TAX BREAKS INCLUDED AS PART OF THE AMERICAN RECOVERY AND REINVESTMENT ACT OF 2009

by Andrew D. Schwartz, CPA

On Tuesday, February 17th, President Obama signed the American Recovery and Reinvestment Act of 2009 into law.  The estimated price tag for this stimulus package is a whopping $787 billion, which includes a variety of tax breaks totaling just under $300 billion.  Let's take a look at some of the tax changes affecting you:

"Making Work Pay" Tax Credit

President Obama has been talking about this tax credit for as long as he's been campaigning for the Oval Office.  The purpose of this credit is to provide relief for the regressive social security tax that most US workers are required to pay.

Why is the social security tax regressive?  Most non-government workers pay social security tax at a rate of 6.2% on the first $108,600 earned in 2009.  Once a person's income exceeds that threshold, they are no longer subject to that tax.  Earn $500,000, and your social security rate drops from 6.2% of your earnings to just 1.3%.  At $1,000,000 of salary, your rate drops even further to a paltry 0.66%.

The Making Work Pay Tax Credit is available for 2009 and 2010 only and is worth up to $400 for single individuals and up to $800 for married couples.  Like most new tax breaks lately, this credit phases-out once your income exceeds a certain threshold.  This tax break starts to phase-out at $150,000 of income ($75,000 if single) and is fully phased-out at $190,000 ($95,000 if single). 

New Car Deduction

In hopes of getting people to purchase new vehicles, the Act contains a provision allowing individuals to deduct the sales taxes paid on the purchase of a new vehicle.  Only sales taxes paid on the first $49,500 of the vehicle's purchase price count. 

Please note that this deduction is only available for vehicles purchased between February 17th and the end of this year.  You can claim this new tax break even if you don't itemize your deductions.  Plus, while your state income tax and real estate tax deduction is generally subject to the Alternative Minimum Tax, it appears that this tax break won't be impacted by the AMT.  There is a phase-out, however, of $125,000 for single individuals and $250,000 for married couples.

How big a deal is this new deduction?  Let's say that you purchase a new vehicle for $40,000, and you live in a state with a 5 percent sales tax.  Assuming you're in the 28% tax bracket, you'll put $560 in your pocket by purchasing a $40,000 vehicle.  I think I'll stick with my 98 Jeep, thank you.

Extra Credit For New Homeowners

Last year, Congress passed the Housing and Economic Recovery Act of 2008 which introduced a new $7,500 tax credit for first-time homebuyers.  (How has that new tax break worked out for us so far?)  As we wrote in our September 2008 Newsletter, the credit applies to homes purchased between 4/9/08 and 6/30/09.  That tax break included a unique feature requiring recipients of the tax credit to repay the full amount of the tax savings back to the IRS ratably over the following 15 years.

This Tax Act increased the maximum amount of the tax credit to $8,000, extended the deadline to purchase a home to November 30, 2009, and waived the repayment requirement for homes purchased in 2009 that are owned and used as a principal residence for at least three years.  The Act did not increase the phase-out which continues to begin at $75,000 for single individuals and $150,000 for married couples.

As an interesting twist, the original act allowed homebuyers to treat their 2009 purchases as having occurred on December 31, 2008 to accelerate when they could receive their $7,500 refund by one year.  It now appears that this strategy might backfire, since the 2008 credit needs to be repaid to the IRS but the 2009 credit does not.

AMT Relief

Congress won't make us wait for AMT relief this year like they have for the previous two years.  As we wrote in our January 2008 Newsletter, Congress needed all the way to December 19, 2007 to pass AMT relief for 2007.  Had nothing been done, an estimated 23 million taxpayers would have been hit with this tax.

For 2008, Congress did a little better.  Even so, they waited until October 3, 2008 to pass the one-year fix.

As part of this Act, the AMT fix has already been extended through 2009.  This will help make everyone's tax planning a lot easier than it has been for the past few years.

