Tax Issues You Need to Know
The American Recovery and Reinvestment Act of 2009 (ARRA), signed into law in February, provides several tax provisions impacting families, including credits for first-time home buyers, new car buyers, home improvements for energy efficiency, college expenses, withholding taxes and others. Following are several areas of special interest that may impact your family.
For 2009 and 2010, the Making Work Pay provision of ARRA provides a refundable tax credit up to $400 for working individuals and $800 for married taxpayers filing jointly. The credit is calculated at 6.2% of earned income. It phases out for individual taxpayers with adjusted gross income (AGI) over $75,000 ($150,000 for married couples filing jointly). Most wage earners benefit immediately with larger paychecks from changes made to the federal income tax withholding tables implementing the Making Work Pay tax credit. The reduction is automatic, so employees do not have to submit a Form W-4 for it. While the tax credit increases take-home pay, taxpayers will need to claim that amount on Schedule M when filing their taxes for both 2009 and 2010.
Taxpayers who have not owned a home for three years before the date of purchase can receive a tax credit up to 10% of the purchase price of the home, or a maximum of $8,000. For homes purchased before December 1, buyers are not required to repay the credit unless the property is sold or ceases to be their primary residence within three years after the purchase date. The credit is claimed by using Form 5405, First-Time Homebuyer Credit. New home owners can either claim it on an amended 2008 tax return or on their 2009 return. The credit is reduced for taxpayers with AGI over $75,000 ($150,000 for joint filers).
Residential Energy Conservation Homeowners may claim a 30% tax break (up to $1500) on the purchase of insulation, heating or cooling systems or energy efficient exterior windows, doors or skylights. This nonrefundable energy tax credit will help individual taxpayers pay for qualified residential energy efficient property, such as solar hot water heaters, geothermal heat pumps and wind turbines.
For 2009, ARRA allows taxpayers to deduct state and local sales and excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles. This deduction is available on purchases made between February 17 and December 31, 2009, limited to the taxes paid on the first $49,000 of the purchase price. It does phase out for taxpayers with modified AGI over $125,000 ($250,000 on a joint return). Taxpayers can claim the credit on either Schedule A or Schedule L. A tax credit is also available for buying certain electric vehicles.
In 2009 and 2010, families paying for higher education should be aware of two ARRA provisions: the American Opportunity Credit and the Qualified Higher Education Expenses (529 Accounts). The American Opportunity Credit, also known as the Hope Credit, adds required course materials to the list of qualified expenses and allows the credit to be claimed for fours years of post-secondary education instead of two. In addition, a portion of the credit may be refundable. The allowable amount is up to $2,500 per student per year. The credit is 100% of the first $2,000 of tuition costs and 25% of the next $2,000 for tuition and related expenses. For most taxpayers, 40% of the credit is refundable. ARRA also expands the definition of qualified higher education expenses for tax-free distributions from eligible 529 plans to include certain computer technology, internet access and other related expenses if the computer is used for college work.
Child Tax Credit
ARRA reduces the minimum-earned income amount used to calculate the additional child tax credit to $3,000. As a result, more taxpayers can claim the credit and increase the payments they receive. Because it is a refundable credit, some taxpayers may receive refunds even when they do not owe any tax. Changes apply to tax years 2009 and 2010.
Earned Income Tax Credit
For 2009 and 2010, ARRA temporarily increases the income limits and earned income tax credit percentage allowed for working families with three or more qualifying children. For 2009, the maximum amount a taxpayer with three or more children can receive in EITC is $5,657. The maximum amount a taxpayer can earn and qualify for the credit is $43,279 ($48,279 for married couples).
For specific questions about the impact of ARRA on your family’s taxes, you should consult your tax preparer. Or, contact the IRS by calling 800-829-1040 or visiting its web site at irs.gov/recovery.
Sue Lynn Sasser, PhD, is an associate professor of economics at the University of Central Oklahoma.