The American Recovery and Reinvestment Act of 2009
Introduction
On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (the Act). The legislation carries a projected cost of $787 billion, and contains a host of wide-ranging provisions. The Act includes new and modified tax credits and deductions, energy incentives, extensions of temporary business depreciation and expensing limits, and a new one-year alternative minimum tax (AMT) patch. The Act also includes new net operating loss carryback rules for small businesses, $250 one-time payouts to recipients of Social Security and veterans benefits, and a temporary subsidization of COBRA premiums.
Available for taxable years beginning in 2009 and 2010, the Making Work Pay tax credit is a new refundable income tax credit:
- The credit is the lesser of 6.2 percent of an individual's earned income or $400 ($800 in the case of a joint return)
- The credit is phased out at a rate of two percent of modified adjusted gross income above $75,000 ($150,000 in the case of a joint return)
- The credit is reduced by any amount received as an economic recovery payment to recipients of Social Security, SSI, Railroad Retirement, and veteran’s disability payments
- To claim the credit, an individual’s tax return must include the individual’s Social Security number (in the case of a joint return, the Social Security number of at least one spouse)
- Revised tax withholding schedules have been issued to reduce tax withholding for the remainder of 2009 to reflect the credit
An eligible individual means any individual other than: (1) a nonresident alien; (2) an individual with respect to whom another individual may claim a dependency deduction for a taxable year beginning in a calendar year in which the eligible individual's taxable year begins; and (3) an estate or trust.
Tip: For purposes of the Making Work Pay tax credit, the definition of earned income is the same as for the earned income tax credit with two modifications. First, earned income does not include net earnings from self-employment which are not taken into account in computing taxable income. Second, earned income includes combat pay excluded from gross income under IRC Section 112.
Tip: For purposes of the Making Work Pay tax credit, an eligible individual's modified adjusted gross income is the eligible individual's adjusted gross income increased by any amount excluded from gross income under IRC Sections 911 (foreign earned income exclusion), 931 or 933 (exclusion of income from Guam, American Samoa, the Northern Mariana Islands, and Puerto Rico).
Caution: Special rules apply to U.S. possessions.
The IRS released new withholding tables that reduce federal income tax withholding requirements to reflect the Making Work Pay tax credit. The new withholding tables are included in a new IRS Publication 15-T. Employers must begin using the new tables by April 1, 2009.
Employees who qualify generally won't have to do anything--when their employers begin using the new withholding tables, they will see an increase in their take-home pay.
The Act increases the earned income tax credit percentage for families with three or more qualifying children from 40 percent to 45 percent for 2009 and 2010. For example, in 2009, taxpayers with three or more qualifying children may claim a credit of 45 percent of earnings up to $12,570, resulting in a maximum credit of $5,656.50.
The Act also increases the earned income tax credit threshold phase-out amounts for married couples filing joint returns for 2009 and 2010. Under the Act, the phase-out threshold for married individuals filing jointly will be $5,000 (indexed for inflation in 2010) more than the corresponding amount for single individuals, surviving spouses, and individuals filing as heads of households.
For example, in 2009, the maximum credit of $3,043 for one qualifying child is available for those with earnings between $8,950 and $16,420 ($21,420 if married filing jointly). The credit begins to phase down at a rate of 15.98 percent of earnings above $16,420 ($21,420 if married filing jointly). The credit is phased down to $0 at $35,463 of earnings ($40,463 if married filing jointly). Prior to the Act, the $21,420 figure above would have been $19,540, and the $40,463 figure would have been $38,583.
Prior to the Act, the refundable portion of the child tax credit for 2009 was limited to 15 percent of earned income in excess of $12,550. For 2009 and 2010, the Act increases the refundable portion of the child tax credit to 15 percent of earned income in excess of $3,000.
American Opportunity tax credit (formerly the Hope credit)
The Act modifies the Hope credit for taxable years beginning in 2009 or 2010, and renames it as the American Opportunity tax credit. Specifically:
- The maximum allowable credit is increased from $1,800 to $2,500 per eligible student per year
- The credit is expanded to apply to 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 credit rate is 100 percent on the first $2,000 of qualified tuition and related expenses, and 25 percent on the next $2,000 of qualified tuition and related expenses
- For purposes of the credit, the definition of qualified tuition and related expenses is expanded to include course materials
- The credit is phased out ratably for taxpayers with modified adjusted gross income between $80,000 and $90,000 ($160,000 and $180,000 for married taxpayers filing a joint return)
- The credit may be claimed against alternative minimum tax liability
- Up to 40 percent of an individual’s allowable credit is refundable
Caution: No portion of the credit is refundable if the individual claiming the credit is a child to whom IRC Section 1(g) applies for such taxable year (generally, any child under age 18 or any child under age 24 who is a student providing less than one-half of his or her own support, who has at least one living parent and does not file a joint return).
