2009 TAX LAW CHANGES

Read 2008 Tax Law Changes...

On February 17, 2009, President Obama signed into law the much anticipated American Recovery and Reinvestment Act of 2009. The massive $787 billion total cost of this economic stimulus package includes nearly $300 billion in tax relief.

The tax title of the Act - the American Recovery and Reinvestment Tax Act of 2009 - includes a new Making Work Pay Credit , enhancements to the child tax credit and first-time homebuyer credit, an enhanced Hope scholarship credit for 2009 and 2010 (called the American Opportunity tax credit), an alternative minimum tax (AMT) patch for 2009, and energy incentives. In addition, the legislation provides extensions for 2008 bonus depreciation and increased Code Sec. 179 expensing, a limited five-year net operating loss (NOL) carryback for small businesses, and incentives to hire unemployed veterans and disconnected youth. The package also contains:

• A one-time stimulus payment of $250 to retires, disabled individuals, social security recipients and disabled veterans;
• A temporary increase of the earned income credit for working families with 3 or more children;
• A deduction for state and local taxes paid on the purchase of a new automobile during 2009; and
• A suspension of federal income tax on the first $2,400 of unemployment benefits per recipient for 2009.

Making Work Pay Credit

In both 2009 and 2010, many individuals are eligible for a refundable credit equal to either (1) $400 ($800 for married taxpayers filing jointly) or (2) 6.2% of earned income, whichever is less. The credit is not included in taxable income.

The credit is not available to everyone, however. It is not available to nonresident aliens, individuals that can be claimed as dependents by any other taxpayer, or estates or trusts. In addition, it is phased out at a rate of 2% of modified adjusted gross income (MAGI) above $75,000 ($150,000 in the case of joint filers), and is therefore totally eliminated if you have a MAGI of $95,000 or greater ($190,000 in the case of joint filers). Finally, you cannot claim the credit if you do not include on your return your social security number and, in the case of a joint return, the social security number of at least one of the spouses. A taxpayer identification number (TIN) issued by the IRS does not qualify as a social security number.

Refundable Child tax Credit Increased

If you have children younger than 17, you may be eligible for a larger child tax credit for 2009 and 2010. As under current law, you can claim $1,000 for each child, but this amount decreased if you make more than $110,000 and file a joint return, $75,000 and are single, or $55,000 and are married but file separately. The good news is that the new law increases the amount of the credit that is refundable to you if the credit exceeds your tax liability. For 2009 and 2010, the credit is refundable to the extent of 15% of your earned income in excess of $3,000 (instead of $8,500.00 for 2008, or $12,550 for 2009 under prior law).

Credit for First-Time Homebuyers Extended and Expanded

If you buy a house in 2009 before December 1; you may be eligible for the newly expanded First-time Homebuyers Credit. This credit, which was to expire June 30, 2009, has been extended through November 30, 2009 - and has been made significantly more attractive.

You can now claim $8,000 (up from $7,500) or 10% of the purchase price, whichever is lower. If you are married and file a separate return, however, the most you can claim is $4,000 (up from $3,750). As under prior law, the credit is phased out for taxpayers with adjusted gross income over $75,000 ($150,000 for married taxpayers filing jointly).

Perhaps more significant is the fact that the credit is no longer treated as a zero-interest loan that must be paid back over 15 years. Instead, the credit needs to be paid back only if, within 36 months of purchasing the home, you either sell it or you (and your spouse) stop using it as your principal residence.

American Opportunity Tax Credit

The new law provides a temporarily enhanced Hope scholarship credit for 2009 and 2010, called the American Opportunity tax credit.

The enhanced credit is available for a higher amount of tuition, is available for up to the first four years of post-secondary education and for additional expenses, and is available to taxpayers who may not have been able to claim it for prior years because of the adjusted-gross-income limitation.

Amount of the Credit. The enhanced credit is allowed for the first 100% of qualified tuition and related expenses up to $2,000 and 25% of the qualified tuition and related expenses for the next $2,000, for a total of $2,500 a year. In contrast, under prior law, the Hope credit was equal to 100% of the first $1,000 of qualified tuition and related expenses and 50% of the next $1,000 of such expenses, both adjusted for inflation to $1,200 for 2009, so that the maximum credit for 2009 was $1,800.00

Additional Expenses. In general, the Hope scholarship credit is available for qualified tuition and related expenses, which include the tuition and fees required to be enrolled at or attend a particular institution. The IRS has stated that expenses for room and board are not included in qualified tuition and related expenses, and books and classroom supplies and equipment are not considered qualified tuition and related expenses unless payment for such expenses must be made directly to the educational institution for the student to enroll and attend classes at the institution.

The enhanced credit is specifically made available for books and other required course materials.

Available for four years of post-secondary education. The Hope scholarship credit is available for up to two years for any student, and only for expenses paid for the first two years of post-secondary education. The enhanced credit applies to the first four years of a student's post-secondary education for 2009 and 2010.

