Individuals – Tax Breaks

Making Work Pay Credit

The Making Work Pay Credit (MWPC) provides a refundable tax credit of up to $400 for individuals and up to $800 for married taxpayers filing joint returns. The MWPC, as approved under the American Recovery and Reinvestment Act of 2009 (2009 Recovery Act), applies to the 2009 and 2010 tax years. The president proposes to extend the MWPC for one year, through December 31, 2011.

The MWPC is primarily delivered through reduced withholding. The MWPC is calculated at a rate of 6.2 percent of earned income. Income phaseouts apply. The MWPC phases out at a rate of two percent of modified adjusted gross income (AGI) in excess of $75,000 for single individuals and it phases out at a rate of two percent of modified AGI in excess of $150,000 for married couples filing a joint return.

IMPACT: In his FY 2010 budget proposal, the president endorsed a permanent MWPC. The federal budget deficit, however, has made a permanent MWPC an unrealistic goal.

Economic Recovery Payments

In 2009, qualified seniors, disabled individuals and veterans, recipients of Railroad Retirement Board (RRB) benefits, and Supplemental Security Income (SSI) recipients received one-time payments of $250. The president wants to make another round of “one-time” payments of $250 to these qualified individuals in 2010.

IMPACT: Any MWPC for which an individual might be eligible is reduced by the amount of any economic recovery payment. According to the IRS, early filing trends indicate that some working taxpayers who received economic recovery payments in 2009 and a MWPC are not properly reporting the $250 payment on their returns.

Refundable Credit for Federal/State Workers

Individuals who retired from federal, state, and local government employment may not be eligible for Social Security benefits. Consequently, they would not receive a one-time $250 economic recovery payment under the president’s FY 2011 budget proposal. The president asked Congress to provide federal, state, and local government retirees with a $250 refundable tax credit when they file their 2010 federal income tax returns in 2011.

COMMENT: The 2009 Recovery Act provided a similar onetime $250 tax credit for federal, state and local government retirees in 2009, which eligible individuals claim when they file their 2009 returns in 2010.

COBRA Premium Assistance

The 2009 Recovery Act provided a nine month subsidy to help individuals involuntarily terminated from employment to continue their health insurance coverage under COBRA. Assistance eligible individuals pay 35 percent of their COBRA premiums and are treated as paying the full amount. The FY 2010 Defense Appropriations Act extended eligibility for COBRA premium assistance through February 28, 2010, and provided for a total of 15 months of assistance. The president proposes to extend eligibility for the COBRA subsidy through December 31, 2010. The duration of the assistance period for qualified individuals who are involuntarily terminated from employment after February 28, 2010 would be 12 months.

COMMENT: Under current law, involuntary termination from employment must occur between September 1, 2008 and February 28, 2010 and the individual must be eligible for COBRA coverage at any time during that period. The House has already approved legislation extending the eligibility period through June 30, 2010.

IMPACT: The president did not recommend making any changes to how employers are reimbursed for their 65 percent of COBRA premium assistance. Employers are reimbursed through a credit on Form 941, Employer’s Quarterly Federal Tax Return.

COMMENT: Higher income individuals may waive COBRA premium assistance. If they do not, they may be subject to recapture rules. Individuals with modified AGI between $125,000 and $145,000 ($250,000 and $290,000 married couples filing jointly) must repay a portion of the subsidy. If a taxpayer’s modified AGI exceeds $145,000 ($290,000 for married couples filing jointly), the full amount of the subsidy must be repaid as an additional tax. These income levels would not be revised under the president’s proposed extension.

EITC

The 2009 Recovery Act enhanced the earned income tax credit (EITC) by increasing the credit percentage for families with three or more children to 45 percent. This treatment, however, is only available for 2009 and 2010. The president proposes to make permanent the 45 percent credit for families with three or more children.

COMMENT: The president also proposes to eliminate the advanced EITC.

Child and Dependent Care Credit

Taxpayers who incur expenses to care for a child under age 13 or for an incapacitated dependent or spouse in order to work or look for work can claim a credit ranging from 20 percent to 35 percent of employment-related expenses, based on AGI. The maximum eligible expenses are $3,000 for taxpayers with one qualifying individual and $6,000 for taxpayers with two or more qualifying individuals.

The president proposes increasing the AGI level at which the 35 percent credit begins to phase out to 20 percent dramatically, from $15,000 to $85,000. The 20 percent credit, therefore, would be applied to taxpayers with AGI in excess of $113,000 (rather than above the $43,000 level now in place). The permanently enhanced credit would be available for tax years beginning after December 31, 2010.

IMPACT: Under the president’s proposal, therefore, taxpayers with incomes up to $85,000 would be entitled to a maximum $1,050 credit ($2,100 for more than one qualifying individual). For those with more than $113,000 AGI, a maximum $600 ($1,200) credit would apply. Under current law, however, the dollar limits on the expenses eligible for the credit are reduced by the amount of any employer-provided dependent care benefits excluded from the taxpayer’s income. The president proposes no changes to this treatment.

COMMENT: The child care credit should not be confused with the child credit. The child credit, which is now $1,000, is scheduled to revert to $500 after 2010. The president’s baseline assumptions in his FY2011 budget proposals include retaining the $1,000 maximum credit, as well as its refundability.

American Opportunity Tax Credit

The 2009 Recovery Act expanded and renamed the Hope education credit as the American Opportunity Tax Credit (AOTC) for 2009 and 2010. Eligible taxpayers receive a tax credit based on 100 percent of the first $2,000 of tuition, fees and course materials paid during the tax year, plus 25 percent of the next $2,000 of tuition, fees and course materials paid during the tax year. The AOTC may be claimed for expenses for the first four years of post-secondary education. The president proposes to make the AOTC permanent.

The credit is reduced ratably if a single individual’s modified AGI exceeds $80,000 and a married couple’s modified AGI exceeds $160,000. The president proposes to index the phase-out limits for tax years beginning after December 31, 2010. The president also recommends indexing the expense amounts for the AOTC for inflation for tax years beginning after December 31, 2010.

IMPACT: With the proposed inflation adjustment, the difference between the AOTC and the former Hope education credit (which would otherwise apply as early as against next year’s spring semester tuition) might make or break a student’s choice of post-secondary education. The Hope credit was $1,800 with a phase-out starting at $50,000 ($100,000 for joint filers), while the AOTC caps out at $2,500 with a phase-out starting at $80,000 ($160,000 for joint filers).

Individual Extenders

The president did not identify specific individual provisions for extension but it is likely that Congress will  pass the following “extenders” sometime in 2010 and make them retroactive to January 1, 2010:

• An alternative minimum tax (AMT) “patch” for 2010 to keep the exemption high enough to prevent an additional 20 million middle-income taxpayers from having to pay AMT;
• State and local sales tax deduction;
• Teacher’s classroom expense deduction of up to $250 annually;
• Higher education tuition deduction for post-secondary education with income phase-outs;
• Tax-free charitable distributions from IRAs for individuals age 70 ½ and older for distributions up to $100,000 (in lieu of a charitable deduction);
• Additional standard deduction for real property taxes for non-itemizers; and District of Columbia first-time homebuyer’s credit.

COMMENT: The president did not propose to extend the now-expired $2,400 exclusion for unemployment benefits received in 2009. For more details about the extenders, see the CCH Tax Briefing: Extenders Legislation on CCH Intelliconnect and the CCH Tax Research Network.

Source: CCH, a Wolters Kluwer business