WHAT'S NEW FOR 2009
The new American Recovery and Reinvestment Act will give a direct tax break to 95 percent of workers and their families. It includes tax breaks that provide a financial boost to everyone from the unemployed, to families with children and children in college, to first-time homebuyers and new car buyers.
click here to see a chart of the ARRA click here to see Tax Brackets
See Who benefits -
Workers and the self-employed would get a payroll tax credit for 2009 and 2010 of up to $400 a year for single taxpayers, and up to $800 for couples filing jointly.
The IRS will get the money to taxpayers by adjusting the withholding tables, thereby boosting paychecks. The increase could be as much as $40 per month per worker, depending on when the withholding tables are changed. Self-employed workers will claim the credit on their tax returns. In the meantime, they can reduce their estimated tax payments for 2009.
When you file your tax return in 2010, you’ll claim a credit worth up to a maximum of $400 for singles or $800 for married workers. The credit will cut what you otherwise owe in taxes dollar for dollar, bringing your tax bill down in line with the reduced withholding taken from your paychecks.
For single tax filers, the credit will begin phasing out at an Adjusted Gross Income (AGI) of $75,000. For couples filing jointly, the phase-out zone will start at $150,000 of AGI. (Adjusted Gross Income is your total income from wages and other income minus certain adjustments, such as deductible IRA contributions and alimony paid.)
Reduced taxes on unemployment income:
Normally, people receiving unemployment benefits must report them as income and can be taxed on them. The new bill makes the first $2,400 of unemployment income nontaxable.
Lowered cost for COBRA health insurance:
This is a valuable benefit for workers who lose their health insurance when they lose their jobs. This government subsidy should help more unemployed people afford to keep their insurance.
Relatively few employees take up their former bosses on this deal, though, because of the high cost of COBRA. While employers often pay two-thirds or more of the cost of health insurance for their employees, in most cases an ex-employee has to pay 100 percent of the cost, plus a 2 percent administrative fee.
But the new law slashes the cost.
A 65 percent subsidy for laid-off workers
For employees involuntarily terminated (other than for gross misconduct) from September 1, 2008 through December 31, 2009, the federal government will pick up 65 percent of the COBRA tab. If you’re laid off and want to continue your health coverage, Uncle Sam will pay most of the cost for you.
If you would otherwise have to pay $1,200 a month for family coverage under COBRA, for example, your cost will drop to $420. The feds will pay the other $780. Since the subsidy can last for as long as nine months, this would be worth more than $7,000 in this example.
This change can also help people who lost their jobs during the last four months of 2008 and decided not to use COBRA. Normally, you have to elect COBRA coverage within 60 days of the date you leave a job. But folks who lost their jobs after September 1, 2008 and turned down COBRA get another chance. Employers are supposed to contact eligible ex-employees and give them up to 60 days to sign up for COBRA at the deeply discounted price.
Subsidy decreases at higher incomes
As with many tax breaks, there is an income cap for this subsidy. If you are single and your modified Adjusted Gross Income for the year falls between $125,000 and $145,000, at least part of the subsidy will be considered taxable. The same is true if you’re married and your income is between $250,000 and $290,000.
For income above $145,000 for single filers and $290,000 for married taxpayers, you have to report any COBRA subsidy received as taxable income. (Of course, that’s still a lot better than having to pay the full premium yourself.) For most taxpayers, modified Adjusted Gross Income is taxable income before subtracting the value of personal and dependent exemptions, and standard or itemized deductions.
First-time Homebuyer's Credit:
The tax package increases the $7,500 first-time homebuyer credit to $8,000 for primary residences purchased between January 1, 2009 and November 30, 2009, and eliminates the requirement that the credit be repaid, as long as the house isn’t sold within three years.
The Hope Credit for college costs is increased to $2,500 for 2009 and 2010, covering 100 percent of the first $2,000 of tuition and related expenses per year and 25 percent of the next $2,000.
The credit is available for all four years of college, up from only two years, and covers the cost of books. It is 40 percent refundable, and begins to phase out at $80,000 of Adjusted Gross Income for singles and $160,000 of Adjusted Gross Income for married couples. The bill also allows tax-free distributions from Section 529 College Savings Plans to cover computer purchases.
The law renames the Hope College credit for 2009 and 2010—it’s now known as the American Opportunity tax credit—and hikes its value from $1,800 to $2,500 for 2009 and 2010.
Because a tax credit reduces your tax bill dollar for dollar, this basically means Uncle Sam will give you up to $2,500 per year for each qualifying college student in your family.
And, unlike the old Hope credit, which was available only for a student’s first two years of college, the new American Opportunity credit can be claimed for four years of post-high-school education. You get the maximum credit if you spend at least $4,000 in qualifying expenses, which now include the cost of books as well as tuition and fees.
What if you already used the Hope credit for the first two years of a child’s college bills? If your child is a junior in 2009, you can use the American Opportunity credit for the child’s junior and senior years.
Buyers of new cars, light trucks, SUVs, motorcycles and motor homes during 2009 can deduct the state sales or excise tax they pay, even if they don’t itemize their deductions.
You can deduct the sales tax you pay on a new vehicle, if you buy it between February 17 and December 31, 2009. And you get this tax break even if you claim the standard deduction—as many taxpayers do—rather than itemizing deductions on your tax return.
For people who take the standard deduction on their 2009 returns next spring, the sales tax deduction will be added to their standard deduction. For example, the standard deduction for married couples for 2009 is $11,400. If a couple pays 6 percent sales tax on a $30,000 car, they can add the $1,800 sales tax to the $11,400 and claim a standard deduction of $13,200. That $1,800 deduction could be worth as much as $450 in tax savings for a car buyer who’s in the 25 percent tax bracket.
Taxpayers who itemize deductions will include their vehicle sales taxes with other qualifying expenses, such as state and local income and property taxes, mortgage interest, charitable contributions and medical expenses.
This break starts phasing out for single taxpayers with Adjusted Gross Income over $125,000 and couples with AGI over $250,000.
Expanded Earned Income Tax Credit (EITC):
More couples that file jointly and have children will qualify for the Earned Income Credit. The tax package starts the phaseout range at $21,420, an increase of $1,880. Also in 2009, the credit increases for families with three or more children to 45 percent of the first $12,570 of earned income, up from 40 percent.
Enhanced Child Tax Credit:
Plus, the Child Tax Credit will cover more low-income earners: For 2008, the credit is refundable to the extent of 15 percent of an individual’s earned income in excess of $8,500; for 2009 and 2010, that floor drops to $3,000.
Extended energy-saving credits:
The 10 percent tax credit for energy-saving home improvements climbs to 30 percent and is extended through 2010. Improvements that qualify for the credit include energy-efficient skylights, windows and outer doors, along with energy-saving water heaters, central air conditioners and biomass stoves.
The bill also eliminates individual credit caps for the different types of property, and instead imposes a $1,500 cap on all qualifying property.
One-year "patch" on the Alternative Minimum Tax:
To keep millions of middle-income taxpayers from being forced to pay the Alternative Minimum Tax (AMT) for 2009, the measure increases the minimum tax exemptions to $70,950 for couples filing jointly and $46,700 for single filers. Otherwise, the exemptions would top out at just $45,000 for couples and $33,750 for singles.