March 8 , 2009 - What tax changes should we expect as a result of the legislation signed by the President recently?

The following are highlights of some of the individual tax changes in the American Recovery and Reinvestment Act of 2009 signed into law by the President on Feb. 17, 2009.

Refundable Child Credit Eased: Currently, a taxpayer receives $1,000 tax credit for each qualifying child under the age of 17. To the extent the child credit exceeds the taxpayer's tax liability, the taxpayer is eligible for a refundable credit (the additional child tax credit) equal to 15% of earned income in excess of a threshold dollar amount (the earned income formula). The threshold dollar amount was to have been $12,050 for 2008, as indexed for inflation.

New law. The Recovery Act modifies the earned income formula for the determination of the refundable child credit to apply to 15% of earned income in excess of $3,000 for tax years beginning in 2009 and 2010.

New American Opportunity Tax Credit: Individual taxpayers may claim a nonrefundable credit, the Hope credit, against Federal income taxes of up to $1,800 per eligible student per year for qualified tuition and related expenses paid for the first two years of the student's post-secondary education in a degree or certificate program. The Hope credit rate is 100% of the first $1,200 of qualified tuition and related expenses, and 50% of the next $1,200 of qualified tuition and related expenses.

New law. The Recovery Act modifies the Hope credit for tax years beginning in 2009 or 2010. The modified credit is referred to as the American opportunity tax credit. The credit is up to $2,500 per eligible student per year for qualified tuition and related expenses paid for each of the first four years of the student's post-secondary education in a degree or certificate program. The modified credit rate is 100% on the first $2,000 of qualified tuition and related expenses, and 25% on the next $2,000 of qualified tuition and related expenses. The definition of qualified tuition and related expenses is expanded to include course materials.

First-time Homebuyer Credit Eased: For qualifying purchases of principal residences in the U.S. after Apr. 8, 2008 and before July 1, 2009, eligible first-time homebuyers may claim a refundable tax credit equal to the lesser of 10% of the purchase price of a principal residence or $7,500.

A taxpayer is considered a first-time homebuyer if he had no present ownership interest in a principal residence in the U.S. during the 3-year period before the purchase of the home to which the credit applies.

The credit for new homebuyers is recaptured ratably over fifteen years, with no interest charge, beginning with the second tax year after the tax year in which the home is purchased. For each tax year of the 15-year recapture period, the credit is recaptured as an additional income tax amount equal to 6 2/3% of the amount of the credit.

New law. The Recovery Act extends the credit so that it applies to purchases before Dec. 1, 2009. In addition, it waives the recapture of the credit for qualifying home purchases after Dec. 31, 2008. If the taxpayer disposes of the home or the home otherwise ceases to be the principal residence of the taxpayer within 36 months from the date of purchase, the pre-Recovery Act rules for recapture of the credit apply. The Recovery Act also increases the maximum homebuyer credit to $8,000.

Partial Exclusion of Unemployment Compensation: An individual must include in gross income any unemployment compensation benefits received under the laws of the U.S. or any State.

New law. Under the Recovery Act, up to $2,400 of unemployment compensation benefits received in 2009 are excluded from gross income by the recipient.

Economic Recovery Payment to Retirees: The Recovery Act provides a one-time payment of $250 to retirees, disabled individuals and SSI recipients receiving benefits from the Social Security Administration, Railroad Retirement beneficiaries, and disabled veterans receiving benefits from the U.S. Department of Veterans Affairs. To be entitled to the $250 payment, the individual must have been eligible for one of the four benefit programs for any month during the three-month period ending with the month which ends before the month that includes the Feb. 17, 2009 date of enactment. Thus, to be entitled to the payment, the individual must have been so eligible during November or December of 2008 or January of 2009. Treasury must begin disbursing economic recovery payments as soon as practicable, but no later than June 17, 2009.

These are just a few of the changes created by the Recovery Act. In future articles, we will address additional issues, including the Making Work Pay Credit, the Subsidy for COBRA Continuation Coverage, and Vehicle Sales Tax Deduction, as well as changes relating to business owners.

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