Taxpayers may need to plan ahead for breaks in stimulus bill.
If you ever needed a reason to sit down and do some tax planning, the new $787 billion fiscal stimulus bill -- including some $300 billion in tax breaks -- is a good one.
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From an earlier-than-usual red flag on who might fall into the alternative minimum tax this year to a new question on paycheck withholding, the bill President Obama signed Tuesday should prompt taxpayers to consider how best to lower their taxes in the year ahead.
Of course, there are some straight-up tax breaks that don't necessarily require much tax planning per se.
Unemployed people will find their first $2,400 of benefits is untaxed, and they may qualify for reduced health-insurance premiums through their former employer's group plan, or Cobra.
There's the $8,000 tax credit for first-time home buyers who buy between Jan. 1 and Dec. 1, 2009 -- this credit doesn't have to be paid back, unlike the $7,500 perk available in 2008.
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But there is one aspect of the home-purchase credit that could require planning: You can claim the credit on your 2008 taxes, even if you bought the house in 2009, according to Mark Luscombe, a principal analyst with CCH Inc., a Riverwoods, Ill., tax publisher and unit of Wolters Kluwer.
"There may need to be a little IRS instruction in that regard because the  forms and instructions probably don't at present contemplate an $8,000 credit," he said. "But it is fairly clear that making that election will not change the 2009 purchase to a 2008 purchase." The home-buyer credit starts to phase out for taxpayers with adjusted gross income above $75,000 for single filers and $150,000 for joint filers, according to CCH.
Then, there's the above-the-line deduction for sales tax paid to buy a new car in 2009. You can only deduct the tax on the purchase price up to $49,500. Luscombe warns that taxpayers shouldn't take both this deduction and the itemized deduction for state sales tax. This deduction on a car purchase phases out at AGI of $125,000 for single files and $250,000 for joint returns. According to CCH, the new-car credit is only for vehicles bought on or after the law's effective date.
Thanks to the stimulus bill, taxpayers now know the precise alternative-minimum tax exemption amounts earlier than usual. For the past few years, Congress has waited until year's end to pass the "patch" that prevents more taxpayers falling into this parallel tax system. The exemption reduces the amount of income taxed at the AMT rate.
Knowing the 2009 exemption amounts now -- $70,950 for joint filers and $46,700 for single and head-of-household filers -- gives taxpayers more time to run scenarios to see where their tax bill is likely to fall, and figure out how to lower that bill. (Absent a patch this year, those figures would have gone back down to just $45,000 for couples filing jointly and $33,750 for individuals, according to CCH.)
"This expected bit of tax help probably won't have a very stimulative effect, but it will lessen uncertainty and help people plan their tax moves earlier in the year," Luscombe said.
"As a result of the AMT exemption amounts going up, fewer people should be subject to the AMT," said Greg Rosica, tax partner at Ernst & Young LLP, in a conference call with reporters Friday.
Credit for Workers
Those taxpayers eligible for the "make work pay" credit -- up to $400 for single workers and $800 for couples -- may want to assess their withholding before this credit starts showing up in their paychecks.
The credit, available in 2009 and 2010, was trimmed to $400 per worker per year, from a draft stimulus bill's $500 payout.
The credit begins to phase out for single filers with adjusted gross income of $75,000 and married-filing-joint filers with AGI of $150,000. The credit isn't available to taxpayers with AGI topping $95,000 for single filers and $190,000 for joint filers, according to CCH.
It's still uncertain exactly how the credit will be paid out. While some tax experts say employers will automatically adjust workers' paychecks, others say that's not so.
"There's supposed to be a choice between having it as a credit on your tax return or having it deducted from your payroll taxes," Luscombe said. "I would think the employee would have to make some input on that regard, rather than having the employer automatically start the deduction. Some people have suggested maybe a revised W-4 would have to be submitted [to] reflect the employee's choice."
That means workers will need to decide whether they want the money in their paycheck or as a tax refund later. Given the variability of individual's tax situations, some taxpayers could find the credit leads to a larger-than-expected refund come tax time in April 2010 -- or a bill for money owed (if, say, a couple's overall income picture means they're not eligible for a credit but a spouse received one anyway).
Meanwhile, some fixed-income people -- including those who receive Social Security, railroad retirement benefits and veterans' benefits -- will get a one-time $250 payment, a decrease from $300 in an earlier draft of the bill.
Child and Education Breaks
Got kids? If you're a lower-income taxpayer, you may benefit from the expanded child tax credit. This refundable credit, worth up to $1,000 per child, now starts kicking in on income of $3,000 and up, compared to current law of $8,500 and higher, according to CCH. Lower-income taxpayers also get the benefit of an expanded earned income tax credit.
Meanwhile, more higher-income taxpayers get access to the valuable Hope college-education credit, expanded to $2,500, up form $1,800 currently, and renamed under the stimulus bill to the American Opportunity Tax Credit.
"It's figured as 100% of eligible expenses to $2,000 plus 25% of expenses above $2,000, so someone with total eligible expenses of $4,000 or more would reach the maximum amount," according to a press release by CCH.
The credit phases out when adjusted gross income hits $80,000 for single filers or $160,000 for joint filers. That means more people are eligible: Under current law, the Hope credit phase-out in 2009 starts at $50,000 for single filers and $100,000 for married filers.
Breaks for the Bus Ride
Mass-transit commuters get a bigger benefit, too. Right now you can pay some of your commuting costs with pre-tax dollars -- if your employer offers this perk. The stimulus bill raises the maximum dollar amount eligible under this perk to $230 for transit passes and van pooling, up from $120, according to CCH. The change brings up the transit limit to match the $230 already allowed for parking costs.
The stimulus bill reduces the required estimated tax payments people in business must make for 2009. "It does not eliminate any of the tax you have to pay," Rosica said. "You're still responsible for your full tax bill come tax filing time for 2009, but it does allow more of a conservation of cash throughout the year."
And there are more perks for small businesses in the bill, including an extension of the current Section 179 expense and the bonus depreciation provisions.
That other stimulus bill in 2008 increased the Section 179 expense deduction to $250,000 from $128,000, and offered 50% bonus depreciation, allowing certain businesses to immediately write off one-half of the cost of a capital expense. This stimulus bill allows those perks in 2009 as well.
Small firms also benefit from the net operating loss carry-back provision, which allows them to use existing losses to offset taxes paid on profits in previous years. Already, firms could do that for the two most recent years, but the stimulus bill expands that to five years.
While early drafts of the stimulus plan offered that break to all companies, the final bill limits it to those with $15 million or less in gross revenue.
That's a big hit to bigger companies who were hoping to collect some quick cash to invest back into their firms, said Clint Stretch, managing principal of tax policy at Deloitte Tax.
And some say lawmakers might have missed a chance to stimulate greater business activity.
"Our best estimate is that taxpayers with less than $15 million of gross receipts are 98% of all corporations, but only 5% of taxable income, so Congress has covered most corporations, but not the ones who account for 95% of corporate tax activity," Stretch said in an email message Friday.
Andrea Coombes is an assistant personal finance editor for MarketWatch, based in San Francisco.