The Stimulus Plan and Your Tax Bill, Part 2

The massive $787 billion Stimulus Act includes quite a few taxpayer-friendly changes worth taking advantage of. In my last column, I covered four important ones for individuals (read our story here). This time, I’ll cover several more.

But first, let’s go over a clarification from the IRS regarding the new and improved rules for the first-time homebuyer credit, which I wrote about last week.

If you make a qualified home purchase between Jan. 1 and Nov. 30 of this year, you can treat the deal as if it occurred in 2008. Then you can claim the first-time homebuyer credit on your 2008 return and get the benefit that much quicker. To do so, fill out Form 5405 (First-Time Homebuyer Credit), and check the box to show you want to claim the credit for 2008. Then file Form 5405 with your 2008 return. Even better: The IRS now says you can claim the larger credit of up to $8,000 for a 2009 purchase (versus a maximum of $7,500 for a 2008 purchase) even though you’re taking the credit on your 2008 Form 1040. Thank you, IRS! (For more details on how to qualify for the First-Time Homebuyer Credit, read our story.)

Yet again, Congress applied a one-year patch on the alternative minimum tax, preventing millions of individuals from being forced to pay the dreaded tax for 2009. As in the past, this year’s patch has two parts:

Expanded Exemptions
You subtract these exemptions in calculating taxable income under the AMT rules, so bigger exemptions mean less chance of being hit with the AMT. The exemptions for 2009 are as follows:

* $70,950 for married joint-filing couples (up from $69,950 for 2008).

* $46,700 for unmarried individuals (up from $46,200).

* $35,475 for married individuals who file separately (up from $34,975).

Nonrefundable Credits
The second part of the patch allows you to use any and all nonrefundable personal tax credits to reduce your 2009 AMT bill, as well as your regular tax bill. The most common nonrefundable credits are the child credit (up to $1,000 per kid) and the two higher-education credits that I write about below. There are others. For example, you can use the credit for buying a new hybrid or clean-burn diesel vehicle to lower your AMT bill. (This was not true for pre-2009 tax years.)

(To learn more about the savings you could reap from the refundable AMT credit, click here.)

For 2009 and 2010, the Stimulus Act makes taxpayer-friendly changes to the rules for the Hope Scholarship higher education tax credit -- which has been temporarily renamed the American Opportunity credit. For simplicity’s sake, I’ll call the revamped credit the modified Hope credit.

The modified credit equals 100% of the first $2,000 of qualified post-secondary education expenses paid during the year, plus 25% of the next $2,000. So the maximum credit is now $2,500. (Under the old Hope credit rules, the maximum credit for 2009 would have been only $1,800.)

Qualified Expenses and Eligibility Rules
The modified Hope credit now covers the cost of tuition, fees, and course materials (but not room and board) for the first four years of post-secondary education. The credit becomes unavailable after the student has logged in four years' worth of academic hours. (Under the old Hope credit rules, the credit was only allowed for the first two years of post-secondary education, and course materials were not a qualified expense.)

Phase-Out Rule
While the modified Hope credit is still phased out (reduced or eliminated) above certain income levels, the phase-out ranges are considerably higher than before.

* The phase-out range for unmarried individuals is between adjusted gross income (AGI) of $80,000 and $90,000.

* The phase-out range for married joint filers is between AGI of $160,000 and $180,000.

(Under the old Hope credit rules, the phase-out ranges for 2009 would have been $50,000 to $60,000 and $100,000 to $120,000, respectively.)

Partially Refundable Rule
The modified Hope credit can be used to offset both your regular federal income tax bill and your AMT bill (if you have one). In addition, up to 40% of the credit is now refundable. That means if you still have some credit left after reducing your federal income tax bill to zero, you can collect 40% of the leftover amount in cash.

Another thing worth noting is that the new law doesn’t change the rules for the Lifetime Learning higher education tax credit, which can be as high as $2,000. For 2009, the Lifetime credit is phased out between AGI of $50,000 and $60,000 for unmarried taxpayers and between AGI of $100,000 and $120,000 for married joint-filing couples.

In general, unemployment compensation benefits count as taxable income. The Stimulus Act grants a one-year federal income tax exemption for the first $2,400 of unemployment compensation received in 2009. Unemployment benefits above the $2,400 limit will still count as taxable income.

For March of 2009 and through December of 2010, the new law increases the maximum federal-income-tax-free fringe benefit allowance for employer-provided transit passes and van pooling to $230 (up from $120). The $230 ceiling is an overall limit. It applies if you use just one of these benefits or both. You can also choose to receive up to $230 per month for one or both of these benefits on a tax-free basis under a salary reduction arrangement, if your employer offers this option.