Caution: Special rules apply to U.S. possessions.
The Act also requires that two studies be carried out. The first will examine how to coordinate the American Opportunity/Hope and Lifetime Learning credits with the Pell grant program. The second study will consider adding a community service requirement to the Hope and Lifetime Learning credits.
First-time homebuyer tax credit
The Housing and Economic Recovery Act of 2008 established a temporary refundable first-time homebuyer credit equal to 10 percent of the purchase price of a principal residence, up to $7,500 ($3,750 if married filing separately). The credit applies to first time homebuyers (generally, individuals who have had no ownership interest in a principal residence for three years) who purchase a qualifying home on or after April 9, 2008 and before July 1, 2009. The credit is phased out for higher incomes, and must be paid back over 15 years in equal installments (repayment is accelerated if the home is sold during the 15-year period).
The American Recovery and Reinvestment Act of 2009:
- Extends the existing homebuyer credit for qualifying home purchases before December 1, 2009; taxpayers may still elect to treat the purchase of a principal residence made in 2009 as if it were made on December 31, 2008.
- Increases the maximum credit amount to $8,000 ($4,000 for a married individual filing separately) for qualifying homes purchased on or after January 1, 2009 and before December 1, 2009.
- Waives the recapture of the credit for qualifying home purchases on or after January 1, 2009 and before December 1, 2009. This waiver of recapture applies without regard to whether the taxpayer elects to treat the purchase in 2009 as occurring on December 31, 2008.
Caution: If the home is disposed of or the home otherwise ceases to be the individual’s principal residence within 36 months of the date of purchase, the previous rules for recapture of the credit will apply.
Tip: The Act also modifies the coordination with the first-time homebuyer credit for residents of the District of Columbia under IRC Section 1400C, and removes the prohibition on claiming the first-time homebuyer credit if the residence is financed by the proceeds of a tax-exempt mortgage revenue bond.
Deduction for state sales and excise tax on the purchase of a qualified motor vehicle
The Act allows qualified motor vehicle taxes paid or accrued within the taxable year to be deducted as an itemized deduction, or as part of the standard deduction.
Specifically, individuals who itemize deductions will be able to include qualified motor vehicle taxes as state and local taxes paid on Form 1040, Schedule A. Qualifying individuals who do not itemize will be allowed to claim qualified motor vehicle taxes paid as part of the standard deduction. Individuals who itemize deductions and make an election to deduct state and local sales taxes in lieu of state and local income taxes are not allowed the increased standard deduction for qualified motor vehicle taxes.
The deduction is:
- Limited to the tax on up to $49,500 of the purchase price of a qualified motor vehicle
- Phased out for taxpayers with modified adjusted gross income between $125,000 and $135,000 ($250,000 and $260,000 in the case of a joint return)
- Effective for purchases on or after February 17, 2009 and before January 1, 2010
- Allowed as a deduction for purposes of calculating alternative minimum tax (AMT)
Tip: Qualified motor vehicle taxes include any state or local sales or excise tax imposed on the purchase of a qualified motor vehicle.
Tip: A qualified motor vehicle means a passenger automobile, light truck, or motorcycle which has a gross vehicle weight rating of not more than 8,500 pounds, or a motor home acquired for use by the taxpayer after February 17, 2009 and before January 1, 2010, the original use of which commences with the taxpayer.
Tip: Under pre-Act law, individuals could generally elect to deduct state and local general sales tax instead of state and local income taxes. Under the American Recovery and Reinvestment Act, state sales and excise tax on the purchase of a qualifying motor vehicle can be deducted in addition to state and local income tax.
The Act provides that the individual AMT exemption amount for taxable years beginning in 2009 is:
- $70,950 in the case of married individuals filing a joint return and surviving spouses;
- $46,700 in the case of other unmarried individuals; and
- $35,475 in the case of married individuals filing separate returns
| Status | 2008 | 2009 |
| Unmarried | $46,200 | $46,700 |
| Married Filing Jointly | $69,950 | $70,950 |
| Married Filing Separately | $34,975 | $35,475 |
For taxable years beginning in 2009, the Act also allows nonrefundable personal credits to offset regular tax liability and alternative minimum tax liability.
