Friday, February 20, 2009

Stimulus Bill Shakes Up Tax Planning

/PRNewswire/ -- "The recently enacted American Recovery and Reinvestment Act of 2009 contains a long list of tax breaks that come with short-term expiration dates," says Bob D. Scharin, Senior Tax Analyst for the Tax & Accounting business of Thomson Reuters. This means taxpayers need to plan now and act soon in order to gain advantage from the legislation. While the provisions are many, explanations are sparse--so guidance from the IRS on how to implement many of the law changes is desperately needed. Here are highlights of the new tax-saving opportunities now available for individuals:

-- The "making work pay credit" provides a $400 ($800 for joint return
filers) tax credit for employees and self-employed individuals. This
credit is refundable--meaning you can get the money even if you owe no
income tax for the year. The credit is intended to reach your pocket
quickly through additions to your pay check. Eligibility for it phases
out, however, starting when your income exceeds $75,000 ($150,000 for
joint return filers). How will employers know whether the phaseout
applies to their employees--especially employees who are married or
who have two jobs? The law does not specify an answer, but if you
receive too much of a credit from your employer, expect to pay it back
when you file your 2009 income tax return.

-- Get a sales tax deduction for car purchases. The sales tax on up to
$49,500 of the purchase price is deductible regardless of whether you
(1) claim the standard deduction or (2) itemize your deductions and
choose to deduct state and local income taxes instead of sales tax.
The deduction begins to phase out, however, when income exceeds
$125,000 ($250,000 on a joint return).

-- The first-time homebuyer credit is enlarged and improved. The credit
for first-time homebuyers in part of 2008 is capped at $7,500 and has
to be repaid over 15 years. For the first 11 months of 2009, the
maximum credit is increased to $8,000 and repayment is not required
unless you sell the home or stop using it as your main residence
within three years. Here too, a phaseout provision applies if your
income exceeds $75,000 ($150,000 for joint returns). The credit for
2009 purchases can be claimed on your 2008 return. Should the form for
the 2008 credit be used to do so? Homebuyers need guidance from the
IRS quickly regarding the mechanics of claiming it.

-- The energy credit gets another life. Previously, you could claim an
aggregate "lifetime" credit amount of up to $500 for making certain
energy-efficient improvements to your home. For 2009 and 2010, the
credit computation is more generous, and the aggregate ceiling for the
two years is $1,500.

-- The mass transit benefit exclusion is bulked up. Previously, you could
exclude from income up to $120 per month of mass transit benefits
provided by your employer (or funded with pre-tax employee
contributions). Thanks to the new law, the figure rises to $230
starting generally in March 2009 and through 2010.

-- The Hope Scholarship credit is expanded in size and availability in a
variety of ways. Prior to the new law, the Hope Scholarship credit was
generally capped at $1,800 and available for only the first two years
of post-secondary education. The new American Opportunity tax credit
amends the Hope Scholarship credit for 2009 and 2010, raising the
credit maximum to $2,500 and its availability to the first four years
of post-secondary education. Furthermore, among other beneficial
changes, the income level at which the credit begins phasing out rises
too--from $50,000 ($100,000 for joint return filers) to $80,000
($160,000 for joint return filers).

-- Alternative minimum tax (AMT) relief has come early in the year. AMT
"patches," raising the AMT exemption amounts have become a year-end
ritual. This created anxiety and complicated tax planning, however,
for many individuals until that year's fix was in. For 2009, we
already know that the patch is sewn up. The AMT exemption rises to
$46,700 for unmarried individuals ($70,950 for joint return filers)
from $46,200 ($69,950 on joint returns) in 2008. If a patch were not
enacted, however, the 2008 amounts would not have applied in 2009;
rather, the way the Internal Revenue Code is written, the AMT
exemption amount would have dropped to $33,750 ($45,000 on joint

"The expiration dates on these provisions require taxpayers to watch the calendar." Scharin observes. For instance, purchasing a home after the first-time homebuyer credit expires can be an $8,000 mistake.

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