Tax Credits: 2009 American Recovery and Reinvestment Act

President Obama has signed the American Recovery and Reinvestment Act of 2009 (ARRA). Individual taxpayers, including workers, unemployed people, veterans, Social Security recipients, and others will generally benefit from these 2009 Tax Credits.

Read more about this stimulus package and how it might benefit you:  

Workers

Making Work Pay Tax Credit: The Making Work Pay provision provides a refundable Tax Credit of up to $400 for working individuals (up to $800 for married filing jointly). The credit is calculated at a rate of 6.2 percent of earned income, and it phases out at modified adjusted gross incomes of greater than $75,000 ($150,000 for married filing jointly).

Working taxpayers whose wages are subject to withholding will generally receive this credit through changes in their withholding, which may mean an increase in take-home pay. This withholding change is automatic, so submitting a revised W-4 Form is not necessary. The credit will be computed on employees’ 2009 income tax returns. For taxpayers whose wages are not subject to withholding, the credit can be claimed on their 2009 return.

For taxpayers who are not eligible for the new Tax Credit, those changes to withholding could result in a smaller refund when they file their 2009 tax returns. Some taxpayers who usually receive very small refunds could end up owing a small amount instead of receiving a refund.

eFile recommends that the following taxpayers pay extra attention to their withholding because of the Making Work Pay Credit: pensioners, married couples with two incomes, individuals with more than one job, working Social Security recipients, workers without valid Social Security numbers, self-employed individuals, and dependents. Pensioners must receive earned income in order to be eligible for the Making Work Pay Tax Credit. Form W-4P (Pension, Social Security Tax Witholding) is designed to help pensioners adjust their withholding. These taxpayers should consult the withholding calculator and submit a revised Form W-4 if necessary.   Learn more about the Making Work Pay Tax Credit or listen to Making Work Pay Tax Credit audio. 

Click here to estimate and calculate your paycheck tax withholding now.

New Car Buyers

Save on a new vehicle. Did you or are you planning to purchase a new passenger vehicle during 2009? If so, learn more about this special new car tax break.

First-Time Homebuyers

The 2009 First-Time Homebuyer Credit allows taxpayers who purchase in 2009 a credit of up to $8,000, with no payback requirement. The credit is also fully refundable, which means that it will be paid to you even if you owe no tax this year.

Homebuyers who have not owned a primary residence for three years leading up to the date of purchase may qualify for this credit (for married couples, this restriction applies to both spouses). Homebuyers who have already owned a home for 5 consecutive years may still qualify for a slightly lower credit of $6,500.

If the home was purchased by November 6, 2009, the credit begins to phase out at modified adjusted gross incomes of over $75,000 for single filers, and $150,000 for married couples filing jointly. For home purchases occurring after November 6, the credit begins to phase out at incomes of $125,000, or $225,000 for married couples filing jointly. This credit does not have to be repaid, provided the buyer stays in their new home for at least three years. You can claim the credit during your online tax preparation on efile.com; you need only to enter basic information and the software will efile or print Form 5405 for you. Read more important details on this Tax Credit.  

Other New 2009 Tax Credits for Individual Taxpayers

Retirees, Veterans, and the Disabled: Social Security recipients, veterans, and railroad retirees will receive a $250 economy recovery payment. Learn More 

Students, Education: The American Opportunity Credit, an expansion of the Hope Credit, increases the number of taxpayers who qualify for higher education tax benefits. It covers college tuition and related expenses, and has been increased to $2,500 for 2009 and 2010. It has been expanded to cover the first four years of college and includes books and other required course materials as well as tuition. It also includes tax-free distributions from certain college savings plans for computer purchases. The credit is 40% refundable (up to $1,000 cash back). It begins to phase out at $80,000 for single filers, and at $160,00 for married couples filing jointly. Learn More 

Earned Income Tax Credit. More low and moderate income families now qualify. Learn More

The Additional Child Tax Credit. The Child Tax Credit and Additional Child Tax Credit now cover more families and offer greater tax savings to some families already covered. Learn More

Home Energy Efficiency: As much as 30% of the purchase price and, in some cases, installation price of home energy efficiency and renewable energy devices is now tax-free.  Learn More

Alternative Minimum Tax (AMT):  Middle-income taxpayers benefit from the minimum tax exemption's  significant increase, $46,700 for single filers ($70,950 married filing jointly). In effect, many middle-income taxpayers do not have to pay the Alternative Minimum Tax.

Unemployed: Tax-free unemployment benefits are increased to as much as $2,400. COBRA subsidies are increased. The Health Coverage Tax Credit is increased to cover 80% of qualified insurance premiums for qualifying workers who have lost their jobs, and is expanded to cover their families for a longer period of time. 

Employers and the Making Work Pay Tax Credit

As an employer, you will need to update your withholding tables. For more information about how the Making Work Pay Credit affects you as an employer, please view the Wage and EIC Payment Table (Publication 15-T, New Wage Withholding and Advance Earned Income Credit Payment Tables).

The Expanded Net Operating Loss Carryback and Small Businesses

The new net operating loss carryback provision allows small businesses that sustained net operating losses in 2008 to offset that loss against income earned within the past five years. Previously, small businesses could only carry back such losses for two years. 

Employer-Supported Employee Transportation and Transit Pass Benefits 

Employees might be able to exclude $230 from income per month in transit benefits and $230 per month in parking benefits –– up to a maximum of $460 per month. Employees may receive benefits for commuter transportation and transit passes and benefits for parking during the same month; they are not mutually exclusive. These benefits are excluded from an employee's gross income for income tax purposes and from an employee's wages for payroll tax purposes.  Previously, there were two separate monthly exclusion amounts, one for transit passes and commuter highway transportation — such as commuter vans — and a different one for qualified parking. The exclusion rate amount for qualified parking was set at a higher rate. The new regulation makes all the exclusion amounts equal and sets them at the higher rate for qualified parking. The law provides the equal benefits through December 31, 2010. The monthly exclusion amount for 2010 will be inflation-adjusted.

The Work Opportunity Tax Credit

The work opportunity tax credit will now cover returning veterans and disconnected youth. To request certification for this expanded program, use Form 8850.