Income phase-out. You may be able to claim the American Opportunity tax credit even if you have been unable to claim the Hope scholarship credit because of the adjusted gross income (AGI) phase-out. The American Opportunity tax credit is phased out for taxpayers with AGI's between $80,000 and $90,000 ($160,000 and $180,000 in the case of a joint return). In comparison, the Hope scholarship is phased out starting at $50,000 ($100,000 for joint filers).

Alternative minimum tax. The American Opportunity tax credit can offset the alternative minimum tax even in years in which most personal credits cannot.

Income and Deductions

Tax on Purchase of a New Vehicle

Starting on February 17, 2009, both itemizers and non-itemizers are allowed a deduction for sales and excise tax incurred on the purchase of a new motor vehicle, motorcycle, or motor home during 2009.

If you are an itemizer, the new law expands the definition of deductible taxes to include qualified motor vehicle taxes, which are state and local sales or excise taxes imposes on the purchase of a qualified motor vehicle. Until now, you generally could deduct these taxes only if you elected to deduct state and local sales taxes in lieu of state and local income taxes - and even then, only certain sales taxes were deductible.

If you are a non-itemizer, the new law adds a new motor vehicle sales tax deduction to the standard deduction.

The deduction is not without limitations. First, the amount of tax you can deduct is limited to the tax on the first $49,500 of the purchase price. In the case of a car, truck, SUV, or motorcycle, the gross vehicle weight rating must not exceed 8,500 pounds. In addition, the deduction is phased out for taxpayers with modified adjusted gross income between $125,000 and $135,000 ($250,000 and $260,000 in the case of a joint return). Finally, the increased standard deduction is not available if you make the election to deduct sales tax rather than income taxes for the year.

Qualified Tuition Programs
(Section 529 Accounts)

Distributions for qualified tuition programs (Section 529 accounts) are tax-free if they are used to pay a beneficiary's qualified educational expenses. Other distributions are included in the beneficiary's income and are subject to a penalty.

In general, qualified educational expenses are tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution, certain expenses of special-needs beneficiaries, and room and board expenses for students enrolled at least half time. However, for 2009 and 2010, the new law expands the definition of qualified educational expenses to include the purchase of computer technology or equipment, as well as Internet access and related services, if they are to be used by the beneficiary's family during any of the years the beneficiary is enrolled at an eligible institution. These expenses may include expenses for computer software, computer or peripheral equipment, and fiber optic cable related to computer use. However, the expansion does not apply to expenses for software designed for sports, games, hobbies unless it is primarily educational in nature.

Exclusion of Gain from the Sale of Qualified Small Business Stock

Individuals may exclude 50% (60% for certain empowerment zone businesses) of the gain from the sale of certain small business stock acquired at original issue and held for at least 5 years. The Taxable portion of the gain is taxed at a maximum rate of 28%, and 7% of the excluded gain is an alternative minimum tax preference. The portion of the gain includible in alternative minimum taxable income is taxed at a maximum rate of 29% under the AMT. Thus, gain from the sale of qualified small business stock is taxed at effective rates of 14% under the regular tax and 14.98%, 17.92%, or 19.98% under the alternative minimum tax depending on the dates of acquisition and disposition. The amount of gain eligible for the exclusion be an individual with respect to any corporation is limited to the greater of (1) 10 times the taxpayer's basis in the stock, or (2) $10 million.

Under the Act, the percentage exclusion for qualified small business stock sold by an individual is increased to 75% for stock issued after February 17, 2009 and before January 1, 2011. As a result, gain from the sale of this qualified small business stock is taxed at effective rates of 7% under regular tax and 12.88% under the alternative minimum tax.

Businesses

Depreciation and Expensing

Increased Section 179 Deduction

In lieu of depreciation, a taxpayer with a relatively small capital budget can elect to write off the cost of a limited amount of property for the year it is placed in service, rather than treating it as a capital expense. In general, the amount for which this election is available is limited to $125,000 phase out to the extent the total amount of property placed in service exceeds $500,000. However, for 2008, these amounts were increased to $250,000 and $800,000, respectively.

The new law extends these higher amounts for 2009. Thus, for tax years beginning in 2009, a taxpayer may expense up to $250,000 of qualifying property. This amount is reduced, but not below zero, by the amount by which the cost of the qualifying property placed in service during the tax year exceeds $800,000.

Section 179 property is depreciable tangible personal property that is purchased for use in the active conduct of a trade or business. Off-the shelf computer software placed in service in tax years beginning before 2010 is also treated as Section 179 property.

Bonus Depreciation

The 50% first-year bonus depreciation deduction for qualified property placed in service in 2008 (2009 for certain property with longer production periods and certain noncommercial aircraft) is extended to property placed in service in 2009 (2010 for certain property with longer production periods and certain noncommercial aircraft). The bonus depreciation allowance is available for property whose original use begins with the taxpayer and (1) is depreciable under MACRS and has a recovery period of 20 years or less, (2) is MARCS water utility property, (3) is off-the shelf computer software depreciable over three years, or (4) is qualified leasehold improvement property.

