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Tax Relief Provisions of the Stimulus Act
After a great
deal of political maneuvering, H.R.1, the American Recovery and Reinvestment
Act of 2009 (Stimulus Act), was approved by Congress and signed into law
by the President. The Stimulus Act provides tax relief for individuals
and businesses alike.
Individuals:
A provision of the
Stimulus Act makes many individual taxpayers eligible for the Making Work
Pay Credit (Work Credit). Eligible taxpayers will receive a 6.2% reduction
in their federal income tax withholding or estimated payment requirement
in 2009 and 2010. The maximum Work Credit benefit is $400 for individuals
and $800 for families. This benefit will begin to phase-out when
an individual's adjusted gross income (AGI) reaches $75,000 ($150,000
for married couples filing jointly).
The Stimulus
Act also provides a one-time payment of $250 for adults eligible for social
security, railroad retirement, or veterans' benefits and individuals of
any age receiving SSI benefits. In addition, the Stimulus Act provides
a one-time $250 ($500 for a joint return where both spouses are eligible)
refundable credit to certain federal and state pensioners who are not
eligible for Social Security benefits.
The Stimulus
Act modifies and renames the Hope Scholarship Credit. The American Opportunity
Tax Credit (Opportunity Credit) provides assistance to those seeking a
college education. Eligible taxpayers can receive an Opportunity Credit
of up to $2,500 per eligible student in 2009 and 2010 to cover
the cost of qualified tuition and related expenses paid during the year.
A related provision allows students to use 529 Plan education distributions
for the purchase of computers and computer technology in 2009 and 2010,
similar to Education Savings Accounts.
The First-time
Home Buyer Credit was increased from $7,500 to $8,000 by the Stimulus
Act and the obligation to repay the credit was generally eliminated for
homes purchased after December 31, 2008. The Stimulus Act also extends
availability of this credit for an additional five months through November
30, 2009.
To encourage the sale of automobiles, the Stimulus Act provides a deduction for state and local sales taxes and the excise tax paid on the purchase of new cars, light trucks, motorcycles, and motor homes purchased this year.
The Stimulus Act contains provisions extending the tax credits for energy-saving
improvements to existing homes; increasing the Earned Income Credit and
the refundable portion of the Child Credit; increasing and extending unemployment
benefits; eliminating the federal tax on the first $2,400 of unemployment
benefits; and subsidizing COBRA payments for certain involuntarily terminated
workers.
Finally, the
Stimulus Act provides relief from the Alternative Minimum Tax (AMT) in
2009 for 26 million families by increasing the amounts exempt from the
AMT.
Businesses: The Stimulus
Act temporarily extends the higher Section 179 expense amounts available
in 2008 for an additional year. Under this provision, business owners
can elect to immediately expense up to $250,000 of qualified equipment
purchased during the 2009 tax year, rather than depreciate it over time.
This benefit will continue to phase-out on a dollar-for-dollar basis once
qualified equipment purchases exceed
$800,000.
The Stimulus
Act also extends availability of the 50% bonus depreciation provision
for capital expenditures incurred in 2009 (2010 for aircraft and long-production-period
property). This provision allows business owners to take 50% bonus depreciation
in the year that the property is placed in service. In addition, the Stimulus
Act extends the placed-in-service deadline for the $8,000 increase in
first-year depreciation provision on qualified vehicles placed in service
by December 31, 2009.
The current difficult economic situation has likely caused many businesses
to incur a net operating loss (NOL) in 2008. Before the Stimulus Act,
NOLs could generally be carried back only two years and, if there was
a tax liability in those two years, taxes paid could be refunded to the
taxpayer. For 2008 NOLs, the Stimulus Act extends the two-year carry-back
to three, four, or five years increasing the likelihood, availability,
and amount of the refund to enhance the business's cash flow.
Other business
provisions of the Stimulus Act include an increased exclusion amount for
a gain from the sale of small business stock, easing of the built-in-gains
rules, delayed recognition of certain cancellation of debt income, and
incentives to hire unemployed veterans and disconnected youth.
Please call us if you have questions about how the Stimulus Act might impact you or your Business.
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Tax Calendar
April 15-Besides being the last day to file (or extend)
your 2008 personal return and pay any tax that is due, 2009 first quarter
estimated tax payments for individuals, trusts, and calendar-year corporations
are due today. So are 2008 returns for trusts and calendar-year estates,
partnerships, and LLCs, plus any final contribution you plan to make to
an IRA or Education Savings Account for 2008. SEP and Keogh contributions
are also due today if your return is not being extended.
-If you need to file a 2008 gift tax return, it also must be filed or
extended by this date.
-If you paid
cash wages of $1,600 or more in 2008 to a household employee, you must
file Schedule H by this date. You may also have to report any federal
unemployment tax paid and any income tax you withheld for your household
employees.
June 15-Second quarter estimated tax payments for individuals,
trusts, and calendar-year corporations are due today.
