Other Tax Provisions - American Recovery and Reinvestment Act of 2009

I’ve talked about folks who buy a car or get (or have) a job seeing tax advantages from this act. What else can you do to take advantage of the new tax laws?

Get a job (and have kids):
Two earned income based credits for taxpayers with qualifying children – the additional child tax credit and the earned income credit, were both expanded. The wage base to qualify for the additional child tax credit was decreased from $8,500 to $3,000, and additional earned income credit is available to taxpayers with three or more qualifying children.

Lose a job :-(
The first $2,400 of unemployment benefits are now excluding from federal income tax. Also, individuals who are involuntarily separated between September 1, 2008 and January 1 2010 can maintain their insurance while paying only 35% of the COBRA coverage (the employer is required to pay the balance, but can take it as a credit against federal payroll taxes and withholding).

Buy a house:
The 2008 stimulus package included a “credit” of up to $7,500 for first time howebuyers (it’s actually a loan). The ARRA increases that to $8,000 and eliminates repayment (after living in the home for 36 months) for homes purchased from January 1, 2009-November 30, 2009 by qualifying taxpayers.

If you bought a house on or after April 9, 2008 and before January 1, 2009 you may still qualify for the 2008 credit.

Go to college (or send your kids):
The HOPE credit got a new name (the “American Opportunity Tax Credit”) and some nice enhancements. The maximum credit was increased from $1,800 to $2,500 for 2009 and 2010. Also students in all four years of college (instead of only those with freshman or sophomore standing) now qualify, and course materials are now qualifying expenses. It’s not all easy street, however, the Treasury Department has been charged with exploring the feasibility of requiring community service to qualify for the education credits.

Withdrawals from Qualified Tuition Plans are now excludable from income if used to pay for computers and computer technology (including internet access) as well as previously qualified educational expenses. The computers have to be used by the student (but not exclusively).

Take the A Train (or Van Pool):
The amount of transportation fringe benefits excludable from income was increased from $120 to $230 per month.

AMT Patch:
Check out our 2007 newsletter (click on AMT Relief) for a more complete explanation of how the alternative minimum tax works, and why it gets “patched” every year. This year, the exemption amount will increase to $46,700 for most taxpayers ($70,950 for married taxpayers filing jointly)

Making Work Pay "Stimulus Payments" American Recovery and Reinvestment Act of 2009

I’ve been getting calls and emails from clients who want to know when their stimulus check will arrive (and if they will ever get their California Refund).

Here’s how the 2009 “Making Work Pay” provision works:

It’s only available to U.S. Citizens or Resident Aliens. Those who are claimed as a dependent on another’s tax return do not qualify.

In 2009 and 2010, there will be a credit for 6.2% of earned income for up to $400 per taxpayer. 6.2% just happens to be the amount of social security withheld from most wages. Like the 2008 stimulus payment, this credit will phase out at $75,000 in modified adjusted gross income* ($150,000 for taxpayers filing jointly). Unlike the 2008 stimulus payment, checks will not be issued to pay the credit in advance.

Instead, qualified employees should see their federal income tax withholding reduced based on the new credit, increasing their net paycheck. I believe the thinking is that taxpayers are less likely to save an extra $13 a week (or so), than a lump sum check for $400. The IRS released new withholding tables yesterday that they would like employers to start using as soon as possible, but no later than April 1st.

When you file your 2009 return next year, the credit should offset the decrease in your withholding, and barring any other changes, your refund or balance due should be about the same as this year.

The Economic Recovery Payment or “making having worked pay”:

There will also be a $250 payment for many retired (and disabled) taxpayers. This payment will be made, not by the IRS, but by the Social Security Administration (to social security, including SSI recipients), Department of Veterans Affairs (for disabled veterans), and Railroad Retirement Board (for railroad retirement beneficiaries). Social Security has a special section on their website. Unlike the 2008 stimulus payment, no action is required to receive these payments if you qualify.

Retirees from the Civil Service or state governments who worked at a time when their wages were not subject to social security will qualify for a refundable $250 credit, but you will have to file a return to qualify.

* Total income subject to tax, less certain adjustments like IRA contributions, but not decreased by foreign earned income exclusions.

Sources:
CCH “Tax Legislation Update”
DHHCS ‘How the Economic StimulusPlan Affects Individuals with Disabilities”
FedSmith.com “$250 Tax Credit of Payment for Federal Retirees”
IRS “Tax Provisions in the American Recovery and Reinvestment Act of 2009

What do you need to file your taxes?

I was asked to rush out 1099-MISCs to a client's independent contractors "so they could file their taxes," which got me thinking about what you actually need to file a tax return.

The most important thing is to know the types and amount of income and expenses you received last year. Information forms like W-2s, 1099s, etc. can be a tool for you, but I believe their primary purpose is to help the IRS identify unreported income.

Do you need a W-2?

I found several articles on the internet explaining how to file a tax return prior to receiving your W2. I don’t advise this, for a variety of reasons - one of which is that the W-2, when it arrives, doesn’t always match your last paystub, which can require you to file an amended return. If you file on paper, W-2’s and any other information forms that show withholding should be attached to your tax return.

Authorized IRS e-filers (like me), are prohibited from e-filing returns before all the W-2s, W-2Gs and 1099-Rs are received. (As you know, W-2s report wages and withholding, but unless you’ve been lucky, you may not have seen a W-2G which reports gambling winnings and any withholding, 1099-Rs report pension distributions, including early distributions from IRAs or 401(k)s). As I have received not only email alerts, but a paper mailing from the IRS just to remind me of this, I expect it to be an enforcement focus this tax season.

What if you don’t receive a W-2 (or other information forms)?

The first step is to contact the issuer (your employer for W-2s). The issue could be something as simple as you’ve moved and they don’t have your correct address. If you cannot contact the issuer, or you have and they will not supply the form, after February 14th, you can contact the IRS at 1-800-829-1040.

If there is no other resolution, you (or your tax preparer) can prepare a substitute form (form 4852) that contains not only the missing data from the original form, but a description of how you arrived at your figures, and what steps you’ve taken to obtain the missing document. You can use the same form if you believe the W2 you were issued was erroneous. Like your tax return, you are required to sign this form under penalties of perjury. The IRS states that returns with from 4852 are generally not filed before April 15th.