Qualified property must also meet time requirements with respect to use and acquisition to be eligible. The original use of the property must commence with the taxpayer after December 31, 2007, and before January 1, 2010. The property must be acquired by the taxpayer after December 31, 2007, and before January 1, 2010, but only if no written binding contract for its acquisition was in effect before January 1, 2008, or acquired by the taxpayer as the result of a written binding contract entered into after December 31, 2007 and before January 1, 2010.

Gaines and Losses

Maximum Five-Year Carryback of Net Operating Losses of Small Businesses

In general, NOLs may be carried back two years. However, corporations, partnerships, and sole proprietorships can elect to carry NOLs for any tax year beginning or ending in 2008 back three, four, or five years. This applies only to businesses that meet a $15-million-or-less gross-receipts test. There are also several helpful transition rules:

• Taxpayers may revoke any prior election made to waive the carryback of NOLs by 60 days after the date of enactment of the new law.
• Any election to increase the carryback period under this provision is treated as timely if made before the date that is 60 days after the new law is enacted.
• Any application for a tentative carryback adjustment with respect to the loss is treated as timely if filed before the date that is 60 days after the new law is enacted.

Other Business Provisions

Incentives to Hire Unemployed Veterans and Disconnected Youth

The work opportunity tax credit is available on an elective basis for employers hiring individuals who are members of one or more targeted groups. In general, the credit is equal to 40% of the first $6,000 of qualified wages paid to an individual during the first year of employment. However, the credit is reduced to 25% of the qualified first-year wages for an employee who works 400 hours or less during the first year of employment. The credit may not be claimed for qualified wages paid to an employee who works less than 120 hours in the first year of employment.

Under the new law, the targeted groups are expanded to include unemployed veterans and disconnected youths who are hired during 2009 and 2010.

Estimated Tax for Individuals with Income from Small Businesses

To the extent income tax is not collected through withholdings, taxpayers must make quarterly estimated payments of tax based on their required annual payment. The required annual payment generally is the lesser of 90% shown on the return, or 100% of the tax shown on the return for the preceding tax year (110% if the adjusted gross income for the preceding year exceeds $150,000).

For tax years beginning in 2009, the new law decreases the required estimated tax payments for qualified individual with income from small businesses. For these individuals, the required annual estimated tax payment for tax years beginning in 2009 is not greater than 90% of the tax liability shown on the return for the preceding tax year.

A qualified individual is any individual with adjusted gross income of less than $500,000 ($250,000 is married filing separately) for the preceding tax year. The individual must certify that more than 50% of the gross income on the preceding year's tax return is income from a small trade or business (a business that employs no more than 500 persons, on average, during the calendar year ending in or with the preceding tax year).

ENERGY

Credit for Residential Energy Property Extended and Modified

As an incentive to make your home more energy efficient, the new law extends the residential energy property credit through 2010 and also makes the credit more attractive. Under the old law, the credit was limited to 10% of certain costs and to a fixed amount of other costs. Now, however, you can claim a credit for 30% of the cost of installing energy efficient improvements and energy efficient property, such as certain insulating materials, windows, exterior doors, metal roofs, circulating fans, boilers, heat pumps, air conditioners, and heaters. The amount of the credit that can be claimed by any taxpayer is limited to a total of $1,500 for 2009 and 2010.

Credit for Residential Energy Efficient Property Increased

From 2006 through 2016, you can claim a credit for 30% of the cost of installing solar electric property or a fuel cell power plant to generate electricity for your home, or for installing solar water heating property to heat water in your home. Also, from 2008 through 2016, you can claim the credit for 30% of the cost of installing a small wind turbine to generate electricity for your home or for installing a geothermal heat pump system to heat or cool your home. The amount you can claim had been capped depending on the type of property you are installing, but the new law largely removes these caps, effective for 2009. The only cap remaining in place is for fuel cells, which remains limited to $500 with respect to each 0.5 kilowatt in the case of a house that is jointly occupied and used by multiple people.

HEALTH

COBRA Premium Assistance

The Act enhances COBRA continuation coverage by offering a premium subsidy for eligible individuals who are involuntarily terminated from their employment. An eligible individual is treated as having paid the premium required for coverage if the individual pays 35% of the premium. In effect, the individual is provided with 65% reduction in premiums for the first nine months for which COBRA coverage is required. The employer is reimbursed for the premium not paid in the form of a credit against payroll taxes.

Generally, the premium-reduced amount is excluded from the eligible individual's gross income. If a premium subsidy is provided to an individual during a tax year in which the individual's modified adjusted gross income exceeds $125,000 ($250,000 in the case of a joint return), the individual must repay all or a portion of the subsidy provided in that year. The mechanism for repaying the subsidy is an increase in the individual's tax liability for the year equal to the amount of the subsidy. The amount of the subsidy that must be repaid is phased in for individuals whose modified AGI does not exceed $145,000 ($290,000 in the case of a joint return).

Health Coverage Tax Credit

As part of an overhaul of the Trade Adjustment Assistance programs, which provide workers, firms, and farmers who are negatively affected by trade with government funded adjustment assistance, the Act makes a number of changes to the health coverage tax credit to make the credit more favorable for eligible individuals and their qualifying family members, including an increase in the amount of the credit.