the purchase of a qualified motor vehicle after February 17, 2009 and before January 1, 2010 can be deducted as part of the deduction for state and local taxes paid on Form 1040, Schedule A, or as part of the standard deduction. The deduction is capped at the tax attributable to a maximum $49,500 purchase price, and is phased out for individuals with modified adjusted gross income exceeding $125,000 ($250,000 for married couples filing joint returns).
- Alternative Minimum Tax (AMT)–2008 temporary AMT provisions are extended to 2009; AMT exemption amounts are increased, and nonrefundable personal credits will continue to offset regular tax liability and alternative minimum tax liability.
| Filing Status | 2008 AMT Exemption Amount | 2009 AMT Exemption Amount |
| Unmarried | $46,200 | $46,700 |
| Married Filing Jointly | $69,950 | $70,950 |
| Married Filing Separately | $34,975 | $35,475 |
- Bonus Depreciation–The additional 50% first-year depreciation deduction applies for an extra year, through 2009 (through 2010 for certain longer-lived and transportation property).
- IRC Section 179 Expensing–The increased limits relating to IRC Section 179 expensing now apply through 2009. As in 2008, the maximum amount that a taxpayer may expense is $250,000 of the cost of qualifying property placed in service for the taxable year. This amount is reduced by the amount by which the cost of qualifying property placed in service during the taxable year exceeds $800,000.
- Net Operating Loss (NOL) Carrybacks–Eligible small businesses (small businesses with average gross receipts of $15 million or less) can elect to extend the existing two-year carryback period for 2008 NOLs to 3, 4, or 5 years.
- Unemployment Compensation–Up to $2,400 of unemployment compensation benefits received in 2009 are excluded from gross income for federal income tax purposes.
- Small Business Stock–The percentage exclusion for qualified small business stock sold by an individual increases from 50% (60% for certain empowerment zone businesses) to 75% for stock issued after February 17, 2009 and before January 1, 2011.
- Economic Recovery Payments–Individuals who are eligible for Social Security benefits, Railroad Retirement benefits, Veteran’s compensation or pension benefits, or Supplemental Security Income (SSI) benefits will generally receive a one-time Economic Recovery Payment of $250.
- COBRA–For involuntary terminations that occur on or after September 1, 2008 and before January 1, 2010, individuals who qualify will only need to pay 35% of COBRA premiums for a period of up to 9 months. The remaining 65% of COBRA premiums will be subsidized. For individuals with adjusted gross income exceeding $125,000 ($250,000 for married individuals filing a joint return), the subsidy must be paid back in part or in full.
Year End Tax Planning Techniques
December 3, 2008 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
Many tax provisions that had already expired or were scheduled to expire at the end of the year were extended as part of the Emergency Economic Stabilization Act of 2008, signed into law on October 3, 2008. Included in the list of extended provisions is an additional one year alternative minimum tax (AMT) “patch,” eliminating a level of uncertainty that would otherwise have plagued many individuals as they reviewed their year-end tax situation. As always, year-end presents both an opportunity and a challenge when it comes to tax planning. But keep in mind that the window of opportunity for many taxsaving moves closes on December 31.
The basics: timing is everything
Year-end tax planning is as much about the 2009 tax year as it is about the 2008 tax year. There’s a real opportunity for tax savings when you can predict that you’ll be paying taxes at a lower rate in one year than in the other. If that’s the case, some simple year-end moves can pay off in a big way.
Unless you think you’ll be in a higher bracket next year, look for opportunities to defer income to 2009. For example, you may be able to defer a year-end bonus, or delay the collection of business debts, rents, and payments for services. Similarly, you may be able to accelerate deductions into 2008 by paying some deductible expenses such as medical expenses, interest, and state and local taxes before year end.
Delay income / Accelerate deductions
- Delay collection of business debts, rents, and payments for services (if you use the cash method of accounting)
- Defer compensation/year-end bonus if possible
- Defer sale of capital gain property or take installment payments instead of lump-sum payment
- Postpone retirement plan distributions that aren’t required
- Make next year’s charitable contribution this year instead
- Pay medical expenses that are due in January before the end of the year
- Prepay deductible interest and property tax
- Make first quarter installment payment of state estimated tax in December
- Accelerate alimony payments
AMT: What you don’t know could hurt you
If you’re subject to the alternative minimum tax (AMT), traditional year-end maneuvers, like deferring income and accelerating deductions, can actually hurt you. The AMT–essentially a separate federal income tax system with its own rates and rules–effectively disallows a number of itemized deductions, making it a significant consideration when it comes to year-end moves. For example, if you’re subject to the AMT in 2008, prepaying 2009 state and local taxes won’t help your 2008 tax situation, but could hurt your 2009 bottom line.