The Act also provides that tax-exempt interest on private activity bonds issued in 2009 and 2010 is not an item of tax preference for purposes of the alternative minimum tax and interest on tax exempt bonds issued in 2009 and 2010 is not included in the corporate adjustment based on current earnings. Tax-exempt interest on private activity bonds issued in 2009 and 2010 to currently refund a private activity bond issued after December 31, 2003 and before January 1, 2009, is not an item of tax preference for
purposes of the alternative minimum tax, and is not included in the corporate adjustment based on current earnings.
Caution: The Act does not change the phase-out limits for individual AMT exemptions.
TFor purposes of the rules that apply to 529 plans, qualified higher education expenses generally means tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution, and expenses for special needs services in the case of a special needs beneficiary that are incurred in connection with such enrollment or attendance. Qualified' higher education expenses generally also include room and board for students who are enrolled at least half-time.
The Act expands the definition of qualified higher education expenses for 529 qualified tuition programs in 2009 and 2010 to include expenses for certain computer technology and equipment used while enrolled at an eligible educational institution.
Tip: Qualified computer technology and equipment includes computer and peripheral equipment, software, and internet access used while enrolled in an eligible institution. It does not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature.
The American Recovery and Reinvestment Act provides that up to $2,400 of unemployment compensation benefits received in 2009 are excluded from gross income for federal income tax purposes.
The Act provides for a one time economic recovery payment of $250 to adults who were eligible for:
- Social Security benefits
- Railroad Retirement benefits
- Veteran's compensation or pension benefits
- Supplemental Security Income (SSI) benefits (excluding individuals who receive SSI while in a Medicaid institution)
Only individuals who were eligible for one of the four programs for any of the three months prior to February, 2009 will receive an economic recovery payment.Economic recovery payments will only be made to individuals whose address of record is in 1 of the 50 states,the District of Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa, or the Northern Mariana Islands.
Caution: If the individual is also eligible for the "Making Work Pay" credit, that credit shall be reduced by the economic recovery payment made under this section.
Caution: Individuals who are otherwise eligible for an Economic Recovery Payment will not receive a payment if their federal program benefits have been suspended because they are in prison, a fugitive, a probation or parole violator, have committed fraud, or are no longer lawfully present in the United States.
The Act also creates a $250 refundable tax credit ($500 for a joint return where both spouses are eligible) against income taxes owed for tax year 2009 for individuals who receive a government pension or annuity from work not covered by Social Security, and were not eligible to receive a payment under the economic recovery payment credit.
COBRA continuation premium subsidy
The law requires certain group health plans to offer certain individuals ("qualified beneficiaries") the opportunity to continue to participate for a specified period of time in the group health plan ("continuation coverage") after the occurrence of certain qualifying events (e.g., termination of employment). These continuation coverage rules are often referred to as "COBRA continuation coverage" or "COBRA," which is a reference to the Consolidated Omnibus Budget Reconciliation Act of 1985, which added the continuation coverage rules.
A health plan may require payment of a premium for any period of continuation coverage. The amount of such premium generally may not exceed 102 percent of the "applicable premium" (generally, the cost of the coverage to the plan) for such period and the premium must be payable in monthly installments.
The Act provides that for a period not exceeding 9 months, an assistance eligible individual is treated as having paid any premium required for COBRA continuation coverage under a group health plan if the individual pays 35 percent of the premium. Thus, if the assistance eligible individual pays 35 percent of the premium, the group health plan must treat the individual as having paid the full premium required for COBRA continuation coverage, and the individual is entitled to a subsidy for 65 percent of the premium.
An assistance eligible individual is any qualified beneficiary who elects COBRA continuation coverage and satisfies two additional requirements:
- The qualifying event with respect to the covered employee for that qualified beneficiary must be a loss of group health plan coverage on account of an involuntary termination of the covered employee's employment occurring on or after September 1, 2008 and before January 1, 2010.
- The qualifying event must occur in the time period specified above, and the qualified beneficiary must be eligible for COBRA continuation coverage during the period and elect such coverage.
If the premium subsidy is provided with respect to any COBRA continuation coverage which covers the taxpayer, the taxpayer's spouse, or any dependent of the taxpayer during a taxable year and the taxpayer's modified adjusted gross income exceeds $145,000 (or $290,000 for joint filers), then the amount of the premium subsidy for all months during the taxable year must be repaid. The mechanism for repayment is an increase in the taxpayer's income tax liability for the year equal to such amount. For taxpayers with adjusted gross income between $125,000 and $145,000 (or $250,000 and $290,000 for joint filers), the amount of the premium subsidy for the taxable year that must be repaid is reduced proportionately.
An employer providing the subsidy can claim a corresponding credit on its quarterly employment tax return, Form 941.
