American Recovery and Reinvestment Act 2009
Impact on Individual’s Income and Taxes

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Introduction

The US Economy of late has been in a downward spiral, stuck in a recession that is being considered by a few economists as one with drastic effects on the economy not seen since the Great Depression. In response to the economic climate Congress enacted a stimulus package which President Barack Obama signed into law on February 17th, 2009. This stimulus package is known as the American Recovery and Reinvestment Act of 2009 (ARRA). The ARRA encompasses spending measures, welfare provisions, tax cuts and some non economic provisions which are estimated to be worth 787 billion dollars. This paper primarily focuses on the provisions of ARRA related to individuals and the effects of the ARRA on individual income and taxes. ARRA modifies many existing provisions in tax law and introduces a few new ones. Individuals can take advantage of several provisions in ARRA with proper planning. ARRA affects some of the well-known tax credits like the earned income tax credit.

The earned income tax credit is one such provision that has been made more accessible for tax years 2009 and 2010. For example, a couple with three children earning $20,000 are now eligible to claim a credit of 45 percent (up from 40 percent) of the first $12,570 of earned income. The phase out amount for income has been increased by $5,000 for couples with or without qualifying children. The phase out amount will be adjusted for inflation beginning in year 2010. Individuals with children may find it easier to qualify for the refundable credit beginning in years 2009 and 2010. For example, a couple with two children having a tax liability of $1,600 that is less than the child tax credit amount of $2,000 are eligible for the additional child tax credit of $400. The couple prior to ARRA was eligible for additional child tax credit by an amount equal to 15 percent of earned income exceeding $12,570. Under ARRA the couple is eligible for a refundable credit equal to 15 percent of earned income exceeding $3,000.

Another credit that affects earned income is the Making Work Pay credit, which is for an amount lesser of 6.2 percent of earned income or $400 for individuals or $800 for married couples. The credit is phased out gradually for individuals filing single with income higher than $75,000 or $150,000 for married couples filing jointly. The credit is also reduced by any economic recovery payment of up to $250 per eligible person made in the form of social security income, supplemental security income or veteran’s benefits. This credit is being provided effective April 1st, 2009 by adjustment to income withholding tables.

Supplementing the tax break for working individuals is an increased exclusion amount for employer provided transit and Van pool benefits beginning March of 2009. For example, Sam who was receiving the maximum eligible amount of $230 per month in parking benefits and $120 per month in transit benefits can now under ARRA receive $230 per month for parking and $230 per month for transit benefits. The fringe benefits provided are not taxable and are excluded from individual’s income.

In addition to the increased fringe benefits for transit, ARRA also provides first time home buyer’s a helping hand. First Time Home Buyer credit is a refundable credit for new home purchases that has been modified under ARRA to increase the credit amount to $8,000 from $7,500. For example, home purchases made in 2008 were eligible for a credit that was lower of 10 percent of the purchase price or $7,500 subject to a 15 year recapture period beginning with second year after purchase meaning the credit had to be paid back over a period of 15 years starting with the second year. Under ARRA for purchases made after December 31st, 2008 the credit is lower of 10 percent of purchase price or $8,000. ARRA has also extended the qualifying dates to include home purchases made before April 10th, 2010. ARRA does not require the credit to be recaptured; meaning the credit amount received need not be paid back as long as the qualifying conditions are met.

For example, Sam and Jane who purchased a home worth $120,000 as first time buyers would be eligible for a credit lesser of 10 percent of the purchase price or $8,000. They would qualify for $8,000 if they purchased the home after December 31st, 2008 and before April 11th, 2010. Sam and Jane also need to close on their home before June 30th, 2010 in order to qualify for the credit.
The Home Buyer credit need not be paid back as long as the home is maintained as the principal residence for a minimum of three years after purchase. First time home buyers can retroactively claim the credit on their 2008 tax return by filing the return before April 15th, 2009 or by amending the 2008 return or claiming it on the 2009 return if the house was purchased after April 15th, 2009.

Likewise under ARRA other big ticket purchases like vehicles bought between a period of February 17th, 2009 and December 31st, 2009 are eligible for a deduction on State and Local excise taxes paid. For example, Jack purchased a motor vehicle worth $52,000 with a gross vehicle weight not more than 8,500 pounds, and then he would be eligible to claim sales taxes and excise taxes he paid on up to $49,500 of the purchase price. The tax deduction is available irrespective of whether Jack claims itemized or standard deductions on his tax return. If Jack files his tax return as single the deduction he can claim has a phase out for gross income range of $125,000 to $135,000 and if Jack is filing as married the phase out would be at income range of $250,000 to $260,000. In states that do not impose sales tax people can deduct other fees or taxes paid to the state.

