American Recovery and Reinvestment Act of 2009

In response to the economic downturn experienced in 2008 and 2009, Congress passed the American Recovery and Reinvestment Act of 2009, to provide economic stimulus in the form of tax credits and deductions, as well as updating some previous tax incentives.

First-time Homebuyer Credit
A refundable credit of up to $ 8,000 is available for the purchase of a principal residence, taking place from April 1, 2008 through November 30, 2009. The credit is calculated as 10% of the first $75,000 of home price for a 2008 purchase. This credit is actually an interest-free loan, because the credit has to be repaid over 15 years, and would be collected via future tax returns starting with the tax return for the year 2010. For purchases in 2009 the credit is 10% of the first $80,000 of purchase price, and this credit would not have to be repaid.

For persons who claim the credit based on a 2008 purchase, in the year the home ceases to be the principal residence before the end of the 15-year repayment schedule, the repayment is accelerated to that year. Special circumstances will result in no repayment required, for example selling the home at a loss.

For a credit based on a 2009 purchase, the home has to remain the principal residence for 36 months after the purchase. If the home ceases to be the principal residence before the end of the 36 month period, the entire credit must be repaid. In order for taxpayers to receive this credit as quickly as possible the 2008 tax return may be re-filed to include the credit as a refundable amount.

In the case of unmarried persons buying a residence together, the single allowable credit needs to be split between them according to their ownership interest. And the credit amount begins to be phased out for incomes in excess of $75,000 for single filings, and $150,000 for married persons filing together.

Recent Update: The Worker, Homeownership and Business Assistance Act of 2009, signed into law on November 6, 2009 extended the date for a home purchase to qualify for the First-time Homebuyer Credit. Under the new law eligible persons must buy, or enter into a binding agreement to buy, a principal residence by April 30, 2010 and close on the home by June 30, 2010. Purchases in 2010 will qualify for the credit on 2009 or 2010 tax returns. For home purchases after November 6, 2009 a properly executed settlement statement must be attached to the tax return, no credit is available for homes costing more than $ 800,000, the purchaser must be at least 18 years old on the date of the purchase and a dependent does not qualify for the credit.

A Homebuyer Credit can also be claimed by a long-time owner of a principal residence who is buying a replacement home. They must have lived in the same principal residence for any five consecutive years during the eight year period ending on the date of purchase of the replacement residence. The maximum allowable credit in this case is $ 6,500. TOP

Deduction for the Purchase of a New Car
If a new car is purchased from February 17, 2009 through December 31, 2009 a deduction may be taken for the sales tax paid on the purchase. The automobile must be brand new (first owner), and the sales tax deduction is calculated on the first $ 49,500 of purchase price. The deduction does not apply to a lease agreement, and the auto must have a gross vehicle weight rating of no more than 8,500 pounds. A 2008 model auto purchase would qualify as long as the taxpayer is the first owner of the auto. The $49,500 maximum purchase price limitation can be for multiple purchases (more than one auto). The auto can be a car, light truck, SUV, motor home, or motorcycle. And the deduction is available for certain taxes and fees if purchased in a state that does not have a sales tax. Previously sales tax paid on the purchase of any auto was includable as an Itemized Deduction. The sales tax (or other tax or applicable fee) paid for the purchase of a new auto may be added to the standard deduction of taxpayers who do not itemize deductions. TOP

American Opportunity Tax Credit (Education Credit)
The HOPE Education Credit is changed for 2009 and 2010 tax returns and becomes the American Opportunity Tax Credit, to allow a tax reduction of up to
$ 2,500 based on maximum allowable education expenses of $ 4,000 per eligible student. The credit adds course materials to allowable expenses, and extends the credit to include the first 4 years of post-secondary education. In addition up to 40% of the credit, not used to reduce income tax, is refundable. The maximum income allowable for the credit is also raised. Previously the maximum HOPE credit was $ 1,800 and could only be calculated on the first two years of secondary education. Like the HOPE credit the student must be at least a half-time attendee for at least one scholastic period in the year and must be a degree or certificate candidate (not graduate degree). TOP

Qualified Tuition Programs (also known as 529 Plans)
Under the new law, for 2009 and 2010 tax returns, tax-free distributions from these plans may also be used for computer technology including internet access. As long as the beneficiary of the plan (student) uses the technology for school, family members may also use the technology, without disqualifying a portion of its cost for tax-free treatment. TOP

Unemployment Benefits
The first $ 2,400 of unemployment compensation, received by an individual in 2009, is non-taxable. Amounts in excess of $ 2,400 received, will be taxable as in previous years. For returns filed by a married couple the exempt amount is per taxpayer, for a total maximum exempt amount of $4,800 for a married couple filing together. TOP

Making Work Pay Credit
A credit (tax reduction) will be available to taxpayers with work income. This would apply to employees as well as self-employed persons. The credit is equal to 6.2 % of the first $ 6,452 of work income per taxpayer, or $ 400, whichever is less. So the maximum credit allowable to an individual filer is $ 400, and for a married couple filing together $800. TOP

Economic Recovery Payment
In 2009 recipients of Social Security and Railroad Retirement benefits, and disabled veterans receiving Veterans Administration benefits also received a one-time Economic Recovery Payment of $250. This payment is not taxable, but will reduce any Making Work Pay credit to which the taxpayer is entitled. Unlike the Economic Stimulus Payments sent in 2008, these payments were not administered by the IRS. They were sent by the Social Security Administration and the Veteran's Administration. TOP

Energy Credits
For 2009 and 2010 tax returns there are credits (or tax reductions) for the installation of energy property and energy efficient property in those years. The eligible cost includes any labor cost included in the installation. The property must be installed in a residence located in the United States. This tax credit for energy property was in place for 2006, and 2007 tax returns with a lifetime cap of $500 worth of tax credit. This has been resumed for 2009 and 2010 with a lifetime cap of $1,500. "Energy property" includes items such as insulation, double-pane windows and insulated doors, certain hot-water heaters and central air-conditioning systems. "Energy efficient property" includes property that produces energy from alternative sources: solar hot water property, geothermal heat pumps, and wind energy property. TOP

Refundable Child Tax Credit
The child tax credit is a $1,000 credit against tax for each child dependent on a tax return, who was under age 17 on December 31. The portion of the credit that is not usable against income tax could potentially be returned as a refund. For 2008 tax returns the refundable amount was the lesser of the unused credit, or 15% of the earned (work) income on the return that exceeded $8,500. For 2009 returns the earned income calculation is a more liberal 15% of earned income that exceeds $3,000 making more low income families eligible for a refund of the unused credit. TOP

Continuing Tax Benefits
For 2009 tax returns sales tax paid will continue to be an itemized deduction. The allowable deduction of up to $250 for supplies purchased for classroom use by and educator (teacher, aid, principal, etc. working in a school for at least 900 hours during the year) continues, as well as the tuition and fees deduction. Property tax paid on real property (up to $500 or a single return, and up to $1,000 on a married filing jointly return) may again be added to the standard deduction for those who do not itemize deductions. TOP

Earned Income Credit
This refundable tax credit, for low and moderate income taxpayers, has been expanded for 2009 tax returns. The maximum qualifying income to obtain the credit has been increased, and the credit may be based on as many as three qualifying child dependents.  For 2008 tax returns an eligible single parent could have received this credit, with two qualifying dependents and maximum income of $ 38,650 and a married couple with maximum income of $ 41,646. For 2009 tax returns a single parent with three qualifying dependents may have a maximum income of $ 43,279 and a married couple income of $ 48,279, and the maximum allowable credit has been increased from $ 4,824 in 2008, to $5,657 for 2009.  TOP