Big Changes for 2009 Tax Returns

Key Credits & Deductions to Watch For

            In February 2009, massive changes were made to the tax law with the passage of the 2009 American Recovery and Reinvestment Act (ARRA). Although headlines focused on benefits to large financial institutions, many of the credits and deductions instituted apply directly to average taxpayers and small businesses.       

            Now that tax season is approaching, it’s a good idea to review the changes set forth by ARRA. Though your tax software will automatically apply many of these changes based on your clients’ financial information, you’ll want to discuss with your clients the opportunities and tax benefits that are available.

Making Work Pay Credit

            The Making Work Pay Credit, a refundable income tax credit for 2009 and 2010, is the lesser of (1) 6.2% of the individual’s earned income or (2) $400 ($800 for married filing jointly or MFJ). This credit is available, in full, to workers with a modified AGI of up to $75,000 ($150,000 for MFJ). Above that amount the credit is phased out at a 2% rate. The credit applies to self-employment earnings to the extent that they’re considered in computing taxable income.

            Be aware that Making Work Pay Credit does not apply to any individual whose tax return does not include a Social Security Number.

            Your clients may already be benefitting from the Making Work Pay Credit, which is handled differently from prior stimulus programs in that it isn’t automatically distrusted via a one-time check, but as reduced wage withholdings. For most W-2employees, employers are already having the withholdings adjusted automatically. (The employer’s share of FICA (or its 6.2% equivalent) remains unchanged). Alternately, taxpayers can take the credit as a lump sum when filing their annual tax return.

            Schedule M, Making Work Pay, and Government Retiree Credits should be included with the individual tax return, regardless of how the taxpayer takes the credit. Most tax software programs will automatically calculate Schedule M for you.

Economic Recovery Payment

            Certain fixed income individuals (such as disabled veterans, railroad retirees, Social Security recipients, and certain government workers) are receiving a one-time recovery payment of $250 payment in 2009. If the individual receives both this payment and the Making Work Pay Credit, the Making Work Pay Credit will be reduced by the $250 payment.

First-Time Homebuyer Credit – Expanded & Extended

            The First-Time Homebuyer Credit, a 2008 credit that has been widely publicized by real estate firms, was extended and changed for 2009 and 2010. The Worker, Homeownership and Business Assistance Act of 2009, signed into law on Nov. 6, 2009, extends and expands the first-time homebuyer credit allowed by previous Acts.

Under the new law, an eligible taxpayer must buy, or enter into a binding contract to buy, a principal residence on or before April 30, 2010 and close on the home by June 30, 2010. For qualifying purchases in 2010, taxpayers have the option of claiming the credit on either their 2009 or 2010 return.  

The new law also:

• Authorizes the credit for long-time homeowners buying a replacement principal residence.
• Raises the income limitations for homeowners claiming the credit.  

Members of the military, Foreign Service and intelligence community serving outside the U.S. should also be aware of new benefits in the law that applies particularly to them.

Following is general information for first-time homebuyers who settled on a new home on or before Nov. 6, 2009.

For 2008 Home Purchases

The Housing and Economic Recovery Act of 2008 established a tax credit for first-time homebuyers that can be worth up to $7,500. For homes purchased in 2008, the credit is similar to a no-interest loan and must be repaid in 15 equal, annual installments beginning with the 2010 income tax year.

For 2009 Home Purchases

The American Recovery and Reinvestment Act of 2009 expanded the first-time homebuyer credit by increasing the credit amount to $8,000 for purchases made in 2009 before Dec. 1. However, the new Worker, Homeownership and Business Assistance Act of 2009 has extended the deadline. Now, taxpayers who have a binding contract to purchase a home before May 1, 2010, are eligible for the credit. Buyers must close on the home before July 1, 2010. [Added Nov. 12, 2009]

For home purchased in 2009, the credit does not have to be paid back unless the home ceases to be the taxpayer's main residence within a three-year period following the purchase.

First-time homebuyers who purchase a home in 2009 can claim the credit on either a 2008 tax return, due April 15, 2009, or a 2009 tax return, due April 15, 2010. The credit may not be claimed before the closing date. But, if the closing occurs after April 15, 2009, a taxpayer can still claim it on a 2008 tax return by requesting an extension of time to file or by filing an amended return.

