2009 Recovery Act: General Update on Stimulus Tax Bill
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Momentum is building for quick passage of an economic stimulus package to jump start the U.S. economy. The American Recovery and Reinvestment Act of 2009 , which is making its way through the House and Senate, is a mixture of tax incentives for individuals and businesses. Compressing most of its $275 billion in tax breaks within the 2009 and 2010 tax years, this tax law will weigh in as one of the largest in our nation's history. Now, while Congress debates the final size and scope of the stimulus package, is a good time to take a look at the expected tax incentives and explore how they could lower your tax bill.
Individuals
Making work pay credit. The pending stimulus legislation would create a new tax break for wage earners: the Making Work Pay Credit. This credit would not be like last year's one-time economic stimulus payments. Instead, the federal withholding tables would be adjusted so qualifying individuals would have less federal income tax withheld. The Making Work Pay Credit is intended to generate $500 for individuals with modified adjusted gross incomes (MAGI) below $75,000 and $1,000 for married couples with combined MAGI below $150,000. If you qualify, your weekly paycheck would go up a little because less money would be withheld for federal income tax. The Senate bill also would provide $300 one-time payments to Social Security recipients, disabled veterans and others on fixed incomes. Both versions would apply for 2009 and, then again, for 2010.
First-time homebuyer tax credit. Congress created the first-time homebuyer tax credit last year to help lift the housing industry out of its deepest slump in decades. Unfortunately, the credit does not appear to have encouraged home sales as lawmakers had hoped. One reason may be the repayment requirement of the credit. Under current law, taxpayers must repay the credit (which can reach $7,500) over 15 years. The stimulus legislation will likely remove the repayment requirement for homes purchased after January 1, 2009.
Education. In recent years, Congress has used the Tax Code to help students and families pay for higher education. The stimulus package would significantly enhance the Hope education credit and extend it to all four years of college. A portion of the Hope credit would be refundable (30 percent in the Senate bill and 40 percent in the House bill). Lawmakers are also likely to expand eligibility for the credit by increasing the income cut-offs. The more generous credit (which would be called the American Opportunity Tax Credit) would only be available for 2009 and 2010. However, Congress often extends temporary credits so this one could be around for awhile.
Child tax credit. Lawmakers know that the child tax credit (currently at $1,000 for qualifying child) is one of the most popular tax breaks. Both the House and Senate bills would increase the refundable portion of the credit for 2009 and 2010. The House bill lowers the current earned income floor for the credit to $0. The Senate bill reduces the floor to $6,000.
Unemployment benefits. Individuals are often surprised to learn that unemployment benefits are not tax-free at the federal level. Generally, they must be included in the recipient's gross income. The Senate bill would exclude up to $2,400 in unemployment benefits from gross income. Although the House bill does not include this provision, it could be part of a compromise conference bill.
Energy. If you install energy-efficient items in your home, such as windows, doors, insulation, hot water heaters, and so on, you may qualify for an existing tax break. The stimulus package is expected to increase the residential energy efficient property credit and boost some maximum amounts. The final bill will also likely enhance the credit for installing alternative energy property, including solar hot water, geothermal, and wind energy property.
Businesses
Bonus depreciation/Small business expensing. Last year, Congress enacted 50 percent bonus depreciation and increased Code Sec. 179 expensing to help businesses weather the recession. Both provisions expired at the end of 2008. The pending stimulus legislation would extend these two incentives into 2009.
NOL carryback. Even more attractive to many businesses, especially businesses currently in a loss position, is the proposed extension of the carryback period for net operating losses (NOLs). Current law generally limits the NOL carryback period to two years. The stimulus package is expected to increase the carryback period to five years. Businesses could carry back losses to previously profitable years and generate much-needed refunds. The House bill slightly tweaks the NOL carryback resulting in a 90 percent carryback for three of the five years. The Senate version allows 100 percent carryback. The Senate bill also would allow taxpayers to carry back the general business credits for five years and would permit businesses that repurchase debt to recognize cancellation of indebtedness income over an extended period.
Work opportunity tax credit. The Work Opportunity Tax Credit (WOTC) rewards employers that hire individuals from certain target groups, such as disabled veterans and economically-challenged individuals. The stimulus package would bring two more groups within the scope of the WOTC: unemployed veterans and disconnected youth.
Energy. President Obama has launched a major effort to make the U.S. energy independent and part of that will be tax incentives for the development and production of alternative sources of energy. Developers and producers of solar, wind, biomass, and other types of renewable sources of energy can expect expanded tax breaks in the stimulus package as well as direct government funding through grants and loans.
Rising unemployment is putting intense pressure on lawmakers to quickly pass a stimulus package. We expect that Congress will meet President Obama's deadline of February 16, 2009 to send him a stimulus bill to sign into law. We'll keep you posted of developments and, as always, if you have any questions about the stimulus legislation, please contact our office.
