Modifications to Certain Individual Income Tax Credits Under the Stimulus Plan

Tax credits are the most effective incentives to taxpayers because they reduce taxes dollar for dollar. Some credits are even partially or fully refundable meaning they are payable in cash to the extent the credit exceeds one’s tax liability. We have previously discussed the benefits of individual tax credits such as the new credit for government retirees and the expanded credit for education called the American Opportunity Tax Credit. The Stimulus Plan also makes other personal tax credits more attractive.

The First-Time Homebuyer’s Credit has been increased, expanded, extended and generally made more attractive. The original credit provisions were enacted by Congress in July of 2008 entitling first-time homebuyers to claim a temporary, refundable credit equal to 10% of the cost of a principle residence purchased between April 9 and June 30 of 2008. The maximum credit was $7500 ($3750 for married filing separately filers) but phased out for higher income taxpayers. The original credit though was more of an interest free loan because it had to be paid back over 15 years. The credit in essence was not available to first-time District of Columbia home buyers if a separate lesser credit was allowable to such home buyers in the District. Finally, the credit was not available if the purchased residence was financed with a tax exempt mortgage revenue bond.

The new credit (as modified by the Stimulus Plan) is extended to homes purchased before December 1, 2009. The maximum credit is increased to $8,000 ($4,000 for married filing separately filers). The credit is expanded to include homes purchased in the District of Columbia and those financed with tax exempt mortgage revenue bonds. The credit is now more attractive because the rule requiring payback of the credit is eliminated unless the taxpayer disposes of the residence or ceases to use the property as a principal residence within 36 months of purchase. These changes to the credit apply to homes purchased after December 31 ,2008. Taxpayers can continue to claim the credit for a home purchased in 2009 in 2008 with an amended or extended return, subject to the new rules. The phase out of the credit where Modified Adjusted Gross income is between $75000 and $95,000 ($150,000 and $170,000 for joint filers) is unchanged. The definition of a first-time home buyer, someone who did not have an ownership interest in a principal residence in the prior 3 years, also remains unchanged..

The Earned Income Credit, which is a refundable credit available to low income workers is increased for taxpayers with 3 or more children and for all married taxpayers for 2009 and 2010. The Stimulus Plan also increases the refundable portion of the $1,000 Child Tax Credit for the years 2009 and 2010.

Spring Incentives Under the Stimulus Plan

Each spring as the tax season grinds to a merciful halt, I find myself thinking of three things. They are in no particular order, The Masters, buying a new car (fantasy) and fixing my house (reality). As tax seasons continue to become more complex, I have long given up the dream of going to Augusta in tax season. While I am resigned to view the second nine on Sunday with CBS, I am somewhat consoled that tax incentives under the Stimulus Plan will fuel my fantasy to buy a new car and help fund the reality of fixing my home.


First the fantasy. For the first time in a long time, under the Stimulus Plan taxpayers may be able to deduct sales tax on the purchase of a new vehicle.. Many of my clients do not know that sales tax has not been deductible since 1986, although fairly recent legislation allowed taxpayers to elect to deduct sales tax in lieu of deducting income tax. For a short time though, the sales tax on the purchase of a new “ qualified motor vehicle” may be deductible in addition to deducting income tax. The sales tax deduction is available whether the taxpayer itemizes or claims the standard deduction and the deduction can be claimed in computing both regular and alternative minimum tax.


A qualified motor vehicle is a new car, light truck, or motorcycle that has a gross vehicle weight of 8500 pounds or less or a motor home. The vehicle must be purchased between February 17, 2009 and December 31, 2009. The deduction is limited to the sales tax on the first $49,500 of the purchase price of the vehicle. In addition, the deduction is phased out for taxpayers with Adjusted Gross Income between $$125,000 and $135,000 ($250,000 and $260,000 for joint filers).


