Articles

THE ECONOMIC STIMULUS PLAN MEANS CHANGES

The recently signed $787 billion economic stimulus package (The American Recovery and Reinvestment Act) of 2009, will have a ripple effect across all industries. The Plan presents an opportunity to ease the tax impact on millions of Americans. Although the new law does not have any major impact for the vast majority of individuals on their 2008 tax returns, these changes will largely impact 2009 and 2010 tax returns.

The tax cuts will have a cumulative effect because it targets the people most likely to spend due to their difficult financial circumstances. Therefore, much of the actual “stimulus” will be put into the economy in the next two years. The problem with our economy is not a problem of production, it is due to a shortage of consumption and that is the basic target for this stimulus package.

Individual Tax Provisions:

Your Paycheck: The IRS issued revised federal withholding tables and Advanced Earned Income Tax Credit tables that will lower the amount of Federal income tax withholding Businesses are to utilize them no later than April 1, 2009. In addition, the credit is 6.2% of earned income, up to $400 per person per year for singles, and up to $800 for married couples. The credit phases out for higher wages earners.

First time homebuyer: A credit is allowed for any purchase in 2009, up to $8,000 without a payback requirement.

Special benefits: A check of $250 will be issued for Social Security recipients, veterans and railroad retirees.

Purchase of Vehicles: There is a sales tax deduction for buying certain new vehicles in 2009.

Unemployment Benefits: Up to $2,400 in Tax Free unemployment benefits in 2009

EITC (Earned Income Tax Credit): There is a temporary increase for taxpayers with three or more qualified children. The maximum EITC for this new category is $5,657. The American Recovery and Reinvestment Act (ARRA) also increases the beginning point of the phase-out range for the credit for all married couples filing a joint return, regardless of the number of children. These changes apply to 2009 and 2010 returns. EITC is a refundable credit intended to help people who work but earn modest incomes. The credit begins to phase out at $21,420 for married filing a joint return with three or more children and completely phases out at $40,465 for one child, $45,295 for two children and $48,279 for three or more children. For married taxpayers filing a joint return with no children, the credit begins to phase out at $12,470 and completely phases out at $18,440.

Tuition Cost: A tuition tax credit is provided for 2009 and 2010 of up to $2,500 of the cost of tuition and related expenses during the taxable year.

Child Tax Credit: The bill would also increase the eligibility for the refundable child tax credit in 2009 and 2010. For 2008, the child tax credit is refundable to the extent of 15 percent of the taxpayer’s earned income in excess of $8,500. The bill would reduce this floor for 2009 and 2010 to $3,000.

Opportunities for Small Business:

Net Operating Losses: Small businesses under $15 million in gross receipts for 2006 – 2008 with deductions exceeding their income in 2008 can use a new net operating loss tax provision in the new ARRA to get a refund of taxes paid over the past five years instead of the usual two years.

Section 179 Deduction: A qualified taxpayer can choose to treat the cost of certain property as an expense and deduct it in the year the property is placed in service instead of depreciating it over several years. This is frequently referred to as section 179. Under the ARRA, a business can continue to expense up to $250,000 of section 179 property for tax years beginning in 2009. Without ARRA, the 2009 expensing limit for this section would have been $133,000. The $250,000 amount provided under the new law is reduced if the cost of all section 179 property placed in service by the taxpayer during the tax year exceeds $800,000. The new law does not alter the section 179 limitation imposed on sport utility vehicles, which have an expense limit of $25,000.

Reduction of Estimated Tax Payments: Usually small businesses have to pay 110 percent of their previous year taxes as estimated taxes. The Recovery Act permits small businesses to reduce their estimated payments to 90% of the previous year’s taxes.

Depreciation: Bonus depreciation is extended through 2009, allowing businesses to take a larger tax deduction within the first year of a property’s purchase.

Capital Gains: Investors in small business who hold their investments for five years can exclude from taxation 75% of their capital gains.

COBRA Premium Subsidy: Employers offering a group health plan subject to federal COBRA or similar state law regulations are required to offer premium assistance to Assistance Eligible Individuals (AEI). Employees as well as their spouses and covered dependents would be considered an AEI if they experienced an involuntary termination between September 1, 2008 and December 31, 2009. An AEI is eligible for a 65% federal subsidy on their COBRA premium for a maximum for of 9 months, and is considered to have paid their COBRA premium in full if payment of 35% is made to the employer.

Form 941, COBRA credit: Effective first quarter 2009, the federal government will reimburse employers for the 65% of COBRA premium by allowing them to take a credit against their quarterly tax liabilities.

This is a highlight of coming changes. There will be more explanation to come from the Internal Revenue Service, and we will surely see changes in several tax areas for 2009

©2009, Mahmoud & Associates