The American Recovery and Reinvestment Act of 2009 will benefit taxpayers on their 2009 tax returns filed next year, in 2010. There are a few instances where 2008 tax returns may be affected. One is for first-time home buyers. See below for a comprehensive list of tax changes in the new law, how they may affect your taxes in 2010 and what you can do now to prepare.


Earned Income Credit – Based on income, there is an increased tax credit for families with 3 or more children. For married couples filing joint returns, there is additional marriage penalty relief. When you file your 2009 and 2010 tax returns, make sure you look up the Earned Income Credit amount in the correct column in the Earned Income Credit chart.

Expanded tax credit for college in the American Recovery and Reinvestment Act of 2009

The recently enacted “American Recovery and Reinvestment Act of 2009” includes a measure aimed at making college more affordable for low and moderate-income students. The new provision temporarily enlarges the Hope tax credit (renamed the American Opportunity tax credit) for students from middle-income families and partially extends this tax credit for the first time to students from lower-income families. Here are the details.

• The new law creates a new American Opportunity tax credit for 2009 and 2010, replacing and expanding the Hope tax credit for those years.
• The maximum amount of the American Opportunity tax credit is $2,500 (up from a maximum credit of $1,800 under the Hope credit). The credit is 100% of the first $2,000 of qualifying expenses and 25% of the next $2,000, so the maximum credit of $2,500 is reached when a student has qualifying expenses of $4,000 or more.
• While the Hope credit was only available for the first two years of undergraduate education, the American Opportunity tax credit is available for up to four years.
• Under the Hope credit, qualifying expenses were narrowly defined to include just tuition and fees required for the student's enrollment. Textbooks were excluded, despite their escalating cost in recent years. The American Opportunity tax credit expands the list of qualifying expenses to include textbooks.
• The Hope credit was nonrefundable, i.e, it could reduce your regular tax bill to zero but could not result in a refund. This meant that if a family didn't owe any taxes it couldn't benefit from the credit, which prompted critics to argue that the credit was thus denied to the very families most in need of help affording college. The American Opportunity tax credit addresses this criticism to a degree by providing that 40% of the credit is refundable. This means that someone who has at least $4,000 in qualified expenses and who would thus qualify for the maximum credit of $2,500, but who has no tax liability to offset that credit against, would qualify for a $1,000 (40% of $2,500) refund from the government.
• The Hope credit was not available to someone with higher than moderate income. Under the credit's “phase-out” provision, taxpayers with adjusted gross income (AGI) over $50,000 (for 2009) saw their credits reduced, and the credit was completely eliminated for AGIs over $60,000 (twice those amounts for joint filers). Under the American Opportunity tax credit, taxpayers with somewhat higher incomes can qualify, as the phase-out of the credit begins at AGI in excess of $80,000 ($160,000 for joint filers).

Making Work Pay Credit – This refundable credit is available to individuals who are employed or self-employed. The credit is 6.2% of earned income, up to $400 for individuals and $800 if Married Filing Jointly. The credit starts to phase out when modified adjusted gross income reaches $75,000 for individuals or $150,000 if Married Filing Jointly. Those making $95,000 or $190,000, respectively, or more will not receive the credit. Eligible individuals will claim the credit on their 2009 and 2010 tax returns.

Economic Recovery Payment – This one-time payment of $250 is allocated to individuals who receive Social Security, Tier 1 railroad retirement benefits, SSI, or VA pension or disability benefits. For most individuals, the government will automatically send them checks sometime during 2009. Government retirees will receive payment when they file their 2009 tax returns.

Unemployment Compensation – Those receiving unemployment compensation will not be taxed on the first $2,400 of unemployment benefits. Unemployment compensation is increased by an additional $25 per week and the time to receive benefits is extended. When filing your 2009 tax return, make sure you reduce reported unemployment benefits by $2,400 (but not below $0). Check with your local unemployment office regarding availability of these benefits.

