July 2009 Newsletter
Posted: 8/25/2009
Dear Client:
Mid-year greetings to you and your family! This summary of the changes made to the federal tax code for the current year is designed to help you with tax planning. Careful tax planning can help reduce your tax liability as you prepare to navigate both the positive and negative aspects of these changes.
American Recovery and Reinvestment Act of 2009
President Obama signed this act into law on February 17, 2009. The $787 billion new law, which contains nearly $300 billion in tax relief, sets in motion a wave of direct spending and tax incentives to jump start the U.S. economy out of recession. However the new program will create a massive budget deficit where the government will be competing with the private market for available capital possibly creating a higher interest rate environment.
Federal Tax Changes Affecting Individuals & Families:
- Reduced employee withholding rates: The “Making Work Pay” credit is valued at $400 for individuals and $800 for married couples. Taxpayers will receive this money each pay period as less federal tax is withheld from their paychecks. The credit phases out at $75,000 adjusted gross income for individuals and $150,000 adjusted gross income for married filing joint. Employers should have already implemented these reduced withholding rates.
- Social Security or Disability assistance: This will consist of a onetime rebate payment of $250.
- Unemployed tax relief: $2,400 in unemployment compensation is not taxable for 2009.
- College credits enhanced: The old Hope tax credit was nonrefundable and limited to $1,800. The new “American Opportunity Tax Credit” replaces the Hope credit for 2009 and 2010. The new credit is $2,500 (on the first $4,000 in tuition and books) and 40% of the credit is refundable. This credit qualifies for all four years of college and includes textbooks as qualifying expenses unlike the old Hope credit. The credit is phased out at when individuals report $80,000 adjusted gross income and $160,000 adjusted gross income for married filers.
- First Time Homebuyer Credit update: Under the old law taxpayers received an interest free loan for up to $7,500. Now if a first time homebuyer purchases a home they receive 10% of the purchase price up to $8,000 and do not have to pay this back, as long as they live in their home for 3 years following the purchase. This credit phases out at $75,000 for single filers and $150,000 for married filers. This credit ends on November 30, 2009.
- Tax break for new car purchases: Taxpayers may be able to deduct the sales tax on purchases of new (not used) cars. The tax deduction phases out at $125,000 for single filers and $250,000 for married filers.
- AMT Patch: The AMT patch for 2009 is $46,700 for individuals, $70,950 for married filing joint and $35,475 for married filing separate.
Federal Tax Changes Affecting Businesses:
- Extension of bonus depreciation: The 50% bonus depreciation from 2008 is extended into 2009.
- Extension of Section 179 expending: Firms can write off up to $250,000 of assets purchased in 2009 provided their new purchases do not exceed $800,000.
- Expanded NOL carry back: Non-farm taxpayers may now elect to carry back net operating losses created in 2008 for up to 5 years. This change is limited to taxpayers with less than $15 million average in gross receipts over the past 3 years.
- Work Opportunity Tax Credit expanded: If a business hires an unemployed veteran (discharged from the service in 2008, 2009 or 2010 and drawing unemployment for more than 4 weeks) or a disconnected youth (between 16 and 25 and not regularly employed or in school) they may qualify for a 40% credit on the first $6,000 paid to the new employee in wages. Paperwork must be filed within 30 days of the employee starting work to qualify for the credit.
- Employers should remember that residents of Van Wert & Paulding counties between the ages of 18-39 qualify as rural renewal county residents and are also eligible for the credit.
- Delayed recognition of certain cancellation of debt income: If a business purchases its own debt at a discount it can delay the recognition of income over 10 years.
- Qualified small business stock: The exclusion from the sale of certain small business stock held more than 5 years is increased to 75% for stock issued after the enactment date and before 2011.
- S Corp holding period: The new law temporarily shortens the holding period of assets subject to the built-in gains tax from 10 years to 7 years.
Federal Energy Tax Incentives for Individuals and Businesses:
- Energy Home Improvement Credit: Taxpayer purchases of insulation, exterior windows, exterior doors, central air conditioners, natural gas, propane water heaters or furnaces, hot water boilers, electric heat pump water heaters, certain metal roofs and stoves, and advanced main air circulating fans during 2009 and 2010 may be eligible for a 30% credit if the property meets energy standards. The maximum credit is $1,500 during this 2 year period.
- Residential energy property caps eliminated: The 2008 caps for small wind energy property ($4,000), qualified solar water heating property ($2,000) and qualified geothermal heat pumps ($2,000) have been eliminated for 2009. The credit for 2009 is 30% of the cost of purchasing and installing the residential energy property.
- Renewable Electricity Production Credit: Taxpayers have 3 different options to qualify for assistance with facilities that produce electricity from alternative sources.
- The renewable electricity production credit gives taxpayers credits based on the amount of electricity sold from their production facility (provided the facility is placed in service by 2012 or 2013 depending on the type of facility).
- Another option is that taxpayers could claim an investment credit the year the facility is placed in service as opposed to the credit above (up to 30% of the cost of the facility).
- Last, taxpayers can apply for a grant instead of the production or investment credit (up to 30% of the cost of the facility). The facility must be placed in service during 2009 and 2010 or construction must begin in either of those years and be finished by the termination of the credit.
This letter is a brief overview of very complex, detailed tax legislation and should not solely be relied upon to make tax decisions. Please call our office on how to position yourself or your business to take advantage of the various tax credits or planning opportunities presented in this new legislation.
Please contact us and we will be happy to meet with you.