Relief and opportunity
Congress and the president enacted a major economic stimulus bill in 2009, which came just a few months after a number of important tax provisions were extended in a financial rescue bill in late 2008. More tax legislation was still possible as this guide went to print, but the stimulus bill alone included $326 billion in new tax cuts. Virtually no revenue raisers were included. Lawmakers decided that with the economy in trouble, it was not the right time to apply the kinds of tax increases that have been used to pay for legislation in past years.
Most of the tax provisions from the new tax bills are designed either to stimulate economic activity or provide relief to taxpayers that have suffered from the downturn. Many are geared toward individuals, and these will provide scores of taxpayers with fresh opportunities for tax savings.
Take a new look at education incentives
You may need to reexamine education credits this year, even if you assumed you earn too much to qualify. The stimulus bill enhanced the Hope Scholarship credit for 2009 and 2010 and renamed it the American Opportunity credit. The credit is now more generous, equal to 100 percent of the first $2,000 of tuition and 25 percent of the next $2,000, for a total credit of up to $2,500. It is also 40 percent refundable. But most importantly, it is allowed against the alternative minimum tax (AMT) and phases out at a much higher income level. For 2009 and 2010, the credit will phase out between adjusted gross incomes of $80,000 and $90,000 for single filers and $160,000 and $180,000 for married couples filing jointly. (See our discussion of tax planning for education expenses.)
Did you make any home improvements?
You may be entitled to a larger tax credit than you think if you made energy-efficient improvements to your home this year. The stimulus bill enhanced both the Section 25C home improvement tax credit and the Section 25D residential energy-efficient property tax credit.
Section 25C provides a credit for installing energy-saving property, such as insulation, energy-efficient windows and roofs, and highly efficient air conditioners, furnaces and water heaters. In 2008, the credit rate was 10 percent and had a lifetime limit of $500. For 2009, the credit rate has been increased to 30 percent with an additional $1,500 added to the lifetime limit.
Section 25D provides a 30-percent personal tax credit for energy-efficient property, such as solar water heaters, geothermal heat pumps and fuel cells. Previously, this credit was generally capped between $500 and $4,000 depending on the property. The stimulus bill eliminates the credit caps for solar, geothermal and wind property and allows the use of subsidized energy financing.
Did you buy a car this year?
The “cash for clunkers” program stole all the press this year, but many car-buyers who didn’t have a clunker to trade in will still get a substantial deduction for a new car purchase. The stimulus bill created an above-the-line deduction for state and local sales tax on new car purchases made between Feb. 17 and the end of the year.
The deduction is allowed for taxes on the first $49,500 of the car’s price, and the phaseout range is unusually high for this type of targeted benefit. The deduction phases out between the adjusted gross income (AGI) levels of $125,000 and $135,000 for single individuals and $250,000 and $260,000 for joint filers. Above-the-line deductions are especially valuable because they reduce AGI (see more on this strategy), but this deduction is not available if you elect to claim state and local taxes as an itemized deduction.
Would you consider investing in a small business?
Qualified small business (QSP) stock has become an even more attractive investment. The stimulus bill increased the exclusion on the gain from the sale of QSP stock from 50 percent to 75 percent for stock bought after Feb. 17, 2009, and before Jan. 1, 2011. This stock is taxed at a long-term capital gains rate of 28 percent, so the increased exclusion drives the effective rate down from 14 percent to 7 percent. Investments in qualified small business stock also come with several other tax benefits. (See more details.)
Are you required to make distributions from your retirement plan?
Normally, taxpayers must begin making required minimum distributions (RMDs) from tax-preferred retirement savings accounts such as IRAs, 401(k)s, 403(b) plans and some 457(b) plans once they reach age 70½. These distributions are calculated using your account balance and life expectancy table and generally must be taken each year by Dec. 31. If not, you can be charged a 50-percent penalty on the amount that should have been withdrawn.
Lawmakers late last year were concerned that the distribution requirements were unfair to taxpayers whose retirement accounts were battered by the downturn, so they enacted a provision to waive all RMDs for 2009. The normal RMD rules are suspended completely, so no taxpayer has to make an RMD for 2009. This includes taxpayers reaching 70½ during calendar-year 2009. The suspension is permanent. You will not have to increase distributions in a later year to make up for 2009. (See Tax planning opportunity 14 for strategies on dealing with RMDs.)
Are you a business owner?
Business owners should be aware of several additional opportunities provided by the stimulus bill. The bill allows qualifying small businesses with under $15 million in annual gross receipts to carry 2008 losses farther back to receive refunds against taxes paid in prior years. Normally, the net operating loss carryback period is only two years, but businesses that meet all the restrictions in the bill can elect a carryback period of three, four or five years.
The stimulus bill also will allow taxpayers to defer cancellation of debt (COD) income incurred in 2009 and 2010. COD income arises from virtually any “forgiveness” of debt, whether it comes from retiring a debt at a discount, refinancing an existing debt, exchanging an old debt for a new one or any other modification. The deferred COD income will be recognized ratably over the five years beginning in 2014.
The stimulus bill also lowered withholding and estimated tax requirements for certain taxpayers with AGIs under $500,000 who earn at least half of their income from a small trade or business. Qualifying taxpayers will only need to pay the equivalent of 90 percent of their 2008 tax throughout 2009 to avoid 2009 underpayment penalties, rather than 100 percent or 110 percent. (Read a more detailed discussion on payment requirements.)
Be aware of what Congress hasn’t done yet
As this guide went to print, Congress was still considering several bills that could have major tax implications. Most significantly, a healthcare reform bill, if enacted, is likely to carry a large tax component.
Congress was also planning to consider a bill to reform the estate tax before it is scheduled to disappear for one year in 2010. (Read more information on the estate tax.) That bill could also extend many popular tax provisions that remain in place for 2009, but are scheduled to expire in 2010. While these changes won’t likely affect the tax laws in 2009, they could change planning strategies right away. Call Grant Thornton to find out the latest status of tax legislation and to discuss any tax-saving opportunities arising from provisions enacted this year.
