Mark the Win Column
In 2009, many changes in tax law favored the taxpayer.
The year 2009 will go down in history as a hubbub of tax-related activity designed to benefit individuals and businesses. Tax and accounting practitioners have had to keep pace with all of the modifications, working to stay informed about the nuts and bolts of the laws and codes in effect due to the flurry of activity by the Internal Revenue Service (IRS) and U.S. Treasury Department. The changes are outlined under the American Recovery and Reinvestment Act of 2009 (ARRA), which was signed into law by President Barak Obama on Feb. 17. The Recovery Act is a never-before-seen economic stimulus plan created to provide aid to Americans in the form of educational improvements, affordable healthcare, and various other tax relief measures.
For tax and accounting practitioners, knowing the specifics about some of the most ubiquitous provisions can be a blueprint for guiding clients on tax planning for the coming years—and establishing expertise and thought leadership far into the future. The following is a roundup of some of the tax-related provisions under the ARRA that affect the greatest number of people and businesses.
The tax credit that had the most far-reaching effect in 2009 was the Making Work Pay tax credit, says Tony Johnson, CPA and national speaker and author on tax issues for Thomson Reuters' Gear Up Tax Seminars. The Making Work Pay tax credit says that, due to changes in the federal income tax withholding tables, most workers will see larger paychecks over the next couple of years. In 2009, as well as in 2010, this provision provides a maximum $400 tax credit to individuals and up to $800 for married taxpayers filing jointly. It’s important to note that not all taxpayers will receive this credit—individuals with more than one job, pensioners and married couples with two incomes may not see the benefit.
In a related matter, unemployment benefits were affected by ARRA as well. For those taxpayers who collected unemployment benefits in 2009, the first $2,400 collected is now tax-free under ARRA.
Homeowners
Individuals looking for a new home will also find a new tax refund via the First-Time Homebuyer Credit. This provision, designed to combat the subprime mortgage crisis by placing people in homes and refueling the housing market, gives new property owners a no-strings-attached $8,000 credit if the home is titled to the individual before Dec. 1, 2009. There is one small caveat: The home must be used as a taxpayer’s principle residence.
Further, for homeowners focused on making their home more energy efficient, the Residential Energy Property Credit boosts the credit rate to 30 percent of the cost of the qualifying improvements (for example, adding insulation, energy efficient windows and HVAC systems, etc.) made in 2009 and 2010. The maximum credit is $1,500. Also, there are other tax credits for installing alternative energy equipment in the home (items such as solar water heaters and wind turbines) and a credit for plug-in electric drive vehicles.
Finally, the IRS has ruled that qualified residence interest, including acquisition indebtedness and home equity indebtedness—is deductible through the Home Mortgage Interest provision. Acquisition indebtedness includes debt from a home acquisition, construction or significant improvement, as long as the amount doesn’t exceed $1 million ($500,000 for individual filers). Home equity indebtedness is deductible, as long as the debt doesn’t exceed the home’s value, and can’t exceed $100,000 ($50,000 for individual filers).
Vehicle Owners
Under the Money Back for New Vehicle Purchases, taxpayers get a deduction for state, local and excise taxes paid on the purchase of a new vehicle, motorcycle or motor home. The vehicle can be valued at up to $49,500 and must be purchased by Dec. 31, 2009. Taxpayers can claim this deduction for 2009 only.
College Students
The American Opportunity Credit is a modification of the Hope Credit and is applicable for 2009 and 2010. This credit, for up to $2,500 per student for parents and students who qualify, is designed to help pay for college expenses. The credit was modified from 2008 to present in order to make the credit available to more taxpayers, including those with higher incomes ($80,000 maximum for individuals and $160,000 for married couples filing jointly), and also allows a broader scope of items to count as qualifying expenses. The credit may be applied to up to four years of post-education.
Modest Income Workers
The Earned Income Tax Credit is for people who have three or more children and earn what the government considers to be a modest income. The credit has been increased from previous years and now equals an amount of $5,657. The increase is temporary and applies only to 2009 and 2010.
The Health Insured
There’s a lot of discussion around healthcare reform, but one tax provision has been passed that says there’s a tax credit on 65 to 80 percent of qualified health insurance premiums. Through the Trade Adjustment Assistance Health Coverage Improvement Act, participants enrolled in the Health Coverage Tax Credit program are eligible to receive this benefit.
Taxpayers who have businesses may also qualify for other deductions. For example, employers who hire what the IRS calls “disconnected youth” before January 1, 2011, are eligible for a Work Opportunity Tax Credit. Individuals are considered disconnected when they are 16 to 25 years old by the hiring date, are not in school, have been unemployed for six months prior to the hiring date, and are not readily employable if they didn’t graduate high school or obtain a GED certificate.
For employers with employees who have involuntarily become unemployed, ARRA provides an employer subsidy for COBRA users, called the Health Insurance Continuation Subsidy, which amounts to approximately 65 percent of the premium, leaving the employee to pay 35 percent. According to the IRS, the employer may recover the subsidy amount it provides to its former employee in the form of credit on the employment tax return.
For small business owners, the Net Operating Loss (NOL) Carryback is designed to help offset losses and receive refunds on taxes that can be paid over a five-year period instead of the previous two-year period. This NOL carryback is extended to those businesses with deductions that exceed their 2008 income. Whatever time period is chosen is irrevocable.
The above list is a partial representation of the new tax benefits to individuals and businesses, and tax and accounting practitioners owe it to their clients to stay on top of all of the changes. Keeping up-to-date can be accomplished through a subscription to the news services provided by Thomson Reuters, Johnson says, or by attending a tax seminar sponsored by Gear Up.
By Laurie Dent |
