Individual Provisions of The American Recovery and Reinvestment Act of 2009 (ARRA)

Overview

Please see the disclaimer at the end of this page.

There are a number of provisions of the ARRA which impact both individuals and businesses of all sizes. These provisions, estimated to reduce federal tax revenues by about $326 billion dollars, affect all aspects of federal income taxation.

Individual Provisions

First Time Home Buyer's Credit (FTHBC)

As with many aspects of federal tax law, words and phrases mean what Congress wants them to mean. A "first time homebuyer" is someone who has not owned their primary residence for three years ending on the closing date of the current purchase.

This replacement credit (maximum of $8,000) is complicated by the fact that Congress enacted, last year, a maximum $7,500 first time homebuyer's credit that really isn't a credit, it is a 15 year interest free loan. The earlier credit is available on 2008 tax returns for homes purchased between April 9, 2008 and June 30, 2009. The new credit applies to homes purchased between January 1, 2009 and November 30, 2009 and does not have to be repaid (unless the home is sold within 36 months). As you can see, the credits overlap for homes purchased early in 2009.

The ARRA continues to allow the FTHBC to be taken on 2008 returns for homes purchased before December 1, 2009. Taxpayers should complete IRS Form 5405, First Time Homebuyer Credit, and attach it to their 2008 return. The taxpayer also has the option of taking the credit on the 2009 income tax return. Any taxpayer who has already taken the $7,500 credit on a 2008 return for a home purchased in 2009 should amend that return to take the more generous ARRA credit.

Computation: The credit is 10% of the cost of a qualified home up to a maximum of $8,000 ($4,000 for married-separate filing status). Phase out ranges are $150,000 to $180,000 (married-joint) and $75,000 to $90,000 (all other returns).

Making Work Pay Credit

This credit (added as IRC Secton 36A) is 6.2% of earned income up to a maximum of $400 ($800 on a joint return). Phase out ranges are $150,000 to $180,000 (married-joint) and $75,000 to $90,000 (all other returns). This credit is NOT available for taxpayers claimed as a dependent on another's return.

Federal withholding tables have been adjusted to that W-2 taxpayers should see a small increase in take-home pay by March paychecks to reflect this credit. Note that take-home pay for dependents and those in the phase-out range will also increase.

Temporary Increase in Earned Income Credit

This amendment to IRC Section 32(b) increases the credit percentage for eligible taxpayers with three or more qualifying children from 40% to 45%. The phase-out range for all married taxpayers is also increased.

These provisions apply to tax years 2009 and 2010.

Temporary Increase in the Refundable Portion of Child Credit

This measure amends IRC Section 24(d) to lower the amount of earned income needed to be eligible from $12,550 to $3,000.

This provision applies to tax years 2009 and 2010.

American Opportunity Tax Credit

IRC Section 25A(b) (describing the Hope Scholarship Credit) is amended to increase the maximum credit (from $1,800 to $2,500), extend availability to the first four years of post-secondary education, and increases the AGI level at which phase out occurs ($160,000 to $180,000 on joint returns and $80,000 to $90,000 on all other returns).

This credit is now available for AMT and up to 40% of it is refundable for some taxpayers.

These provisions apply to tax years 2009 and 2010.

Computer Technology and Equipment Allowed As Qualified Higher Education Expense for Section 529 Accounts

IRC Section 529(a) is amended to include "the purchase of any computer technology or equipment ... or Internet access and related services, if such technology, equipment, or services are to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is enrolled at an eligible educational institution."

Sports, games and hobby software costs are not eligible "unless the software is predominately educational in nature."

This provision applies to tax years 2009 and 2010.

Suspension of Tax On Portion of Unemployment Compensation

For tax year 2009 only, IRC Section 85 is amended to make the first $2,400 of unemployment compensation be excluded from taxable income.

Additional Deduction for State Sales Tax and Excise Tax on the Purchase of Certain Motor Vehicles

IRC Section 164 is amended to add an above-the-line (before AGI) deduction for state sales and excise taxes paid on the purchase of qualified motor vehicles. Only taxes on the first $49,500 of vehicle costs are deductible.

A "qualified motor vehicle" is a passenger automobile, a light truck, a motorcycle, or a motor home. Original use must commence with the taxpayer and except for the motor home, maximum gross vehicle weight rating is 8,500 pounds. This deduction is available to taxpayers who do not itemize. However, it is not available to taxpayers who itemize and elect to deduct state sales taxes instead of state income taxes on Schedule A.

This provision applies to qualified vehicles purchased between February 18th, 2009 and December 31, 2009.

Extension of Alternative Minimum Tax Relief for Nonrefundable Personal Credits and Extension of Increased Alternative Minimum Tax Exemption Amount

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