Unlike the incentives to make big ticket item purchases ARRA does provide some badly needed relief measures for the growing ranks of the nations unemployed by excluding up to $2,400 of unemployment income from taxation. For example, Pam earned $10,500 in unemployment compensation in 2009, only $8,100 would be considered taxable income as up to $2,400 of unemployment income per year is considered exempt from taxation.

Further individuals who have been involuntarily terminated can now get 65 percent subsidy for COBRA continuation health insurance coverage, For example, Judy was involuntarily terminated from her job on July 1st, 2009. As Judy was terminated between the period of September 1st, 2008 and December 31st, 2009 she would qualify for a nine month subsidy of her COBRA health insurance premiums.
If in the above situation Judy were to be receiving aid under Trade Adjustment Assistance (a program that provides aid to workers who lose their jobs as a result of increased imports) or is over 55 years of age receiving pension payments from Pension Benefit Guaranty Corporation, she would qualify for a subsidy that covers 80 percent (up from 65 percent) of the health insurance premium she is paying.
Again for instance if Judy is above the age of 65 she might qualify for an economic recovery payment beginning March 2009. The economic recovery payment provides $250 to retirees, supplemental security income, disabled veterans, and rail road retirement beneficiaries. The individual would be eligible for a onetime payment provided the recipient was eligible to receive benefit payments under one of the categories like retirees, veterans as mentioned above in either November 2008 or December 2008 or January 2009 and was a resident of one of the 50 states. The recipients of the payment, however, will have to reduce their Making Work Pay credit by the amount of the onetime economic recovery payment.

In addition to ARRA providing relief to the senior citizens, students and parents get a break from the ever increasing college expenses by the expansion of Hope credit for the years 2009 and 2010.The Hope credit which can be claimed for educational expenses has been expanded to include four years of post-secondary education.
For example, Rick and Jackie have two sons Doug aged 18 and Joe aged 22, whose post- secondary education costs Rick and Jackie paid. Doug is in his first year and Joe is in his fourth year of college. Rick and Jackie are eligible for a credit of up to $2,500 (up from $1,800) for each of their sons. Prior to ARRA being passed they would have been ineligible to claim Joe as Hope credit was valid only for only the first two years of post- secondary education. The credit is phased out between income limits of $160,000 to $180,000 for joint filers (up from $ 96,000-$116,000) and $80,000 to $90,000 for individuals up from ($48,000-$58000).

In addition, for the years 2009 and 2010 expenses paid by Rick or Jackie for the purchase of computer, related technology or even internet access for their son’s education can be treated as qualified educational expenses under QTPs or 529 plans.
Not to leave out the high wage earners the ARRA brings AMT relief for the near future. The Alternate Minimum tax popularly called as AMT was first conceived 40 years ago to ensure that high income individuals paid a minimum amount of tax. Over a period of time, as AMT was not indexed for inflation and that led many middle income taxpayers falling in the AMT net. Exemption amounts for AMT have increased starting from 2009 to $46,700 for individuals, $70,950 for married joint filers and $35,475 for married separate filers. The non refundable tax credits can be used to reduce the tax liability of the regular tax as well as the AMT.

Keeping in line with green economy that the lawmakers’ envision for the future, Congress has included several credits to promote use of alternate energy and efficient use of energy.
The ARRA brings back the residential energy credit which was available in 2007, but not in 2008. The new version of the credit is applicable for 2009 and 2010, has an increased credit limit of $1,500 up from $500 previously and increases the credit percentage from 10 percent to 30 percent of the qualifying costs. Existing homeowners adding energy saving insulation, energy efficient windows, skylights, heating and air conditioning systems qualify for the credit.

The qualification requirements for the products are much higher than the requirements in the previous version of the credit. Homeowners can rely on the energy star labels if the product was purchased before June 1st, 2009 after which period the manufacturer needs to certify according to IRS notice if their products meet the qualifying criteria for the credit.
The growing number of alternative energy users would find the new law lending a helping hand by eliminating the previously set maximum limits. The maximum credit is set to 30 percent of cost of qualifying property for purchases up to year 2016. The non refundable energy tax credit covers qualifying purchases meeting new standards for solar water heaters, wind turbines, geothermal property and fuel cell property.