Bonus depreciation and IRC Section 179 expensing
The Act extends the additional 50% first-year depreciation deduction for one year, through 2009 (through 2010 for certain longer-lived and transportation property).
Tip: The Act also extends for one year the temporary $8,000 increase in the first-year depreciation limit that applies to passenger automobiles that qualify for the 50 percent bonus depreciation. So, for qualifying autos placed in service in 2009, the first-year depreciation limit that would otherwise apply is increased by $8,000 (the 2008 first-year depreciation limit was $10,960, made up of the $2,960 "normal" limit plus the $8,000 temporary increase; the 2009 "normal" limit had not been announced as of the date the legislation was passed).
Tip: The Act also extends through 2009 (through 2010 for certain longer-lived and transportation property) the option to increase the research credit or minimum tax credit limitation (for deferred credit amounts attributable to pre-2006 tax years) by the bonus depreciation amount with respect to certain property placed in service in 2009 (2010 in the case of certain longer-lived and transportation property), in lieu of taking the additional 50 percent first-year depreciation deduction.
The Act extends 2008 limits relating to IRC Section 179 expensing for one year, to taxable years beginning in 2009. As in 2008, the maximum amount that a taxpayer may expense is $250,000 of the cost of qualifying property placed in service for the taxable year. This amount is reduced by the amount by which the cost of qualifying property placed in service during the taxable year exceeds $800,000.
Net operating loss (NOL) carrybacks
The Act allows eligible small businesses to elect to extend the general 2-year carryback period for 2008 net operating losses (NOLs) to 3, 4, or 5 years. An eligible small business is a taxpayer meeting a $15,000,000 gross receipts test.
The provision applies to an eligible taxpayer's NOL for any taxable year ending in 2008, or if elected by the taxpayer, the NOL for any taxable year beginning in 2008. However, any election under this provision may be made only with respect to one taxable year.
Estimated tax payment requirements for individuals with prior-year small business income
For taxable years beginning in 2009, the Act modifies the estimated tax payment requirements for qualified individuals. Specifically, the new required annual payment is the lesser of 90 percent of the tax shown on the current year return or 90 percent (down from 100 percent) of the tax shown on the return for the prior taxable year.
A qualified individual means any individual if the adjusted gross income shown on the tax return for the preceding taxable year is less than $500,000 ($250,000 if married filing separately), and the individual certifies that at least 50 percent of the gross income shown on the return for the preceding taxable year was income from a small trade or business. For purposes of this provision, a small trade or business means any trade or business that employed no more than 500 persons, on average, during the calendar year ending in or with the preceding taxable year.
The Act creates a new targeted group for the work opportunity tax credit. That new category is unemployed veterans and disconnected youth who begin work for the employer in 2009 or 2010.
An unemployed veteran is defined as an individual certified by the designated local agency as someone who: (1) has served on active duty (other than for training) in the Armed Forces for more than 180 days or who has been discharged or released from active duty in the Armed Forces for a service-connected disability; (2) has been discharged or released from active duty in the Armed Forces during the five-year period ending on the hiring date; and (3) has received unemployment compensation under state or federal law for not less than four weeks during the one-year period ending on the hiring date.
A disconnected youth is defined as an individual certified by the designated local agency as someone: (I) at least age 16 but not yet age 25 on the hiring date; (2) not regularly attending any secondary, technical, or post-secondary school during the six-month period preceding the hiring date; (3) not regularly employed during the six-month period preceding the hiring date; and (4) not readily employable by reason of lacking a sufficient number of skills (this can include a low formal education level).
Credit for non-business energy property (IRC Section 25C)
The Act modifies the credit for the purchase of qualified energy efficient improvements to existing homes (IRC Section 25C):
- The 10 percent credit rate is increased to 30 percent
- All energy property otherwise eligible for the $50, $100, or $150 credits is instead eligible for a 30 percent credit, without regard to the $50/$100/$150 dollar limitation
- The credit is extended for one year, through December 31, 2010
- The $500 lifetime cap (and the $200 lifetime cap with respect to windows) is eliminated and replaced with an aggregate cap of $1,500; the $1,500 cap applies to property placed in service after December 31, 2008 and prior to January 1, 2011
- New efficiency standards are established for qualifying property
Credit for residential energy efficient property (IRC Section 25D)
IRC Section 25D provides a 30 percent personal tax credit for the purchase of qualified solar electric property and qualified solar water heating property that is used exclusively for purposes other than heating swimming pools and hot tubs. IRC Section 25D also provides a 30 percent credit for the purchase of qualified geothermal heat pump property, qualified small wind energy property, and qualified fuel cell power plants.
