2009 Stimulus Provisions Worth Getting to Know Now

August 6, 2009

Although the American Recovery and Reinvestment Act (ARRA) will put more money into the pockets of individuals and small businesses, it will make preparing 2009 federal returns a little more challenging. Combined with the likelihood that the Obama administration will introduce additional tax law changes yet this year, professional tax preparers are gearing up for a memorable 2009 tax season.

Tax preparers can get a head start on the upcoming tax season now by learning about the more complicated ARRA provisions. Among those are the First-time Homebuyer and Making Work Pay Credits – two provisions that have received a good deal of press in recent months, but have yet to be fully understood.

Perhaps the most well-known provision is the revised First-time Homebuyer Credit. Homebuyers who purchase a home in 2009 before Dec. 1 can claim an increased credit amount of 10 percent of the home purchase price, up to $8,000. It phases out when modified adjusted gross income is $75,000 for an individual or $150,000 for joint filers.

First-time homebuyers are defined as those who have never owned a principal residence, as well as those who have not owned a principal residence during the three years prior to the date of purchase. Married taxpayers must both qualify as “first-time homebuyers” in order to receive the full credit of $8,000.

The only scenario in which the credit must be paid back is if the home ceases to be the owners’ principal residence within 36 months of the purchase date. Then the full credit amount must be repaid on the federal return for that tax year.

As with most legislation, there are exceptions. Certain taxpayers are permitted to receive advance payment of the credit to cover certain purchasing costs. Homebuyers with mortgages backed by the Federal Housing Administration (FHA) can use the credit for closing costs, fees and additional money for a down payment beyond the FHA’s required 3.5 percent minimum.

Anyone can apply for an FHA-backed mortgage, regardless of income. However, there are limits on the size of the mortgage, and lenders may charge a fee for the credit. Some states are also offering similar programs.

Whether taxpayers claim the full First-time Homebuyer Credit by amending their 2008 return or by claiming it on their 2009 return should depend on income. If their income is expected to decrease in 2009, it will likely make more sense to claim the credit on the 2009 return.

The ARRA also includes a new credit already affecting millions of Americans. Starting in summer 2009, the Making Work Pay Credit increased employees’ take-home pay by reducing federal income tax holdings.

Qualified taxpayers will receive a tax credit of up to 6.2 percent of their earned income, up to $400 for single filers and $800 for joint filers. The Making Work Pay Credit phases out at a modified adjusted gross income of $75,000 - $95,000 ($150,000 - $190,000 married filing jointly), and non-residents and taxpayers claimed as a dependent are ineligible.

The IRS has been encouraging qualified individuals to review their federal withholding using their Withholding Calculator to ensure sufficient funds are being withheld to meet their 2009 tax obligation.

The Making Work Pay Credit amount will be reduced by any amount received for the Economic Recovery Payment or Government Retiree Credit. As a result, those taxpayers’ refund amounts may appear to decrease, when in reality, they are simply receiving part of their 2009 refund in advance.

Those who qualify for the Economic Recovery Payment should have already received their check in the mail.

If taxpayers are eligible for the Government Retiree Credit, they must file 2009 federal returns in order to receive the refundable credit, even if they aren’t required to file. If a taxpayer qualifies for both the Economic Recovery Payment and Government Retiree Credit, that person will only receive the former.

The Making Work Pay Credit, Economic Recovery Payment, and Government Retiree Credit will be figured on the new Schedule M in 2009 and then recorded on the 1040, 1040A or 1040EZ.

In addition to the revised First-time Homebuyer Credit and new Making Work Pay Credit, the 2009 stimulus includes various provisions that will impact millions of 2009 federal returns. From dependents and the unemployed to college students and small businesses, there’s something for just about everyone in the ARRA.

An increasing number of tax preparers are using professional software in order to help them remember and correctly apply all of the latest tax law changes. TaxACT offers a variety of affordable solutions that allow users to begin work on next year’s returns in October with its Preview release. Final versions of TaxACT software are released in early January.

For more information about the ARRA, visit TaxACT’s ARRA site and www.IRS.gov.

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