COBRA – Jobless individuals paying for COBRA insurance who were involuntarily terminated between Sept. 1, 2008, and Dec. 31, 2009, may receive a federal subsidy of 65% of monthly COBRA premiums for 9 months. Employers should notify you if you are eligible, and COBRA charges will be reduced sometime in 2009.


Additional Child Tax Credit – Lower income families with children will receive increased eligibility for the refundable portion of the tax credit for lower income families with children when they file their 2009 and 2010 tax returns.

First-time Homebuyer Credit – First-time home buyers who purchase a home between April 8, 2008, and Dec. 1, 2009, can receive up to an $8,000 refundable tax credit. Phaseout of this credit starts at $75,000 for individuals and $150,000 if Married Filing Jointly. Those making $95,000 or $170,000, respectively, or more are not eligible to receive this credit. When you file your 2008 or 2009 tax returns, make sure you claim the maximum benefit under this provision. Individuals who purchased a home in 2009 and already filed a 2008 return claiming a $7,500 credit based on the prior law should amend their return to claim the balance of the credit (up to $500).

Nonbusiness Energy Credit – Taxpayers who invest in energy improvements, such as new windows and doors, to their homes can claim a tax credit of up to $1,500 when filing your 2009 and 2010 tax returns.

Residential Energy Efficient Property Credit – Homeowners who invest in such energy improvements as solar heating and geothermal pumps will receive an increased tax credit when filing 2009 to 2016 tax returns.

American Opportunity Tax Credit – An enhanced Hope Credit can be applied to qualified education expenses for the first 4 years of higher education. Maximum credit is $2,500, of which 40% is refundable. Decreased credits are given for individuals making $80,000 ($250,000 if Married Filing Jointly). You may claim this deduction on your 2009 tax return even if you don't itemize.

Section 529 Plan Distributions – The expanded definition of qualified higher education expenses now includes the purchase of computers and related equipment for college.

Vehicle Purchase – If you buy a new vehicle after Feb. 16, 2009, and before 2010, you can get a tax deduction for the state and local sales tax. The deduction is for new vehicles costing up to $49,500, and the benefit begins to phase out for individuals with modified adjusted income of $125,000 ($250,000 if Married Filing Jointly). You may claim this benefit on your 2009 tax return even if you don't itemize.

Plug-in Electric Vehicles Credit – This modification to the tax credit benefits people who purchase a qualified plug-in electric motor vehicle after 2009. The credit is limited to $7,500, and the amount begins to decrease after the manufacturer sells 200,000 plug-in vehicles. When you purchase a plug-in vehicle, ask the dealer about the credit. You'll claim the credit when you file your 2010 to 2014 tax returns.

Required minimum distribution relief in the Worker, Retiree, and Employer Recovery Act of 2008

A recent tax law change promises to help give older Americans some much needed financial flexibility as they struggle to manage their finances during this difficult economic time. A key provision in the recently passed Worker, Retiree and Employer Recovery Act of 2008 is designed to help alleviate the financial burden facing seniors who have seen their retirement savings shrink dramatically. The new provision provides relief to senior citizens by allowing them to continue to keep money in retirement accounts that they are typically required by law to withdraw once they reach age 70 1/2.

Here's a brief summary of this new provision:

As you know, the tax laws generally require individuals with retirement accounts to make required withdrawals based on the size of their account and their age every year after age 70 1/2. This rule is intended to prevent wealthy individuals from using retirement accounts as a tax shelter. Any individual who fails to take a required minimum distribution (RMD) is heavily penalized by the IRS, which taxes the amount not withdrawn at 50%.

The new law suspends the required minimum distribution from retirement accounts in 2009. This waiver, which is available to everyone regardless of their total retirement account balances, applies to all defined-contribution plans, including 401(k), 403(b), 457(b), and IRA accounts. Suspending the mandatory withdrawal allows retirees to keep the money in their account if they choose, and possibly recover some of their losses.