The Act eliminates the credit caps for solar hot water (there was no cap with respect to qualified solar electric property), geothermal, and wind property. The Act retains the existing limit that applies to qualified fuel cell power plants (the credit for any fuel cell may not exceed $500 for each 0.5 kilowatt of capacity). The Act also eliminates pre-Act rules that reduced the credit for property that was funded using subsidized energy financing.
Credit for alternative fuel vehicle refueling property (IRC Section 30C)
IRC Section 30C provides for a credit equal to 30 percent of the cost of installing qualified clean-fuel vehicle refueling property, to be used in a taxpayer's trade or business or installed at the principal residence of the taxpayer. Qualified refueling property is property (not including a building or its structural components) for the storage or dispensing of a clean-burning fuel or electricity into the fuel tank or battery of a motor vehicle propelled by such fuel or electricity, but only if the storage or dispensing of the fuel or electricity is at the point of delivery into the fuel tank or battery of the motor vehicle. The use of such property must begin with the taxpayer.
For business property placed in service in 2009 or 2010, the Act increases the maximum credit available for business property from $30,000 to $200,000 for qualified hydrogen refueling property and to $50,000 for other qualified refueling property. For non-business property (used at a taxpayer's principal residence), the maximum credit is increased from $1,000 to $2,000. In addition, the credit rate is increased from 30 percent to 50 percent, except in the case of hydrogen refueling property.
Plug-in electric drive motor vehicle credit
The Act modifies the existing plug-in electric drive motor vehicle credit, effective for vehicles acquired after December 31, 2009:
- Maximum credit is limited to $7,500 regardless of vehicle weight.
- The credit is eliminated for low speed plug-in vehicles (a new credit is established--see below) and for plug-in vehicles weighing 14,000 pounds or more.
- The 250,000 total plug-in vehicle limitation is replaced with a 200,000 plug-in vehicles per manufacturer limitation. The credit phases out over four calendar quarters beginning in the second calendar quarter following the quarter in which the manufacturer limit is reached.
Tip: The actual credit amount is calculated as $2,500, plus $417 in the case of a vehicle which draws propulsion energy from a battery with not less than 5 kilowatt hours of capacity, plus $417 for each kilowatt hour of capacity in excess of 5 kilowatt hours. An overall cap of $7,500 applies.
The Act creates a new 10 percent credit for low-speed vehicles, motorcycles, and three-wheeled vehicles that would otherwise meet the criteria of a qualified plug-in electric drive motor vehicle but for the fact that they are low-speed vehicles or do not have at least four wheels. The maximum credit for such vehicles is $2,500. The new credit is part of the general business credit. The new credit is not available for vehicles sold after December 31, 2011.
Finally, the Act creates a new 10 percent credit, up to $4,000, for the cost of converting any motor vehicle into a qualified plug-in electric drive motor vehicle. To be eligible for the credit, a qualified plug-in traction battery module must have a capacity of at least 4 kilowatt-hours. This provision is effective for property placed in service after February 17, 2009. The credit is not available for conversions made after December 31, 2011.
- Permits businesses to defer income from cancellation of indebtedness arising from a reacquisition of an applicable debt instrument (e.g., the repurchase by the taxpayer of a debt instrument that was issued by the business). Reacquisition must occur after December 31, 2008 and prior to January 1, 2011.
- Increases the percentage exclusion for qualified small business stock sold by an individual from 50 percent (60 percent for certain empowerment zone businesses) to 75 percent; as a result, gain from the sale of qualified small business stock to which the provision applies is taxed at effective rates of 7 percent under the regular tax and 12.88 percent under the alternative minimum tax. Effective for stock issued after February 17, 2009 and before January 1, 2011.
- Extends for three years (generally, through 2013; through 2012 for wind facilities) the period during which qualified facilities producing electricity from wind, closed loop biomass, open-loop biomass, geothermal energy, municipal solid waste, and qualified hydropower may be placed in service for purposes of the electricity production credit. The provision extends for two years (through 2013) the placed-in-service period for marine and hydrokinetic renewable energy resources.
- Modifies the rules that apply to the business energy credit under IRC Section 48.
- Provides that the alternative motor vehicle credit (IRC Section 30B) is a personal credit allowed against the alternative minimum tax (AMT), effective for taxable years beginning after December 31, 2008.
- Increases the monthly exclusion for employer-provided transit and vanpool benefits to the same level as the exclusion for employer-provided parking (as a result, the exclusion increases from $120 for 2009 to $230); effective beginning March 1, 2009 through December 31, 2010.