General Information

Homebuyers who purchased a home in 2008, 2009 or 2010 may be able to take advantage of the first-time homebuyer credit. The credit:

• Applies only to homes used as a taxpayer's principal residence.
• Reduces a taxpayer's tax bill or increases his or her refund, dollar for dollar.
• Is fully refundable, meaning the credit will be paid out to eligible taxpayers, even if they owe no tax or the credit is more than the tax owed.

The credit is claimed using Form 5405, which you file with your original or amended tax return.

Temporary Tax Deduction on Car Purchases

            This benefit is actually an above-the-line deduction for the state sales taxes, local sales taxes, and excise taxes paid by a purchaser of a new vehicle. To qualify, a taxpayer must have purchased the vehicle for first use between February 17 and December 31, 2009. The vehicle must be either (1) a passenger vehicle, light truck, or motorcycle with a gross weight of no more than 8,500 pounds, or (2) a motor home. Deductible taxes can’t exceed the portion attributable to the first $49,500 of the price paid for any single vehicle. Phase-outs start for individual with AGI greater than$125,000 ($250,000 MFJ).

            For taxpayers taking the standard deduction, this credit should be claimed on Schedule L, Standard Deduction for Certain Filers. For itemizers, use Schedule A, Itemized Deductions.

American Opportunity Tax Credit

            The American Opportunity Credit is a reworking of the Hope Credit and has been enhanced in the following ways under ARRA:

·         Amount increased to a maximum of $2,500 (from $1,800) per eligible student per year.

·         Modified rate of 100% of the first $2,000; 25% of the next $2,000, with a maximum $2,500 per year allowed for $4,000 in qualifying payments

·         40% of the credit is refundable for 2009 and 2010.

·         Applies for all four years of college

·         Qualifying expenses include course materials

The credit can be claimed by either a non-dependent taxpayer student or a parent of a qualifying student. Along with the changes listed above, the phase-out level for claiming the credit has increased to $80,000 AGI ($160,000 for MFJ).

The American Opportunity Credit is claimed using Form 8863, Education Credits.

Qualified Tuition Programs (“529 Plans”)

            Changes in qualifying expenses have been made to tax-free college savings plans for 2009 and 2010. A beneficiary of a qualified tuition program can now use distributions to pay for computers and computer technology (including Internet). Distributions are tax-free. (Previously, these expenses were not tax-free, were included in the beneficiary’s income, and were subject to penalty).

Earned Income Credit (EIC)

            For 2009 and 2010, EID percentage is increased to 45% of the first $12,750 of earned income for taxpayers who have three or more qualifying children.(Prior to the new law, the credit was 40% of this amount for taxpayer with two or more qualifying children.) Several forms will be modified to account for the third child:  Form 8867 (Paid Preparer’s Earned Income Checklist), Form 8862 (Information to Claim EIC After Disallowance), And Schedule EIC Earned Income Credit).

            In addition, the EIC phase-out range has been adjusted upward by $1,880 to eliminate any marriage penalty for joint filers.

Child Tax Credit

            In another child-related credit, the refundable part of the Child Tax Credit is increased for 2009 and 2010. The income threshold is now set at $3,000 (down from $8,500). The full credit amount is still $1,000.

Unemployment Compensation

            Generally, a taxpayer’s gross income must include all unemployment compensation benefits received. In 2009 only, up to $2,400 of unemployment compensation is excluded from gross income for federal income tax purposes.

Transit Benefits

            Transit passes, van pooling, qualified parking and other qualified transportation fringe benefits are not typically included in employee income up to a certain dollar amount. In March 2009, this dollar amount was increased to $230 per month (up from $120) for transit passes and van pooling. This increased exclusion will continue through 2010 with adjustments made for inflation.

AMT Patch

            Under ARRA, the Alternative Minimum Tax (AMT) patch for 2009 features the following exemption amounts:

·         For joint filers and surviving spouses: $70,950 (up from $69,950)

·         For singles and heads of households: $47,200 (up from $46,200)

For married filing separate filers: $35,475 (up from $34,475)