[Updated Jan 2011] : No New Taxes with Tax Extensions Approved. President Obama has now signed into law a bill that covers a temporary extension of all the bush-era tax cuts. The new bill also contains extensions to some of the 2008 stimulus tax breaks, and even has some new tax cuts. You can see more on these extensions here. With this legislation he has essentially created a new 2011 Economic Stimulus package, estimated at around $858 billion.
Further, there will be no $250 SSI payment in 2010. See this article for the latest developments on this payment into 2011.
As 2009 draws to a close many folks have been wondering what is happening with the numerous economic stimulus credits and payments dispensed under President Obama’s Economic Stimulus package. I have written extensively about the key stimulus credits and deductions over the last 6 months as covered in some of the following posts, but here is a summarized update on each of them and the tax implications for those who have or will receive these payments.
For an update on the 2010 stimulus credits, see this recently updated post: Updates on 2010 Government Tax Credits – Home Buyer Credit Filing Extension, $250 SSI and Medicare Gap Payments, Teacher Credits and Unemployment Insurance
More than 1.4 million Americans have already claimed the new tax credit for first-time home buyers, according to a report from the IRS. However for the many would-be home buyers, the extension of the $8000 new home buyer credit (expiring on December 1st) will be of particular concern. Especially for those considering a purchase in the next few months because they must go through the whole home buying process and close before the end date. Further the stabilization of the housing market due to the 2008 credit and unprecedented success of the cash for clunkers program has shown that stimulus payments that directly help consumers seem to have the most impact. When Congress passed the $8,000 tax credit for first-time home buyers last winter, it was intended as a dose of shock therapy during a crisis. Now the question is becoming whether the housing market can function without it. As many as 40 percent of all home buyers this year will qualify for the credit. It is on track to cost the government $15 billion, more than twice the amount that was projected when Congress passed the stimulus bill in February.
The two biggest housing trade groups – the 1.2 million-member National Association of Realtors and the National Association of Home Builders – are mounting unusually intense lobbying campaigns to make the case for extending the credit, and maybe even expanding it (to $15,000 per the original bill). On a national basis, according to economists at the National Association of Realtors, anywhere from 300,000 to 350,000 additional sales of houses will be stimulated this year by the credit. Each home sale generates about $63,000 in downstream “ripple effects” elsewhere in the economy, they say. That includes sales of furnishings, appliances, lawn mowers, landscaping and renovation materials, plus moving expenses. If you accept the numbers – and some analysts consider them a stretch – this means the housing credit provides a powerful, immediate stimulus bang for the buck. Failure to extend what may be one of the most effective pieces of the Obama administration’s 2009 stimulus legislation would cost jobs, economic growth and tax revenues, the housing groups argue.
The sponsor of the original Senate bill, Johnny Isakson, Republican of Georgia, agrees and is back with a new bill that would give a maximum $15,000 credit to any buyer who stays in a home for at least two years.
But can any of this happen before the December 1st deadline? The key complicating factor here is Congress’s heavy load of higher-profile, pressing issues (like health-care reform) that will get attention before anything else. On top of that, a tax-credit extension would cost billions in lost revenue – a big negative when the federal budget deficit is already wallowing in a record amount of red ink. In the end, however, given the political economics of the housing credit, the odds favor some sort of extension, probably later rather than sooner. But don’t bank on it and if you are ready to purchase a home then do so sooner rather than later.
Tax Implications: The $8,000 credit passed in 2009 does not have to be paid back and is tax free (called fully refundable). If you don’t owe any taxes, you get the full amount back. Unfortunately you still have to pay back the 2008 enacted $7,500 credit (for homes bought between April 8, 2008, and before December 31, 2008).
Social Security Payment and Making Work Pay Tax Credit in 2010
These tax credits (i.e. you don’t have to pay them back) were part of the American Recovery and Reinvestment Act and provide:
- A refundable tax credit in 2009 and 2010 of up to $400 for working individuals and up to $800 for married taxpayers filing joint returns. This tax credit will be calculated at a rate of 6.2 percent of earned income and will phase out for taxpayers with modified adjusted gross income in excess of $75,000, or $150,000 for married couples filing jointly. Taxpayers who do not have taxes withheld by an employer during the year can also claim the credit on their 2009 tax return. There are also provisions in the 2010 Obama budget, for this credit to be extended until 2013.
- A one-time economic recovery payment of $250 in 2009 to retirees and disabled people receiving Social Security benefits. The making work pay tax credit ($400 or $800) will be reduced by $250 if you are eligible for both credits or special credits for certain government retirees. The one-time economic recovery payment will not count as income for SSI. There is also talk that this payment will be made again in 2010 to help those not eligible for the making work pay credit (those with no earned income.