The energy conserving credits extend further as ARRA provides incentives to purchase electric vehicles. The first 200,000 owners of a new electric vehicle from an automotive manufacturer will be eligible for a credit in the range of $2,500 to $7,500. The vehicle is considered a qualifying purchase if it has four wheels, weight below 14,000 pounds and if it is a self propelled vehicle with a battery charged by an external source and a propulsion system capable of delivering at least four kilowatts. The credit increases by $417 for every additional kilowatt hour capacity exceeding four kilowatt hours of the battery up to a maximum amount of $5,000 based on kilowatt hour capacity.

For example, Yang purchases a new electric vehicle on June 1st, 2009 with a nine kilowatt hour battery capacity and a vehicle weight of 11,000 pounds, and then Yang would be eligible for a total credit of $4,585, i.e. ($2,500 plus the $417 per every kilowatt hour exceeding four kilowatt hours).
If Yang decides to purchase the vehicle after December 31st, 2009 he would qualify for the credit if the vehicle draws propulsion energy from a battery having at least five kilowatt hour’s capacity. Assuming the same facts about the vehicle as above, Yang would qualify for a total credit of $4,168, i.e. ($2,500 plus the $417 per every kilowatt hour exceeding five kilowatt hours). The credit is reduced once a manufacturer has sold 200,000 vehicles of that particular model.

In addition the new law has included two - or three wheeled electric vehicles and low speed vehicles. The credit is limited to 10 percent of purchase price not exceeding the amount of $2,500 and the credit is valid for purchases made between February 17th, 2009 and January 1st, 2012. If the electric vehicle is a low speed vehicle propelled by a battery with a capacity of four kilowatt hours or if it is a two- or three-wheeled vehicle propelled by a battery with a capacity of two and a half kilowatt hours then it would be considered a qualifying vehicle. The credit is reduced by any other deduction or credit taken for the plug-in electric drive vehicle.

The new law also encourages people interested in converting their existing vehicles to a plug in electric drive vehicle by providing a credit equivalent to 10 percent of cost up to a maximum of $4,000. The credit is valid for vehicles converted and placed in service between February 17th, 2009 and December 31st, 2009. Even if a taxpayer had previously qualified for an electric vehicle credit they would be eligible to claim the conversion credit. ARRA also helps in reducing the AMT by allowing offsetting alternative motor vehicle credit against it. Prior to ARRA taxpayers were not allowed to offset the credit amount for a taxpayer owing AMT.

Conclusion
In conclusion it can be said that ARRA is a stimulus package with something for everyone and one need to act quickly to take advantage of the several incentives which are set to expire soon.
The ARRA offers incentives to make purchases of homes, electric vehicles, energy efficient appliances bringing about much needed cash to keep critical components of the economy such as the housing sector, auto industry, etc., afloat. The ARRA provides additional income to senior citizens in the form of an economic recovery payment while the nations unemployed find great relief in the form of subsidized health insurance payments, income tax exemption for unemployment compensation. The law provides many incentives encouraging people to go green by buying alternative energy equipment and energy saving products. Middle to upper income people find themselves with something to cheer about in the form of increased AMT exemption amounts.
Whether we know or not ARRA has affected people from all walks of life in a positive way. There is more to ARRA that individuals can take advantage of by careful financial planning and due diligence in understanding the law.

References
Chris Fenn, "Congressional Plan for Economic Recovery: Overview of Recent Tax Acts", CPA Journal, Aug. 2009. pp. 38-47.

Anthony S. Bakale, “The American Recovery and Reinvestment Act's Energy Provisions for Individuals.” Tax Advisor, Aug. 2009. pp 506-508.

CCH “The American Recovery and Reinvestment Act of 2009”, Federal Tax course Letter, April 2009 Vol 23, Issue 4.

RIA “Highlights of the Tax and Benefits Provisions of the American Recovery and Reinvestment Act of 2009.” Tax Planning and Practice Guides (Special Studies)

Internal Revenue Code : § 25C, § 25D, § 30, § 30D, § 26, § 30B, § 135f(2), § 85(C), § 529(e)(3)(A), § 170(e)(6)(F)(i), § 164(a)(6), § 56(b)(1)(E), § 164(b)(6), § 36A(b)

http://ftp.irs.treas.gov/newsroom/article/0,,id=211307,00.html