Update: Stimulus Act - Tax Changes You Should Know

Update posted on June 03 2009 Back to Blog

Important information regarding the 2008 Recovery Act and the 2009 Stimulus Act.

Dear Clients and Friends,

The purpose of this letter is to inform you about recent tax law changes. The 2008 Recovery Act was passed in December 2008 and includes tax law changes that impact the 2009 tax year. The American Recovery and Reinvestment Act of 2009 (known as the Stimulus Act) was signed on February 17, 2009, and includes tax law changes for both individuals and businesses. The following includes highlights of these new tax acts.

Recovery Act Changes:

Wavier of Required Minimum Distributions (RMD) – For 2009, the RMD from IRAs and defined contribution plans has been waived. The waiver applies only to 2009 and the RMD is likely to be required once again in 2010.

RMD are required to begin by April 1 of the following year in which the account owner reached age 70½. For individuals turning 70½ during 2008 whose distributions were not paid until 2009, these distributions are still required to be made in 2009. Failure to make 2008 distributions will still result in a 50% penalty on the RMD.

If an owner dies before the required beginning date, the RMD must begin either: 1.) no later than December 31 in the year after death or 2.) the entire account must have been distributed no later than December 31 of the calendar year containing the fifth anniversary of death. As a result of the Act, the 2009 calendar year is not counted as one of the five years for the post-death distribution rule. This applies if the owner’s death occurred between 2004 and 2008.

Previously, a RMD was not eligible as a rollover distribution (and could not be rolled over into a retirement plan) and, therefore, not subject to the 20% withholding. A 2009 distribution is eligible as a rollover distribution since it is no longer a RMD.

Stimulus Act Changes Impacting Individuals:

Making Work Pay Credit – The act included a refundable credit equal to the lesser of 6.2% of earned income or $800 for a married couple filing jointly ($400 for a single taxpayer). The credit will be fully phased-out (eliminated) when modified adjusted gross income reaches $190,000 if married filing joint and $95,000 if single. Employers were given the opportunity to adjust employee withholding amounts to take into account the credit. As a result the credit is currently collectible through lower payroll withholdings.

Economic Recovery Payment – This is a one-time $250 payment for individuals eligible for government programs between November 2008 and January 2009. This includes those eligible for Social Security, Supplemental Social Security Income (except those in a Medicaid institution), Railroad Retirement, or veteran’s compensation or pension.

Credit for Government Retirees – For certain government retirees who do not qualify for the Economic Recovery Payment, a one-time refundable credit of $250 is available for 2009. The following three tests must be passed in order to be eligible: 1.) Retiree received pension or annuity benefits in 2009 for services as an employee of the U.S. or state government based on wages that were not subject to FICA withholdings when paid, 2.) Retiree is not eligible for the Economic Recovery Payment, and 3.) Retiree’s Social Security Number is reported on his or her 2009 Form 1040.

Temporary Sales Tax Deduction – State and local sales and excise taxes paid on purchases made between 2/17/09 and 12/31/09 of new passenger autos, light trucks (8,500 lbs or less), motorcycles, or motor homes, may be deductible. The amount of the deduction is limited to the taxes paid on the first $49,500 of the purchase price and may be claimed as an itemized deduction or added to the standard deduction. The deduction is subject to phase-out.

Modified Education Credit – For 2009 and 2010 the “American Opportunity Credit” (previously known as the “Hope Credit”) will allow a credit equal to 100% of the first $2,000 plus 25% of the next $2,000 of qualified post-secondary education expenses (maximum credit of $2,500). Costs have been expanded to include tuition, fees, and course materials for the first four years of post-secondary education; however, unavailable if four years worth of credit hours have already been logged. The deduction is subject to phase-out and 40% of the credit is refundable.

Extended Home Buyer Credit – The already established first-time homebuyer credit has been improved by extending the time period to purchase to 11/30/09. The act also increased the amount of the credit to the lesser of 10% of the purchase price or $8,000 and eliminated the requirement to repay the credit for 2009 purchases.

Computer and Internet costs qualify for 529 Distributions – Computer costs, including equipment and software as well as Internet access fees, paid in 2009 and 2010 qualify as higher educational expenses for the purpose of receiving tax-free distributions from 529 plans. Expenses must be used by the account beneficiary during the years of enrollment at an eligible educational institution.

Alternative Minimum Tax (AMT) “Patch” – To prevent millions of individuals from being subject to AMT, the AMT exemption amounts have been increased for 2009 to $70,950 for married filing joint or surviving spouse, $46,700 for single, and $35,475 for married filing separate. For 2009, you are permitted to use all nonrefundable personal credits to reduce your AMT liability as well as your regular tax liability.

Tax Free Treatment of Unemployment Benefits – For unemployment benefits received in 2009, the first $2,400 will be exempt for federal income tax purposes.

Residential Energy Credits – The Act includes a credit of 30% for the purchase and installation of energy-efficient furnaces, heat pumps, air conditioners, windows, and insulation to your principal home. The dollar limitations have been removed and the aggregate credit amount has increased to $1,500 for 2009 and 2010.

Estimated tax payments – For individuals with adjusted gross income under $500,000 that have a small business with fewer than 500 employees, 2009 estimated taxes may be based on the lesser of 90% of their 2008 or 2009 tax liability.

Stimulus Act Changes Impacting Businesses:

Section 179 Deduction – The 2008 temporary $250,000 maximum amount allowed for immediate expensing deduction and the increased phase-out threshold of $800,000 will remain at the increased levels for 2009.

Bonus Depreciation – The 50% first-year bonus depreciation deduction for new assets placed in service has been extended through December 31, 2009.

NOL Carryback Period – Medium and small-sized businesses with $15 million or less in average annual gross receipts may elect to carry back their 2008 Net Operating Losses for three, four, or five years. This allows businesses to collect a refund of taxes paid in previous years.

S Corporation Built-in Gains Exception – If the seventh year of an S corporation’s recognition period has elapsed prior to the beginning of the tax years 2009 and 2010, built-in gains will not be subject to tax.

COBRA Premium Subsidy – A 65% government subsidy for COBRA continuation payments for up to nine months will apply for periods of coverage beginning on February 17, 2009. This 65% is paid by the former employer, who is effectively reimbursed by a reduction in payroll taxes.

This letter is intended to be a summary (and should not be considered all inclusive) of recent tax law changes that were put into effect and to make you aware of their tax benefits. Please contact us if you have any questions regarding recent tax law changes or any other matters we may assist you with.

Other Information

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IRS Circular 230 Disclosure - As required by IRS rules, although this written communication may address certain tax issues, the issuer of this document did not intend nor write the advice to be used to avoid any penalty imposed by a taxing authority, nor may the user/recipient of this document use this document’s written tax advice for that purpose. Nor may it be used to promote, market or recommend to another party any transaction or matter addressed herein.