Now the reality. The Stimulus Plan also provides incentives to taxpayers who choose to make certain improvements to their homes such as doors, windows fans, heaters and air conditioners that are also energy efficient. This is accomplished by modifying the existing residential energy property credit. The existing credit is 10% of certain costs and a fixed amount of other costs, up to a maximum lifetime credit of $500 and was available for the years 2006, 2007 and 2009. The new credit is 30% up to a maximum of $1500 for the years 2009 and 2010 combined. This $1500 maximum can be claimed in addition to the $500 lifetime credit claimed in 2006 and 2007. The new law, though modifies the energy efficiency standards for many of the types of property available for this credit. Most retailers have already adapted by disclosing whether the property qualifies.

Economic Stimulus Plan Tax Incentives for Education

The Economic Stimulus Plan (the Plan) provides increased tax benefits for individuals incurring post secondary education expenses for themselves, spouses, dependents and others. More specifically, the amount of the Hope Scholarship Credit (“the Hope Credit”) is increased, renamed the American Opportunity Tax Credit (AOTC”) and made partially refundable. The kinds of expenses eligible for this credit have been expanded and the credit is made available to more taxpayers. In addition to these changes, the kinds of educational expenses eligible to be paid from what is commonly referred to as “Section 529 Plans” are also expanded. All of these changes are effective for expenses paid in either 2009 or 2010 for academic periods beginning in 2009 or 2010.

The maximum AOTC is increased to $2500 per eligible student. The maximum Hope Credit was $1500 per student adjusted for inflation to $1800 for 2008. The AOTC applies to a student’s first four years of post secondary education, while the Hope Credit applied only to a student’s first two years of study. The Hope Credit applied to tuition and certain related expenses while the AOTC expands the definition of related expenses to include books and other required course materials. Query whether the cost of skis and boots would qualify as required course materials for my daughter’s 1 credit skiing course at Penn State.

As previously mentioned, the AOTC will be available to more taxpayers since the Adjusted Gross Income (AGI) phase out limits are higher than the Hope Credit phase out limits. The maximum Hope Credit was reduced ratably when a taxpayer’s AGI exceeded $50,000 ($100,000 for joint filers) and completely eliminated when AGI reached $60,000 ($120,000 for joint filers). The maximum AOTC of $2500 per eligible student is reduced ratably when AGI reaches $80,000 ($160,000 for joint filers) and completely eliminated when AGI exceeds $90,000 ($180,000 for joint filers).

The Hope Credit was only available to the extent the taxpayer actually owed tax. Forty percent of the AOTC is refundable unless the taxpayer claiming the credit is a dependent child subject to the “Kiddie Tax”. The AOTC expires after 2010. Without further legislation, the tax benefits for individuals incurring post secondary education expenses will return to the provisions of the Hope Credit.

The Stimulus Plan also expands the kinds of expenses that may be paid tax free from a Qualified Tuition Program (Section 529 Plan) to include computer equipment and technology. This change is also effective for expenses paid in 2009 and 2010. More specifically, computers, peripheral equipment, software and cable related to computer use (not including computer games unless predominately educational) used by the student or his family can be paid from 529 funds.

Stimulus Benefits for Non Workers

We have previously discussed the Economic Stimulus Plan (“the Plan” ) tax benefits for workers, called the Making Work Pay Credit (“MWPC”). This income tax credit is equal to 6.2% of a person’s earned income up to a maximum of $400 per worker. The Plan though, also provides tax benefits for certain individuals with no earned income. Recipients of certain federal benefits will receive a cash payment of $250. Government retirees will be eligible for a $250 tax credit in 2009.

The Economic Recovery Payment is a one time cash payment of $250 to certified eligible recipients of “qualifying federal programs”. “Qualifying federal programs” are generally Social Security, Railroad Retirement, Veterans and Supplemental Security Income (SSI). An individual must have been eligible to receive benefits under a “qualifying program” during any of the months of November,2008, December,2008 or January of 2009 The individual must also have an address of record in one of the 50 states, the District of Columbia, Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa or the Northern Mariana Islands.

An otherwise eligible individual will not receive an Economic Recovery Payment if such benefits are suspended in the case of Social Security and Railroad Retirement, because the recipient is incarcerated, a fugitive, a probation or parole violator or made false or misleading statements with respect to the right to receive these benefits. An individual whose Veteran’s benefits are suspended or reduced because he or she is incarcerated or a fugitive felon will not receive an Economic Recovery payment. An individual receiving SSI while in a Medicaid institution is also ineligible. Finally, an otherwise eligible recipient under any “qualifying program” who dies before certification is not eligible.

