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
returns).



"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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Complete Analysis of the Worker, Retiree, and Employer Recovery Act of 2008 Available From the Tax & Accounting Business of Thomson Reuters

/PRNewswire/ -- Both the House and Senate unanimously and in record-time passed the Worker, Retiree, and Employer Recovery Act of 2008 at the end of last week, clearing the way for the President's signature. This new tax law, which is already available in full analysis on Checkpoint, the premier tax research platform for the Tax & Accounting business of Thomson Reuters, temporarily suspends the requirement for taxpayers age 70-1/2 and older (and their beneficiaries) to make annual minimum distributions from their retirement plan accounts. This will provide older Americans some much-needed financial flexibility as they struggle to manage their finances during this difficult economic time.

According to Bob Trinz, Senior Tax Analyst for the Tax & Accounting business of Thomson Reuters, tax laws generally require individuals with retirement accounts to make required withdrawals based on the size of their account and their age every year after age 70-1/2. The new law suspends the required minimum distribution from retirement accounts in 2009. This waiver, available to everyone regardless of their total retirement account balances, applies to all defined-contribution plans, including 401(k), 403(b), 457(b), and IRA accounts. Suspending the mandatory withdrawal allows retirees to keep the money in their account if they choose, and possibly recover some losses. The suspension for 2009 also applies to beneficiaries of retirement plan accounts and IRA owners.

The new law also provides relief for single-employer plans by allowing employers to "smooth" the value of pension plan assets over 24 months instead of having to apply the mathematical average that Treasury requires. This change will soften the accounting of 2008 plan losses. "The adjustment of this phase-in rule will provide great relief," says Trinz.

The new law also helps multiemployer plans, which may elect to "freeze" their status as (or as not) "endangered" or "critical" for one year. Plan years that started between October 1, 2008 and October 1, 2009 may elect to retain their status from the previous year. As before the new law, plans in endangered or critical status must adopt a funding improvement or rehabilitation plan, respectively. While a plan is in critical status, employers obligated to contribute must make additional contributions not required for plans in endangered status, but are relieved from the obligation to make general funding contributions. Under the new law, the election to freeze a plan's status would delay the need to respond to any lack of progress under the terms of the funding improvement or rehabilitation plan until the following plan year.

The new law also provides an election for sponsors of multiemployer plans in endangered or critical status in plan years beginning in 2008 or 2009, allowing a three-year extension of a funding improvement or rehabilitation plan. That allows these plans to accomplish their goals in 13 years instead of 10 (18 years instead of 15, for seriously endangered plans).

The new law makes numerous technical corrections to the Pension Protection Act of 2006. "The technical modification of greatest interest is for nonspouse beneficiaries of qualified plan participants and IRA owners," says Trinz. "For plan years beginning after 2009, company sponsored plans will have to offer nonspouse beneficiaries a rollover option. This gives much-needed flexibility to those who inherit retirement plan accounts from someone other than their spouse."

"The extent of the technicalities and scope of this new law is far-reaching and taxpayers should contact their tax preparers to ascertain how it will affect them in the long and short-term," says Trinz. "For our seniors, we can conclusively say: 'this will help.'"

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