Since stepping into office six months ago, President Obama has made numerous tax changes through the American Recovery and Reinvestment Act of 2009.
These tax incentives are focused on reinvesting money in the economy to pull the country out of recession.
“The best way to jump-start the economy is to get businesses and individuals to dump money into it,” says Mark LaPlace, CPA, director of tax services at GBQ Partners LLC. “Even those who don’t benefit from the tax credits understand that some of these credits, such as the first-time homebuyer credit, are good incentives to get our economy moving in the right direction.”
Smart Business spoke with LaPlace about tax incentives available to individuals and businesses, the benefits of these changes and how to take advantage of the tax incentives.
What are some tax incentives available to individuals?
The major one is the Making Work Pay credit, which is a direct credit to employed taxpayers earning a limited income. The credit is a direct reduction in 2009 withholdings that helps reduce tax burdens. The credit does not have to be paid back. The White House is excited about this credit, but it’s not a large amount of money. It’s only $400 for single taxpayers and $800 for couples filing jointly. It phases out at an adjusted gross income of $75,000 for singles and $150,000 for couples. While the extra money is good, it’s not a significant amount to change behavior.
What other tax credits are available?
There is a credit similar to the Making Work Pay credit that gives individuals not working but receiving retirement benefits a one-time $250 credit. The administration saw that retirees were unfairly penalized by the Making Work Pay credit, so this credit was instituted.
Another major credit is the first-time homebuyer incentive. The old credit was increased to $8,000 for homes purchased between Dec. 31, 2008, and Nov. 30, 2009, from a third party. This credit also does not have to be paid back, while the old credit had to be paid back. The credit is phased out for those with income above $75,000 for singles and $150,000 for couples.
Another new credit gives taxpayers the ability to deduct sales tax on new vehicle purchases between Feb. 17 and Dec. 31, 2009. This has not been available for years and is only available in 2009. It’s also available to those who don’t itemize deductions, which will benefit non-homeowners who purchase new vehicles in 2009.
The Hope Education Credit, which covers education expenses for the first two years after high school, has been renamed the American Opportunity Tax Credit. The credit has also been increased from $1,800 per year per student to $2,500 per year per student.
Finally, Congress has reinstituted the Alternative Minimum Tax Patch, which is the exemption for the Alternative Minimum Tax. This helps middle-income taxpayers who have found themselves in this alternative minimum tax situation to get out of it.
What tax incentives and credits are available for businesses?
The biggest incentive is the extension of bonus depreciation. Businesses are able to write off 50 percent of the purchase price for new acquisitions of nonreal property in the first year. The other 50 percent goes through the normal depreciation, so there is a more than 50 percent deduction in year one. This deduction was extended for qualifying asset acquisitions made through Dec. 31, 2009.
Another incentive that goes hand in hand with this is the Section 179 expensing election. This deduction has allowed smaller businesses with certain criteria to take a limited amount of capital improvement dollars and write those off in year one. The bill has increased the cap from $125,000 to $250,000 per year. This is a bit more limited than bonus depreciation, but it accelerates the ability to write off capital improvements.
Businesses that lost money are also allowed to carry that loss back two years and amend prior tax returns where they had a profit, and then forward 20 years. The bill allows smaller businesses to carry net operating losses from 2008 back three to five years instead of two years. A lot of small businesses lost money in 2008, and even as far back as 2006 and 2007, so that two-year carryback may not have given them a substantial benefit. This gives them a larger window to recoup tax dollars paid in the past. This is only for 2008 losses, but may be extended for 2009 depending on what happens with the economy.
How can you make sure you’re taking advantage of these tax credits?
Individuals, particularly middle income individuals who have historically prepared their own tax returns, should look at using either a paid preparer (a tax service or a certified public accountant) or tax preparation software for the 2009 tax year. These services and software will ask you the right questions to make sure all these credits and incentives are claimed. If you try to do the same thing by downloading forms from the Internal Revenue Service, you’re going to spend hours and may not get all the available incentives.
How are these tax credits beneficial?
The credits help stimulate the economy. The first-time homebuyer credit benefits taxpayers who may have been deferring a home purchase because of the down economy, and it generates stimulus in the housing industry. It’s the same for the vehicle sales tax deduction. This gives people incentive to buy a new vehicle and jump-start the auto industry.
Other incentives, such as bonus depreciation, give businesses money to spend on capital improvements. When the economy goes south, businesses try to save money by not purchasing new equipment. This incentive encourages businesses to buy new assets.
Mark LaPlace, CPA, is the director of tax services at GBQ Partners LLC. Reach him at (614) 947-5258 or firstname.lastname@example.org.