The appropriate Commissioner, Secretary or Board of a “qualifying program” must certify the individual as eligible for an Economic Recovery Payment. The payment is to be made as soon as 120 days after the date of enactment (February 17, 2009) but no later than December 31, 2010. A working individual also eligible for the “MWPC” will have that credit reduced by the amount of any Economic Recovery Payment.

Certain government retirees, not eligible for an Economic Recovery Payment may be entitled to a $250 refundable tax credit in 2009 under the Stimulus Plan Individuals must receive a pension or annuity as a result of work performed for the United States or any state or instrumentality thereof. Such individual then would not be covered by Social Security. The individual must also have a valid social security number, which does not include a taxpayer identification number issued by IRS to those not eligible for a social security number.

More Alternative Minimum Tax Patches

Over the last several years, Congress has elected to solve the increasing number of unintended Alternative Minimum Tax victims by providing temporary one year fixes. The American Recovery and Reinvestment Act of 2009 (“the ACT”) continues this tradition.

The Alternative Minimum Tax (“AMT”) parallels the regular income tax and must be paid to the extent it exceeds one’s regular income tax. Alternative Minimum Taxable Income (AMTI”) is regular taxable income with certain adjustments and increased by tax preferences. Like regular income taxable income, there is an exemption from the AMT.

The AMT exemption for years prior to 2001 was $45,000 for married filing joint filers (including surviving spouses), $33,750 for unmarried individuals, and $22,500 for married filing separately filers. The exemption is phased out by 25% of the excess of AMTI over $150,000 for joint filers, $112,500 for unmarried individuals, and $75,000 for married filing separately filers.

Unlike the regular income tax, neither the AMT exemption, nor the phaseout amounts are increased by inflation. Normally this would cause an unintended annual increase in the number of taxpayers subject to the AMT. Congress has periodically increased the exemption but not the phaseout amounts. For example the AMT exclusions for 2008 are $69,959 for joint filers, $$46,200 for unmarried filers and $34,975 for married filing separately. Without further legislative action, the exemption would return to pre 2001 amounts.

The Act increases the AMT exemptions for 2009 to $70,950 for married filing joint and surviving spouse filers, $46,700 for unmarried filers and $35,475 for married filing separately filers. The phaseout amounts remain unchanged. The AMT exemption for corporations ($40,000) and trusts or estates ($22,5000) also remain unchanged. It is important to note that the increased AMT exemptions are for 2009 only. Without further legislation, the exemptions will return to pre 2001 amounts in 2010 and thereafter.

The ACT also extends for one year the ability to use nonrefundable credits against the AMT. For years prior to 2009, an individual was allowed to offset their AMT by non refundable personal income tax credits, including the dependent care credit, education credits, credit for the elderly and disabled, child and adoption credits, credit for home mortgage interest, retirement savings credit, energy credits, and the D.C. first time homebuyer credit. Before the ACT most non refundable credits would not have been available to reduce the AMT. The ACT extends the prior law to 2009 thus allowing most non refundable personal credits to be used for AMT purposes.

Finally, the Act removes the tax exempt interest on private activity bonds as a tax preference for bonds issued in 2009 and 2010.

The AMT is claiming more victims every year and not necessarily those for whom the tax was intended. It is extremely difficult to calculate especially considering the subsequent year’s credit for AMT paid in a previous year. Proper calculation requires more tax expertise than the average non professional taxpayer can ever possess. While one should always consider using a professional tax preparer in all but the simplest situations, it is almost a necessity to seek professional advice where the AMT is concerned.

The Making Work Pay Tax Credit

The Making Work Pay Credit is perhaps the best known tax provision of the American Recovery and Reinvestment Act of 2009 (the Final Stimulus Plan). This refundable federal income tax credit, available in 2009 and 2010, can be claimed by most individuals with earned income. The credit is 6.2 % of earned income up to a maximum credit of $400 ($800 on a joint return).

