Credits, Deductions of the American Recovery & Reinvestment Act

by JERRY COON

jerrycoon The picture is becoming clearer where it concerns some of the credits and deductions that were adjusted when President Obama recently signed the American Recovery & Reinvestment Act of 2009 (AR&R). There are so many provisions in this bill that were changed, thus affecting so many people, that it has guaranteed that tax professionals will spend many hours in the months ahead becoming familiar with those changes. Lower-income taxpayers, especially, will potentially get a tremendous amount of tax relief under this bill.

First, those receiving Earned Income Tax Credit (EITC) will get the benefit of an increased EITC. In 2009 and 2010, taxpayers with three or more qualifying children can receive up to a maximum EITC of $5,656. That is an increase of $832 over the 2008 maximum credit of $4,824. It’s important to note that EITC is fully refundable, so the term “tax relief” isn’t technically totally accurate. Tax relief would imply there would be some tax to get some relief from.

For reference purposes, under pre-American Recovery & Reinvestment Act law, two taxpayers filing a joint return with earnings of $29,000 and three children would already pay zero tax, would get a full refund of their withholding, and would get $2,669 in refundable EITC. That is how our current tax system works. The new EITC tables have not been released as yet, but it looks like these same taxpayers would get a refund of about $3,203 in 2009. The American Recovery & Reinvestment Act practically guarantees our tax system will continue to work in the same old way far into the future.

The second provision affecting these same taxpayers allows more taxpayers to participate in the refundable portion of the Child Tax Credit (CTC). For each dependent under the age of 17, $1,000 of CTC is allowed. However, for 2008, basically only taxpayers with earnings in excess of $12,550 would qualify for a refundable CTC. The new law allows this refundable portion to start with earnings in excess of $3,000. The previously noted joint taxpayers with $29,000 and three children would receive an additional $3,000 of refundable CTC in addition to the $3,203 of refundable EITC for a total minimum refund of $6,203.

I think it’s fair to say that providing for a family of five on $29,000 of income would prove to be a difficult proposition in the best of times, so the $6,203 would be very helpful, especially today. I think it’s also fair to say that our politicians repeatedly misrepresent our tax system. Our above taxpayers actually pay zero tax due to available credits and deductions. In fact, over 40% of all taxpayers, after credits and deductions, pay zero tax. The AR&R Act dramatically expands the number of taxpayers who will pay zero tax and could result in over 50% of taxpayers paying zero tax. Eventually, the AR&R will put more burden and pressure on those who are paying tax. I don’t have a solution to our tax system, but I do have a problem with the presentation of “tax relief.”

A third provision that would benefit not only the above taxpayers but many other taxpayers as well is the newly expanded Hope Scholarship Credit, which will now be called the American Opportunity Tax Credit and will apply to the 2009 and 2010 tax years. The old Hope Scholarship Credit (HSC) was not refundable; 40% of the new American Opportunity Tax Credit (AOTC) is refundable. The old HSC was totally phased out for single taxpayers with adjusted gross income of $58,000 and joint filers with income of $116,000. AOTC increases these phase-out amounts dramatically so that single filers with income up to $80,000 and joint filers with income up to $180,000 will still qualify for some credit. The old HSC limited the term “qualified expenses” upon which the credit is calculated to include just tuition and some fees. AOTC expands qualified expenses to include all required course materials such as books or other publications. AOTC increases the maximum amount of available credit up to $2,500, with up to $1,000 of this credit refundable.

The American Recovery & Reinvestment Act of 2009 is full of provisions such as the above three examples. I will continue to explain the act in future articles.

This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent.
He owns Action Tax Service on Northland Dr in Rockford.
His email address is jcoon@actiontaxservice.com

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