The Emergency Economic Stabilization Act brought the latest in a long series of temporary “fixes” for AMT, but this patch (which includes increased AMT exemption amounts), expires at the end of the year. It’s likely that a more permanent solution will be implemented next year, but the specifics of such a permanent solution are uncertain.
There’s also good news for many who have been subject to AMT in prior years, particularly those caught in the AMT web as a result of exercising incentive stock options in the past. The Stabilization Act makes the calculation of the AMT refundable credit amount more taxpayer-friendly (through 2012), and eliminates the phase-out of the refundable credit amount for individuals with higher adjusted gross incomes. The Act also provides for an abatement of outstanding tax balances owed as of October 3, 2008, attributable to the AMT treatment of incentive stock options. The bottom line? Consider carefully your AMT situation for 2008 in light of the recent changes.
IRA and retirement plan opportunities
Traditional IRAs (assuming that you qualify to make deductible contributions) and employer-sponsored retirement plans such as 401(k) plans allow you to contribute funds pretax, reducing your 2008 income. Contributions you make to a Roth IRA (assuming that you meet the income requirements) or a Roth 401(k) aren’t deductible, so there’s no tax benefit for 2008, but qualified Roth distributions are completely free from federal income tax–making these retirement savings vehicles very appealing.
For 2008, the maximum amount that you can contribute to a 401(k) plan is $15,500, and you can contribute up to $5,000 to an IRA. If you’re age 50 or older, you can contribute up to $20,500 to a 401(k) and up to $6,000 to an IRA. The window to make 2008 contributions to your 401(k) closes at the end of the year, while you can generally make 2008 contributions to your IRA until April 15, 2009.
For some, it may make sense to think past 2008 and 2009: If you qualify, consider whether it makes sense to convert some or all of your traditional IRA assets to a Roth IRA. Funds that you convert, to the extent that the funds represent investment earnings and deductible contributions, are considered taxable income. Nevertheless, the potential future tax benefit could outweigh the current tax bill.
New and extended provisions
The Emergency Economic Stabilization Act also extended several popular provisions that had expired or were set to expire. To the extent that they apply to you, be sure to factor these items into your year-end analysis:
- For 2008 and 2009, you’ll continue to have the option to deduct state and local general sales tax (instead of state and local income tax) on your Schedule A.
- The above-the-line deduction (maximum $4,000 deduction) for qualified higher education expenses, and the above-the-line deduction for up to $250 of out-of-pocket classroom expenses paid by education professionals, are also extended through 2009.
- Taxpayers age 70½ or older now have through 2009 to make charitable contributions of up to $100,000 directly from an IRA to a qualified charity, without including the distribution in income.
- Beginning this year (and continuing for 2009 as well), individuals who do not itemize deductions are able to claim an additional standard deduction of up to $500 ($1,000 for married couples filing jointly) for real estate property taxes paid.
Energy efficient home improvements
A credit of up to $500 for the purchase of energy efficient home improvements (e.g., insulation, exterior windows and doors) and energy efficient property (e.g., qualified furnaces) expired at the end of 2007.
The Emergency Economic Stabilization Act reinstated the credit, but only for property placed in service during 2009. While limited in scope–for example, the credit is capped at $200 for windows, and $150 for qualified furnaces–the credit offers an opportunity for savings. If you’re eligible for the credit, and plan on making a qualifying improvement or purchase, waiting until 2009 to do so might make sense in order to qualify for the credit.
Bail-Out Bill Tax Changes Affecting Individuals
November 6, 2008 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
The Emergency Economic Stabilization Act of 2008, referred to by some as the “bailout bill,” or, as others prefer to call it, the “rescue plan,” was recently enacted in an attempt to stabilize the turmoil in the U.S. economy. While a great deal of attention has been focused on the true bailout provisions of the Act, there are also a plethora of tax law changes affecting individual taxpayers. Here are some of the most noteworthy.
Extension of mortgage debt forgiveness
The Act extends for three additional years the exclusion from gross income for discharges of qualified principal residence indebtedness.