This credit is reduced by the amount of any economic recovery payment or government retiree credit received by the taxpayer. In general, $250 payments will be made in 2009 to most adult recipients of certain Social Security, Railroad Retirement, Veterans, and SSI benefits. Also in 2009, certain government retirees will receive a $250 tax credit.

The Making Work Pay Credit is phased out for higher income workers by reducing the amount of the credit by 2% of Modified Adjusted Gross Income (MAGI) exceeding $75,000 ($150,000 for joint filers). The credit is totally phased out when MAGI equals or exceeds $95,000 ($190,000 for joint filers). MAGI is Adjusted Gross Income plus certain foreign source income excluded from a taxpayer’s gross income.

Most individual taxpayers (estates and trusts are not considered individual taxpayers for this purpose) who have a valid social security number are eligible for this credit. A taxpayer identification number issued by IRS does not count as a valid social security number. If a joint return is filed, only 1 spouse needs to have a valid social security number. Non resident aliens and those taxpayers able to be claimed as a dependent on another taxpayer’s return cannot claim the Making Work Pay Credit.

The credit will be made available to taxpayers through reduced federal income tax withholding rather than as a single check from the government. Presumably, this method of delivery will increase consumer spending to a greater extent than the previous method of a single lump sum check.

Tax Provisions of the Final Stimulus Plan

The American Recovery and Reinvestment Act of 2009, commonly referred to as the Final Stimulus Plan, was signed into law on February 17, 2009. While spending is the largest component of the stimulus plan, the Act also contains several important tax provisions. These tax provisions which affect wage earners and the unemployed, home and car buyers, college spenders and small businesses are also designed to increase spending.

The following is a very general overview of some of the major provisions of this tax bill. In the ensuing weeks we will examine these provisions in greater detail.

The “Making Work Pay” refundable tax credit for 2009 and 2010 should affect most taxpayers. The credit is 6.2 % of wages up to $400 ($800 for joint returns). The credit begins to reduce when Adjusted Gross Income reaches $75,000 ($150,000 for joint returns) and is eliminated when such income hits $95,000 ($190,000 for joint returns). Social Security, Railroad Retirement and Veteran’s Administration benefit recipients will receive a minimum credit of $250 regardless of the amount of their wages.

Lower income taxpayers will receive other tax benefits under this bill. Expansion of the Earned Income Credit and liberalization of the Child Credit will hopefully give lower income taxpayers with dependent children more dollars in their pockets. For the first time recipients of unemployment compensation will escape tax on the first $2400 of these benefits.

All taxpayers subject to the controversial alternative minimum tax will see an increase in the exemption from such tax in 2009. The exemption will increase to $46,700 from $33.750 (to $70,950 from $45,000 for joint returns).

The credit for first-time homebuyers is expanded to $8,000 under this bill which also extends and liberalizes the credit. New car buyers will get a deduction for sales tax on the first $49,500 of the cost of a car, motorcycle or mobile home purchased between February 17 and December 31 of 2009. The tax deduction can be taken even if the taxpayer does not itemize, but is phased out for higher income taxpayers.

Taxpayers paying college expenses for either themselves or their dependent children in 2009 and 2010 may benefit from a change in the way tax benefits of such expenditures are calculated. The new “American Opportunity Tax Credit” increase the maximum credit to $2500 and is available for the first four years of post secondary schooling. The income phaseout ranges have also been increased. Forty percent of the credit will be refundable.

Limited tax breaks are also provided for businesses. Since the 1960’s Congress has believed that business owners will purchase more equipment if given appropriate tax incentives. This bill is no exception this theory. Bonus depreciation or the ability to write of 50% of the cost of qualifying property is extended to 2009. The ability of small businesses to completely write of certain capital expenditures in the year of acquisition (section 179) is also extended to 2009. Certain small businesses will also be allowed to carry back losses to five previous years, increased from 2 previous years. There are several other tax benefits provided for in the bill including the expansion of certain business credits.

In succeeding weeks we will examine and explore these tax provisions in greater detail, one provision at a time.