The Making working Pay $400/$800 credit is being paid by the IRS (via adjusted withholding tables for employers), while the $250 social security payment is being paid out by the SSA. Most qualified wage earners should already have or be receiving the making work pay credit, which was typically handled by their employers through automated withholding changes in May 2009. For the making work pay credit, this would be reflected with a larger paycheck as a result of the changes made to the federal income tax withholding tables (see irs.gov). Some people may find that the changes built into the withholding tables resu
lt in less tax being withheld than they required and should update their W4 forms (via their HR or payroll depts).
The new car deduction is limited to the state and local sales and excise taxes paid on up to $49,500 of the purchase price of a qualified new foreign or domestic vehicles. It is has income restrictions and the new vehicle must be purchased on or after Feb. 17, 2009, and before Jan. 1, 2010, to qualify for the deduction. With all the US automakers bailouts and the cash for clunkers program, it is highly unlikely that this deduction will be extended, comments which have been echoed by the Obama administration.
Many folks have also been wondering whether the new car tax deduction can be claimed in conjunction with the now expired cash for clunkers rebate voucher ($3500 or $4500) program. The answer is yes. In fact, as I discuss in this article, there are up to 3 government sponsored subsidies/tax breaks available for new car buyers. The key is meeting the eligibility criteria for each one, which with some careful planning is definitely possible.
For example, in most states car buyers are taxed on the amount (sales price) of the car before the cash-for-clunkers rebate ($3,500 or $4,500) was applied. So if you bought a $45,000 car that qualifies for cash-for-clunkers, you would have paid sales tax on the $45,000 price. It is on this sales price that you can claim the tax deduction. Assuming your state and local sales tax rate is 6%, you’d pay $2,700 in sales tax (on the $45,000 car) which would be deductible on your federal return. Your actual tax savings would depend on your income and marginal tax rate, of course. If your marginal tax bracket is 15%, you’d multiply your deduction by 15% and get $405 in actual tax savings in our example. If you’re a higher income taxpayer in the 33% marginal bracket, the savings would be $891.
Tax Implications: The new car deduction is available regardless of whether a taxpayer itemizes deductions on their return (Schedule A). The deduction cannot be taken on 2008 tax returns – even if they are amended or filed late. Also, taxpayers who might want to deduct all of their state and local sales taxes for 2009, in lieu of income taxes, won’t be able to take two deductions for the state and local sales taxes paid on a car. The Cash for Clunkers rebate is also tax free.
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Additional tax credits have been provided for making energy efficiency improvements or installing alternative energy equipment in your home. The Stimulus package provides for a uniform tax free credit of 30 percent of the cost of qualifying improvements up to $1,500, such as adding insulation, energy-efficient exterior windows, and energy-efficient heating and air conditioning systems. The new law replaces the old law combination available in 2007 of a 10-percent credit for certain property and a credit equal to cost up to a specified amount for other property. The new law also raised the limit on the amount that can be claimed for improvements placed in service during 2009 and 2010 to $1,500, instead of the $500 lifetime limit under the old law.
This credit can be used with another government rebate (which does not require repayment either) funded under the so called cash for appliances program. This program, managed by Department of Energy (DOE) but run by the states, provides rebates to consumers for the purchase of new ENERGY STAR qualified home appliances. Rebate checks (in the $50 to $200 range) will be issued whenever a qualifying appliance is purchased once the program is live (in fall 2009). ENERGY STAR qualified appliance categories eligible for the tax free rebates include: central air conditioners, heat pumps (air source and geothermal), boilers, furnaces (oil and gas), room air conditioners, clothes washers, dishwashers, freezers, refrigerators, and water heaters.
Unemployment Health Benefit Extensions
Under the economic stimulus plan unemployment benefits were extended through December 2009 and health insurance coverage for unemployed Workers was expanded under the COBRA program to provide a 60% subsidy for COBRA premiums for up to 9 months. With unemployment such a key factor for a sustained economic recovery there is a reasonable chance that benefits will be further extended in 2010 to prevent the country falling back into a recession.
In fact, Congress is already looking into this as unemployment reaches record highs. The proposal is to extend unemployment benefits for another 13 weeks. The measure would lengthen benefits for the more than 300,000 people who live in states with unemployment rates greater than 8.5% and who are set to run out of compensation by the end of this month. The legislation would also help another 1 million people who are scheduled to lose be
nefits by the end of the year.
In most states, the unemployed receive 26 weeks of state-funded benefits. Depending on where they live, they could get federally funded extensions for a total of 79 weeks. Governors of 22 states appealed to Congressional leaders this week to quickly pass extended benefits
~ Getting Help with Home Foreclosures as Filings Continue to Rise
~ Stimulus Payments in 2010 & 2011
~ Food Stamps Stimulus Payment
~ When Will I Receive the 2009 Economic Stimulus Working ($800/$400), Social ($250) and New Home ($8000) Tax Credits