Increased Energy Efficient Tax Credits

Good news for anyone looking to make energy efficient improvements to their principal residence.  The new law includes a provision extending the tax credit for people installing insulation, windows, exterior doors, or energy efficient furnaces, water heaters, and central air conditioning through 2010.  This law also triples not only the rate of the credit to 30% of the costs incurred but  also the maximum annual credit from $500 per home to $1,500.

Unemployment Assistance

For people who unfortunately lose their jobs during these tough economic times, this Act provides some help.  For starters, the first $2,400 of unemployment benefits received during 2009 won't be taxable.  Plus, weekly benefits are slated to increase by $25.

Also, if you are involuntarily laid off between 9/1/08 and 9/1/10, the government will subsidize 65% of your monthly COBRA health insurance payment.  According to these new rules, you simply pay 35% of your monthly premium to your employer, and your employer then receives a refund from the federal government of the remaining cost of your health insurance as part of their quarterly payroll tax filings.

What A Disaster

The economy is a mess, the country is more than $10 trillion in debt, and no one can be sure when things will turn around.  Hopefully this $800 billion stimulus package will help jump start the economy.  Whatever the short-term results of the stimulus package will be, however, it's important to understand how you can take full advantage of the various tax breaks included in the American Recovery and Reinvestment Act of 2009.

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SkiNH.COM OFFERS FREE SKIING FOR KIDS AT NEW HAMPSHIRE MOUNTAINS

by Andrew D. Schwartz, CPA

Check out this unbelievable opportunity that my wife and I stumbled on last summer when we were looking into a family ski trip for the pre-tax season winter.  Click on the Kids Ski Free link on www.SkiNH.com to learn how to get free lift tickets to most of the ski mountains in New Hampshire for your fourth and fifth grade children. 

The cost is just $20 per child for a booklet chock full of complimentary lift tickets.  Please note that your fourth grader also needs to complete a short essay on some topic pertaining to the history of skiing in New Hampshire.  My daughter wrote about snowmaking.

The fifth graders have it much easier.  Simply submit your $20 fee along with a copy of their recent report card to prove that they are currently in the fifth grade, and you're all set.

I have two kids - a fifth grade son and a fourth grade daughter.  We really got lucky finding this free skiing opportunity this year.  So far this winter, my kids have skied eight times, and we haven't paid a dime for their lift tickets.  Plus, many of the mountains offer discounted or two-for-one tickets for adults who accompany the child.  Here are some of the incredible ski bargains we've enjoyed this winter thanks to SkiNH.com:

• All four of us skied at Black Mt in Jackson NH for $39.
• All four of us skied at Crotched Mt in Southern NH for $51.
• My two kids and I skied at Mt. Sunapee for $54.
• All four of us skied at Gunstock, Mt. Cranmore, and Pat's Peak for around $90 per day.

According to their site, "Ski NH is the statewide association representing 37 alpine and cross country resorts and more than 200 lodging properties in New Hampshire.  The Earn Your Turns and Snowsports Passport program are made possible by the support of the NH Department of Travel and Tourism Development" plus a few other sponsors. 

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2008 & 2009 TAX FACTS

• For 2008, the standard deduction for a single individual is $5,450 and for a married couple is $10,900. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes (or sales taxes), real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses.
• For 2008, the personal exemption is $3,500. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  
• The maximum earnings subject to social security taxes is $106,800 for 2009, up from $102,000 for 2008.
  
• The standard mileage rate is $.55 per business mile as of January 1, 2009, down from $.585 per mile as of December 31, 2008.
  
• The maximum annual contribution into a 401(k) plan or a 403(b) plan is $16,500 in 2009.  And if you'll be 50 or older by December 31st, you can contribute an extra $5,500 into your 401(k) or 403(b) account this year.
• The maximum annual contribution to your IRA is $5,000 for 2008 and 2009.  And if you turn 50 by December 31st, you can contribute an extra $1,000 that year.  You have until April 15, 2009 to make your 2008 IRA contributions. 

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