Individual Tax Provisions

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Making Work Pay Tax Credit

The Act provides for an income tax credit equal to the lesser of 6.2 percent of an individual’s earned income or $400 ($800 for married couples filing a joint return). The credit would be reduced, but not below zero, if an individual’s modified adjusted gross income exceeds $75,000 ($150,000 in the case of married couples filing jointly). The credit applies to 2009 and 2010.

Economic Recovery Payment

The Act provides for a one time payment of $250 for 2009 to Social Security beneficiaries and SSI recipients, to veterans receiving disability compensation and pension benefits fromthe Department of Veterans Affairs and to retired government employees. Recipients of this payment will be subject to a dollar-for-dollar reduction in the amount of the otherwise available Making Work Pay Tax Credit.

Alternative Minimum Tax

The Act contains a patch for 2009 to the AMT. The patch increases the exemption amounts to $70,950 for married couples filing a joint return and surviving spouses (increased from $69,950 in 2008) and $46,700 for singles and heads of households
(increased from $46,200 in 2008) and allows taxpayers to claim most personal tax credits to reduce AMT liability.

Education Credit

The Act increases for 2009 and 2010 the HOPE credit from the current maximum of $1,800 to $2,500 per year, includes textbooks as a qualifying expense, extends the period of eligibility for the credit from two years to four years, and increases the income phase-out levels from $50,000 ($100,000 for married couples filing a joint return) to $80,000 ($160,000 for married couples filing a joint return). The maximum credit is obtained by incurring $4,000 of qualifying expenses, consisting of 100 percent
of the first $2,000 of expenses and 25 percent of the next $2,000 of expenses. The credit would be renamed the American Opportunity Tax Credit and would be available for credit against the AMT liability. In addition, 40 percent of the credit would be refundable.

Unemployment Compensation

The Act excludes the first $2,400 of unemployment compensation from taxable income in 2009.

First Time Homebuyer Credit

In 2008, Congress enacted a tax credit for first time homebuyers for homes purchased on or after April 9, 2008, and before July 1, 2009. However, the credit must be repaid ratably over 15 years. The Act increases the maximum credit from $7,500 to $8,000, extends it through November 30, 2009, and eliminates the required repayment obligation after 36 months in the home. These enhanced provisions apply to homes purchased after December 31, 2008, and through November 30, 2009. The credit phases out for taxpayers with adjusted gross income above $75,000 ($150,000 formarried couples filing a joint return).

New Vehicle Deduction

The Act allows taxpayers to claim an above the line deduction for the sales and use taxes or excise taxes paid on the purchase of a new car, motorcycle, light truck, or recreational vehicle. Because the deduction is above the line, taxpayers who do not itemize their deductions can benefit from it. The deduction is limited to taxes paid on the first $49,500 of the purchase price and is phased out for taxpayers with adjusted gross income exceeding $125,000 ($250,000 for married couples filing a joint return).

Child Tax Credit

Under current law, the child tax credit of $1,000 per child is refundable to the extent of 15 percent of earned income in excess of $8,500. For 2009 and 2010 the Act increases the refundable portion of the child tax credit by reducing the income threshold to $3,000.

Earned Income Tax Credit

The Act increases the credit from 40 percent to 45 percent of the first $12,570 of earned income for taxpayers with three or more children.

Transit Benefits

The Act increases the exclusion for transit passes and van pooling employers can provide to employees from $120 per month to $230 per month staring in March 2009 and extends the increased amount through 2010 with an inflation adjustment.

Small Business Capital Gains

The Act increases the gain exclusion on small business stock from 50 percent to 75 percent for stock acquired after February 17, 2009, and before January 1, 2011, and held for more than five years.

COBRA Benefits

The Act enacts a subsidy for unemployed workers to pay for their health insurance premiums. Under the Act, the employee pays 35 percent of the cost of the COBRA coverage. The former employer is required to pay the remaining 65 percent
of the cost. The former employer is entitled to a credit against its income tax withholding and payroll taxes for this amount. The benefit is phased out for taxpayers with adjusted gross income exceeding $125,000 ($250,000 for married couples filing a joint return). The provision applies to employees who are involuntarily separated from employment between September 1, 2008, and January 1, 2010, but is only effective for months of coverage beginning after February 17, 2009.