Help for Business Owners
Established
as "the Official Link to the U.S. Government” Business.gov www.business.gov is a unique
website for business owners. Operated by the Small Business Administration,
this website offers business owners information on how to find loans and
grants, start a home-based business, register a business name, search
or register a corporation, obtain a business license, get information
on employment laws, and bid on government contracts.
Within the loans and grants area, for example, business owners can search
for loans, grants, and financing using a checklist starting with the business
type. The user may then select the type of financing needed, e.g., working
capital. He or she is then given a list of several loan programs to review
and pursue to obtain a working capital loan.
This website
provides an avenue for business owners to locate financing or other assistance
to help survive the current economic situation.
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Consider
Selling Appreciated Stock
With the poor results most investors have seen
in the stock market lately, it appears insulting to suggest selling current
investments at a profit. But many investors hold stock positions that
have actually appreciated substantially above their cost. Perhaps it is
stock purchased some time ago as a long-term investment or stock that
was inherited many years ago with a low basis. If you are in the enviable
position of owning appreciated stock that you have held for more than
a year, you might consider selling this stock now to take advantage of
the current low capital gains rates before they expire or are repealed
by Congress.
The current 0% and
15% capital gains rates are set to expire after 2010, but could be repealed
or altered if Congress needs additional tax revenue. Taxpayers with highly
appreciated stock positions should consider selling at least a portion
of their investment to take advantage of the current low capital gains
rates. Following the sale they can then immediately repurchase identical
stock; establish a new, higher tax basis; and maintain their previous
financial position. The wash sale rules, which prohibit investors from
selling stock at a loss and purchasing the identical stock 30 days before
or after the sale, only apply to losses. They have no impact on capital
gains from stock sales. This strategy will not be appropriate for everyone,
but could be beneficial particularly for investors planning to reduce
their current stock positions over the next few years.
Please call
us to discuss this tax saving strategy or any other tax planning or compliance
issue.
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Tax-wise Strategies
for U.S. Savings Bonds
Many of us own U.S. savings bonds. As you probably
know, you won't get rich quick investing in savings bonds, but you won't
lose sleep worrying about their credit quality either. So, let's explore
some background and some ways savings bonds might be a choice for some
of your investment dollars.
Paper Series
EE savings bonds are issued at a discount (1/2 of face value), and electronic
form Series EE savings bonds are issued at face value. Interest on Series
EE bonds accrues and is paid at the earlier of their redemption or maturity.
For each year before maturity, the bond's redemption value increases.
This annual increase in value represents the "interest accrual"
for each year. Cash-basis taxpayers (most individuals) generally report
the interest earned on Series EE bonds in the year the bonds are redeemed
or mature - whichever comes first.
Series I U.S.
savings bonds combine the features of deferring taxes on the interest
until maturity with inflation-protected growth. Series I bonds are issued
at face value and pay a fixed interest rate plus a semiannual inflation-adjusted
rate. Interest is added to the bond monthly and paid when the bond is
redeemed. Like Series EE bonds, cash-basis individuals report interest
on Series I bonds in the year of maturity (or in the year redeemed, if
earlier).
Tax savings
can also be realized by using Series EE U.S. Savings bonds to pay for
a child's education expenses. All or a portion of interest on Series EE
U.S. savings bonds issued after December 31, 1989, may be excluded from
income if bond proceeds are used to pay qualified higher education expenses
at eligible educational institutions.
If a savings
bond is transferred during the owner's lifetime, the transferor generally
must recognize any income that has been accrued, but not yet reported.
Nevertheless, gifting a bond may be beneficial if substantial income is
yet to be earned on the bond and the donee is in a lower tax bracket than
the donor. A Series EE (and presumably, a Series I) bond can be transferred
to a revocable (living) trust without triggering the deferred income.
Savings bonds
are not subject to the income taxes of states, U.S. possessions, or local
taxing authorities. Taxpayers living in high-tax states may achieve tax
savings by investing in U.S. bonds, since the interest is not taxable
by states. However, such taxpayers must own the bonds directly, not through
a qualified plan or IRA, to achieve state income tax savings. Most states
tax IRA and qualified plan distributions (to some extent) regardless of
the nature of the assets held in the plan or IRA.
Savings bonds
can be a sound investment for children subject to the kiddie tax. While
income from savings bonds is being deferred, no kiddie tax liability is
incurred. After graduation, the child can redeem the bonds and presumably
pay taxes at a rate lower than the parents. Alternatively, the child can
continue to defer the savings bond income and the tax liability thereon
after graduation.
A savings bond's
current redemption value, earned interest, and other information can be
determined using the Savings Bond Calculator at www.publicdebt.treas.gov.
Please call
us to discuss the potential tax advantages of owning savings bonds or
other
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The
Tax and Business Alert is designed to provide accurate information regarding
the subject matter covered. However, before completing any significant
transactions based on the information contained herein, please contact
us for advice on how the information applies in your specific situation.
Tax and Business Alert is a trademark used herein under license.
© Copyright 2009