Tax Planning: What’s New For 2009?
Kevin G. Wick

Now that April 15 has come and gone (thankfully), now may be the time to turn our attention to planning for next year’s tax returns. The American Recovery and Reinvestment Act of 2009 (referred to as the “Recovery Act”), which was signed into law on February 17, 2009, makes a number of beneficial tax changes for individuals. However, most of them are temporary in nature, meaning that unless extended by future legislation, they apply only for 2009 or in some cases for 2009 and 2010. Here is a review of the more widely applicable provisions that could have an impact on you and your family.
New “Making Work Pay” Credit. Individuals who work generally will receive a credit of up to $400 ($800 for joint filers). The credit is refundable, meaning you get it even if you owe no income tax. This change applies for 2009 and 2010. The credit is the lesser of 6.2% of your earned income or $400 ($800 on a joint return). The credit is phased out for taxpayers with   adjusted gross income (“AGI”) in excess of $75,000 ($150,000 for married couples filing jointly).
You won’t be getting a separate check from the IRS, as you may have with last year’s stimulus payment. Rather, your employer will automatically adjust your withholding so that you will get a little more money in each paycheck. If you have multiple jobs, you may have to adjust your withholding so that too much is not taken out. If you are self-employed, you can effectively receive the credit in advance by reducing your quarterly estimated tax payments.
One-time $250 payment or credit for others. The Recovery Act provides a one-time payment of $250 in 2009 to retirees, disabled individuals and SSI recipients receiving benefits from the Social Security Administration, Railroad Retirement beneficiaries, and disabled veterans receiving benefits from the U.S. Department of Veterans Affairs. It also provides a one-time refundable tax credit of $250 in 2009 to certain government retirees who are not eligible for Social Security benefits. The Making Work Pay credit described above is reduced by any $250 payment or credit received.
New sales tax deduction for vehicle purchases. For 2009, there is a new deduction for state and local sales taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles after Feb. 16, 2009 and before Jan. 1, 2010. The deduction generally is available regardless of whether you itemize your deductions on Schedule A or claim the standard deduction on your income tax return.
The deduction is limited to the tax on up to $49,500 of the purchase price of an eligible motor vehicle. Like the Making Work Pay Credit above, this deduction is phased out The tax break phases out starting with taxpayers earning $125,000 per year ($250,000 for joint returns).
If you itemize and choose the option to deduct state sales taxes in lieu of state income taxes, you will not get the new deduction. This prevents you from getting a double deduction for the sales taxes on the vehicle but it also involves some tricky planning considerations because different rules apply to the optional deduction for state sales taxes and this new deduction.
Improved first-time homebuyer credit. Last year, Congress provided taxpayers with a refundable tax credit for first-time homebuyers equal to the lesser of 10% of the purchase price or $7,500 for qualifying purchases after April 1, 2008 and before July 1, 2009. The credit is essentially an interest-free loan because it has to be paid back to the government over fifteen years (or earlier if the home was sold).
This year’s Recovery Act has improved the credit for 2009 purchases by (i) eliminating the requirement to pay it back (subject to exceptions), (ii) increasing the maximum credit to $8,000, and (iii) making it available for purchases through November of 2009.
You have the option to treat a 2009 purchase as having been made on December 31, 2008 and thus get an immediate refund as part of your 2008 tax return. If you have already filed your 2008 taxes, you can file an amended 2008 return to get the credit for a 2009 purchase.
You are considered a first-time homebuyer if you (or your spouse, if married) had no present ownership interest in a principal residence in the U.S. during the three year period before the purchase of the home to which the credit applies. Additionally, the credit phases out for taxpayers with AGI in excess of $75,000 ($150,000 in the case of a joint return).  
College tax breaks. The Recovery Act expands tax breaks for individuals seeking a college education. For 2009 and 2010, it gives taxpayers a new “American Opportunity” tax credit of up to $2,500 of the cost of tuition and related expenses paid during the tax year. You receive a tax credit based on 100% of the first $2,000 of tuition and related expenses (including books) paid during the tax year and 25% of the next $2,000 of tuition and related expenses paid during the tax year. The credit is available for the first four years of post-secondary education in a degree or certificate program. Forty percent of the credit is refundable. The credit is phased out for taxpayers with AGI in excess of $80,000 ($160,000 in the case of a joint return).
Tax break for the unemployed. Unemployment compensation benefits are ordinarily fully taxable. However, under the Recovery Act, an individual does not have to pay tax on up to $2,400 in unemployment benefits received in 2009.
Lastly, for those of you of retirement age, late in 2008 Congress passed a separate law that helps individuals who are taking or about to take required payouts from tax-qualified retirement plans or traditional IRA’s. In essence, the law waives these required payouts (called “required minimum distributions” or RMD’s) for 2009. Had the waiver not been granted, those of you with retirement accounts invested in beaten-down assets such as stocks or mutual funds would have had to sell assets at a loss this year to generate RMD’s for 2009. If you can afford to skip this year’s RMD, you can avoid selling in a down market and in turn lower your tax bill for 2009.
Please keep in mind that this is only a summary of these new provisions. Please feel free to call our office or consult your tax advisor for details of how the new changes may affect you and your family.