Tax Laws? What does the new American Recovery and Reinvestment Act means to you?

Wednesday, March 04, 2009

by Ashlie DuCros

This article is presented by courtesy of Olmsted and Associates Tax Accountant:

Welcome to the month of March, there is still time to contact our office regarding your 2008 tax needs. Additionally we want to continue providing you with articles, tips, and tools to keep you informed throughout the year. For more in depth information and articles please feel free to visit our website at www.olmstedcpa.com .

American Recovery and Reinvestment Act

On February 17, 2009 President Obama signed the American Recovery and Reinvestment Act of 2009 into law. The bill contains approximately $287 billion in tax cuts for families and businesses. The tax cuts include a $400-per-worker tax credit known as Making Work Pay Credit and will put cash in the hands of America's working families in the upcoming months. In addition, there is a one-time $250 payment to seniors, veterans, and retirees. The new law temporarily excludes up to $2,400 of unemployment compensation from a recipient's gross income for 2009. The new law also includes an alternative minimum tax (AMT) patch for 2009. The AMT patch for 2009 raises exemption amounts slightly above 2008 patch levels. There is also a New Car Deduction, which allows purchasers of new vehicles for the rest of 2009 an above-the-line deduction for state and local sales taxes or excise taxes paid on the purchase (there are limitations to the deduction). There is a First-Time Homebuyer Tax Credit up to $8,000 for purchases made through November 30, 2009 (will have an explanation below on this Credit). The new law also includes enhancements of the Education, Child Tax Credit and Earned Income Credit. There are also energy incentives including the Residential Energy Property Credit and Energy Efficient Property Credit and Plug-in electric Vehicles.

Businesses:

The new law extends the 50-percent first-year bonus depreciation and section 179 expensing allowed under the 2008 Economic Stimulus Act of 2008 through December 31, 2009. The code section 179 expensing remains at $250,000 maximum and the reduction threshold also remains at $800,000. The new law provides a five-year carryback of 2008 NOLs for qualified small businesses with average gross receipts of $15 million or less. It also gives the businesses a choice of carrying back NOLs to three, four or five years. This applies to only 2008. Other business incentives in the new bill are for Qualified Small business stock, S Corp Built-In Gain period, estimated taxes and Cobra benefits.

First-Time Homebuyer Tax Credit:

Under the new law the First-Time Homebuyer Tax Credit is extended through purchases made by November 30, 2009. The new law also increases the credit from $7,500 to $8,000 ($4,000 for married filing separate). The recapture rule is waived for qualifying home purchases occurring during the period January 1, 2009 through Nov. 30, 2009, so long as the property remains the taxpayer's principle residence for 36 months after purchase.. This change transforms the credit from an interest-free loan to direct financial assistance. The credit begins to phase-out for taxpayers with Adjusted-Gross-Income of $75,000 single ($150,000 joint filers). In addition, there is an election to treat the purchase of a home in 2009 as made by December 31, 2008 (i.e. can use the credit with the filing of your 2008 tax return).

Offset Education Costs
Education tax credits can help offset the costs of higher education for yourself or a dependent. The Hope Credit and the Lifetime Learning Credit are two education credits available which may benefit you.   Because they are credits rather than deductions, you may be able to subtract them in full, dollar for dollar, from your federal income tax.
The Hope Credit
·         The credit applies for the first two years of post-secondary education, such as college or vocational school. It does not apply to the third, fourth, or higher years of undergraduate programs, to graduate programs, or to professional level programs.
·         It can be worth up to $1,800 ($3,600 if a student in a Midwestern disaster area) per eligible student, per year.
·         You're allowed a credit of 100% of the first $1,200 ($2,400 if a student in a Midwestern disaster area) of qualified tuition and related fees paid during the tax year, plus 50% of the next $1,200 ($2,400 if a student in a Midwestern disaster area)
·         Each student must be enrolled at least half-time for at least one academic period which began during the year.
·         The student must be free of any federal or state felony conviction for possessing or distributing a controlled substance as of the end of the tax year.
The Lifetime Learning Credit
·         The credit applies to undergraduate, graduate and professional degree courses, including instruction to acquire or improve job skills, regardless of the number of years in the program.
·         If you qualify, your credit equals 20% (40% if a student in a Midwestern disaster area) of the first $10,000 of post-secondary tuition and fees you pay during the year, for a maximum credit of $2,000 ($4,000 if a student in a Midwestern disaster area) per tax return.
You cannot claim both the Hope and Lifetime Learning Credit for the same student in the same year. You also cannot claim either credit if you claim a tuition and fees deduction for the same student in the same year. To qualify for either credit, you must pay post-secondary tuition and certain related expenses for yourself, your spouse or your dependent. The credit may be claimed by the parent or the student, but not by both. Students who are claimed as a dependent cannot claim the credit.

These credits are phased out for Modified Adjusted Gross Income over $48,000 ($96,000 for married filing jointly) and eliminated completely for Modified Adjusted Gross Income of $58,000 or more ($116,000 for married filing jointly). If the taxpayer is married, the credit may be claimed only on a joint return.

If you would like more information regarding the Hope Credit or Lifetime Learning Credit please do not hesitate to contact our office.


Seven Facts to Help You Understand the Alternative Minimum Tax

Tax laws provide tax benefits for certain kinds of income and allow special deductions and credits for certain expenses. These benefits can drastically reduce some taxpayers' tax obligations. The Alternative Minimum tax attempts to ensure that anyone who benefits from these tax advantages pays at least a minimum amount of tax.
Congress created the AMT in 1969, targeting a small number of high-income taxpayers who claimed so many deductions they owed little or no income tax.
Because the AMT is not indexed for inflation, a growing number of middle-income taxpayers are discovering they are subject to the AMT.
You may have to pay the AMT if your taxable income for regular tax purposes plus any adjustments and preference items that apply to you are more than the AMT exemption amount.
The AMT exemption amounts are set by law for each filling status.
For tax-year 2008, Congress raised the alternative minimum tax exemption to the following levels
$69,950 for married couple filing a joint return and qualifying widows and widowers.
$46,200 for singles and heads of household.
$34,975 for married person filing separately.
Taxpayers may find more information about the Alternative Minimum Tax and how it impacts them by referring to IRS Form 6251, Alternative Minimum Tax Individuals, available on IRS.gov, or by contacting our office and one of our accountants will be more than happy to give you more details.