The Mortgage Forgiveness Debt Relief Act of 2007 provided an exclusion for the discharge of up to $2 million ($1 million if married filing separately) of Qualified Principal Residence Indebtedness that applies to debts discharged from January 1, 2007 through December 31, 2009. The Act extends the end date to December 31, 2012. The exclusion applies to foreclosures, deed-in-lieu of foreclosures, or any loan modification.
Note: “Qualified Principal Residence Indebtedness” is a debt incurred to acquire, construct, or substantially improve a principal residence.
One-year “patch” for the alternative minimum tax (AMT)
The 2008 AMT exemption amount for individuals is raised to $46,200 for singles, $69,950 for married couples filing jointly, and $34,975 for married couples filing separately. This is a one-year “patch.” Absent further legislation, the AMT exemption amounts in 2009 will be $33,750 (single), $45,000 (married filing jointly), and $22,500 (married filing separately).
The Act also modifies the way the AMT refundable credit is calculated, generally making it easier for individuals to utilize any AMT credit that is carried over from prior years.
Additionally, the Act offers specific relief to individuals who were unable to pay AMT liability that resulted from the exercise of incentive stock options (ISOs) in prior years.
Note: AMT exemption amounts are phased out for higher income taxpayers. For married couples filing jointly, phaseout starts when income exceeds $150,000. For unmarried individuals, the phase out threshold is $112,500, and for married individuals filing separately, the threshold is $75,000.
New tax credit for electric vehicles
The Act creates a new tax credit of $2,500 to $7,500 for plug-in electric vehicles. The credit will start to phase out for each manufacturer after 250,000 qualifying electric vehicles are sold. Vehicles that qualify will need to be certified under the Clean Air Act and meet low-emission standards. Higher tax credit amounts are also available for electric vehicles with gross vehicle weight ratings of more than 10,000 pounds.
New tax-free fringe benefit for bicyclists
The Act provides a new tax break for employees who commute by bicycle. Employers can provide a tax-free fringe benefit of up to $20 per month to cover “reasonable expenses incurred by the employee” for the purchase, improvement, repair, and storage of a bicycle that is regularly used to commute between the employee’s home and office. This bicycle fringe benefit will begin in 2009.
Extension and modification of energy tax credits
The Act extends and modifies the energy efficient property credit through 2016, and allows the credit to offset AMT liabilities. The Act also removes the $2,000 maximum limit on solar electric property. Two new types of equipment are added that would qualify for the credit: wind energy equipment will produce a tax credit worth 30% of the cost of the equipment, with a maximum credit of $4,000, and geothermal heat pumps would qualify for a credit worth 30% of the cost, with a maximum credit of $2,000.
The nonbusiness energy property credit is extended for property placed in service during 2009. This provides a credit of up to $500 for purchasing energy-saving products, such as windows, insulation, and HVAC systems. The Act also adds two new types of improvements that qualify for the credit: biomass fuel stoves with a thermal efficiency rating of 75% or more, and asphalt roofs with cooling granules.
Other tax changes
* The Act modifies the child tax credit for 2008 by lowering the income threshold for the refundability of the credit from $12,050 to $8,500.
* The deduction for up to $250 of personal expenditures by teachers, counselors, and principals in K-12 schools for materials and supplies is extended for 2008 and 2009. This is an “above-the-line” deduction: you need not itemize to take this deduction.
* IRA owners who have reached age 70½–and who must therefore begin to withdraw money from their retirement accounts–can contribute up to $100,000 of directly to a qualified charity without having to include the distribution in income. This tax benefit is extended for 2008 and 2009, but is only available for individuals over age 70½ by the end of the year.
* The Housing and Economic Recovery Act of 2008 established a new real property tax standard deduction for non-itemizers. The maximum deduction is $1,000 for married couples filing jointly and $500 for all others. This deduction can’t exceed the amount of state and local real property taxes that you actually pay during the year. This deduction was originally for 2008 only. The Emergency Economic Stabilization Act of 2008 extends it through 2009.
* The optional itemized deduction for state and local sales taxes (in lieu of deducting state and local income taxes) is extended for 2008 and 2009. You must claim itemized deductions on Schedule A of Form 1040 to take this deduction.
* The deduction for up to $4,000 of college tuition and related fees is extended for 2008 and 2009. This above-the-line deduction allows married couples (filing jointly) with incomes of $130,000 or less ($65,000 for individuals) to deduct up to $4,000 in higher education expenses and those couples (filing jointly) earning $130,000 to $160,000 ($65,000 to $80,000 for individuals) to deduct up to $2,000. As it is an “above-the line” deduction, if you qualify, you need not itemize to take it.