It is common sense to take a method and try it. If it fails, admit it frankly and try another. But above all, try something.
- Franklin D. Roosevelt
Clearly, something isn’t working in America. With mounting job losses, creeping retail sales, record foreclosures, it was clear that something had to change. What wasn’t abundantly clear was how to effectuate that change.
Congress thinks it has an answer. After weeks of back and forth, the compromise version of the stimulus package, the American Recovery and Reinvestment Act of 2009, has passed both houses of Congress. It now moves to President Obama’s desk where it is expected to become law on Tuesday, February 17, 2009.
The bill has been both touted and criticized on both sides. We’ve heard cries of “it’s too much!” and “it’s not enough!” by both sides of the House and Senate. Now, with the details finally hammered out, it’s your chance to weigh in.
First, the specifics. The estimated price tag of the new bill is $789.5 billion, just over the amount pledged as part of the TARP bailout signed into law by then President Bush. Nobody even flinches at the “b” anymore. It is, however, less than the original versions proposed by the Senate, the House and President Obama.
Sixty five percent (65%) of the bill reflects increased expenditures. Roughly half of those expenditures are direct benefits spending for food stamps, jobless benefits and the like; the remaining amount is appropriated for infrastructure and other projects.
The remaining thirty five percent (35%) are tax provisions which will have a direct impact on tax bills for businesses and individuals. Here are a few highlights:
1, No rebate checks. Most tax professionals, myself included, have speculated for months that a second check would not be included in the final version of the bill, despite rumors to the contrary. The reality is that the prior administration just did not get the “bang for the buck” that they had hoped for in exchange for mailing out rebate checks. It was an expensive and most would argue, failed, attempt to inject consumer cash into the economy. So, no rebate checks this go round (but see #2 and #3 below).
2, Making Work Pay Credit. Rather than rely on rebate checks, the new bill includes a tax credit, the Making Work Pay Credit, which will provide up to $400 per individual worker and $800 per working married couple. Excluded from eligibility are nonresident aliens and those who can be claimed as a dependent on another taxpayer’s return. The credit will be administered through cuts in withholding – you’ll see a few dollars extra in your paycheck each pay period (and I do mean a “few” dollars!). The full credit would be available to those earning $75,000 or less ($150,000 per married working couple). Phase-outs would allow a partial credit for individuals up to $100,000 and couples earning up to $200,000. The credit, which would be administered by cuts in federal withholding, would also be refundable, so that if you do not have enough withheld to result in dollars back throughout the year, you can likely apply it to your tax return (this includes those who are self-employed).
3, Credit for Retirees and the Disabled. Since those who are retirees and/or disabled would not qualify for the Making Work Pay Credit, they will receive a one time payment of $250. The specifics aren’t yet public but I’m guessing that it will be in the form of a check, as with the rebate.
4, AMT Relief. The bill includes yet another one-year provision, called a “patch”, to shield middle class taxpayers from the AMT (Alternative Minimum Tax). The exemption amount is bumped up a few hundred dollars. The exemption amounts for 2009 are now $70,950 for married couples and $46,700 for individual taxpayers.
5, Partial Unemployment Compensation Exemption. Unemployment compensation is generally taxable as income for federal tax purposes. The new bill allows a federal income tax exemption for the first $2,400 received in federal unemployment benefits in 2009. Amounts above that limit remain taxable.
6, Child Tax Credit Income Limit Lowered. The income threshold for eligibility for the child tax credit will be lowered to $3,000. That means that families will begin qualifying for the credit (up to $1000) at each dollar earned over $3,000. This temporary reduction is only applicable for 2009 and 2010.
7, Increase in Earned Income Tax Credit. The amount recoverable under the earned income credit will be increased to 45% of qualifying earnings for low-income families with three or more children. There is also a provision to offer “marriage penalty” relief incurred in the credit. Like the child tax credit income, this provision is only applicable for 2009 and 2010.
8, American Opportunity Tax Credit. A temporary provision to expand the Hope Scholarship tax credit is included in the bill. The applicable amount has been increased to $2500 and applies for all four years of college. The two year credit (for 2009 and 2010) is also partially refundable.
9, 529 Plan Qualified Expenses Expanded. Taxpayers can now add computers and computer technology, which could include educational software and internet, to the list of expenses which qualify under a 529 plan. This exception applies to 2009 and 2010 only.
10, Sales Tax Deductions for New Car Buyers. Taxpayers can deduct state and local sales taxes paid on the purchase of a new car, light vehicle, recreational vehicle or motorcycle on their federal income tax (leased vehicles do not qualify). The deduction is above-the-line deduction, meaning that you don’t have to itemize to qualify. There’s a $49,500 limit on the cost of the vehicle and income restrictions apply (upper limits of $125,000 for individual taxpayers and $250,000 for married taxpayers). The deduction is available through the end of 2009.
11, No Car Loan Interest Deduction. Finally, some common sense. You know I wasn’t a fan of the $10 billion proposed break in personal interest for car loans. It was removed from the final bill.
12, Temporary Credit for Home Buyers. The final version of the bill increases the size of the existing temporary, refundable first-time home buyer credit to $8,000 – the Senate version was largely scrapped. The requirement that the credit be paid back over 15 years has been removed; however, if you sell the home within three years (some exceptions for hardship and divorce apply), the credit must be paid back. Income is capped at $75,000 for individuals and $150,000 for married taxpayers for qualifying taxpayers. This credit is applicable from January 1, 2009 through November 30, 2009. Homeowners who previously qualified for the 2008 tax credit are not affected.
13, Expansion of Residential Energy Credits. The residential energy property tax credit has been increased from 10% to 30%, with a cap of $1,500, total, for 2009 and 2010. Qualifying modifications include energy efficient insulation, exterior windows (including skylights) and doors, central air conditioners and some water heaters or furnaces.
14, Transit Accounts. Pretax accounts for commuting have been capped at at $230 per month for parking and for public transit. Finally!
15, Small Business Owner Estimated Tax Break. Under prior law, estimated tax payments were required to be at least 100% of the tax liability for the prior year in order to escape penalty. In 2009, estimated tax payments for individuals with a majority of income derived from a small business (meaning 500 or fewer employees) will be allowed a “safe harbor” of 90% of the 2008 liability.
16, Financial Institution Compensation Capped. Despite rumors that the compensation caps were not included in the final bill, the provisions did make it in – and the final version is much much strict than those imposed by the White House. Bonuses for executives at all financial institutions receiving TARP money will be limited to no more than 1/3 of annual compensation. The bonuses must be paid in company stock, not other perks, which is restricted for sale until after the TARP money is repaid. These limits apply to top executives and the highest-paid employees at all 359 banks receiving “bail out” money.
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It’s a massive bill. To summarize pages and pages into readable bits is quite challenging – and I’m sure that I left something out that somebody cares about (NOLs for businesses, anyone?). But I tried to cover what I think is most interesting to you. If you don’t see something that you were looking for – or if you have questions – just ask. I’m happy to try and muddle through to find the answers.
Likewise, I’d love to know what you think about the final bill. Is it all that you hoped it would be and more?
And here’s my disclaimer: I’ve read the bill (you can, too, by going to thomas.gov). And some of the amended versions – there were a staggering 485 amendments. And the compromise version. And the “final” version. My head hurts from so much “strike section 1(a)” and “insert section 2(b)” here nonsense. It’s been quite a whirlwind of additions and deletions. Until the ink is dry on the page, however, this bill is not law. So, keep that in mind, okay?
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