On the Money: Tax ramifications of economic stimulus

The American Recovery and Reinvestment Act (ARRA) of 2009 was signed into law on Feb 17. Historically, high-income earners have not found benefit from tax cuts, though the combination of difficult economic times (especially if you operate a pass-through business entity) and higher income phase-outs puts you in a position to personally benefit.

For sake of simplicity, the calculations below pertain to those filing jointly (single tax filers have lower income thresholds – generally 50 percent).

The Act provides for $116 billion in tax relief to workers by returning the first $400 of Social Security tax per person (reduced by 2 percent of the amount joint income exceeds $150,000) in 2009 and 2010. Another provision ($70 billion) is a one year “patch” on the alternative minimum tax (AMT).

Going to college also became more affordable. The Hope Credit receives a temporary boost for 2009 and 2010. The credit is for 100 percent of the first $2,000 plus 25 percent of the next $2,000 of qualified expenses (maximum $2,500 credit). Students (and their parents) will appreciate that the credit is also now available for the first four years of college (previously limited to the first two years). Qualified expenses are expanded to include course materials. The credit is allowed against AMT. Also benefitting students is a provision that identifies qualified expenditures from 529 college savings plans to include amounts paid or incurred during 2009 and 2010 to buy computer technology, equipment, or services (including Internet access) for use by a college student and his or her family.

There are several provisions that offer aid on certain investments; namely that the AMT will not apply to interest on private activity bonds issued in 2009 and 2010. Bonds issued in 2004-2008 may be transformed into fully exempt bonds if they are refinanced. Separately, mutual fund shareholders may receive a pass through of realized tax credits.

Financial hardship provisions include a federal subsidy of 65 percent of COBRA health insurance premiums for nine months (joint income limitation of $250,000), a temporary increase of both the earned income tax credit and the refundable portion of the child tax credit, and $2,400 of unemployment income may be excluded from income for 2009 only.

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