What the Stimulus Plan Means for Your Tax Bill

Yesterday, President Obama signed the American Recovery and Reinvestment Act of 2009 (the Stimulus Act) into law. The mind-blowing $787 billion package includes some new and expanded tax credits and other taxpayer-friendly changes. Here are four important changes that will affect many individual taxpayers.

A fair majority of workers will be entitled to the temporary "Making Work Pay" credit for 2009 and 2010. This credit is equal to 6.2% of annual earned income and can amount to a maximum of $400 for an individual or $800 for a joint-filing married couple.

The credit is also refundable. That means it can be used to offset your entire federal-income tax bill, including any alternative minimum tax (AMT), and you get to collect any leftover credit amount in cash after your tax bill has been reduced to zero.

There are phase-out rules, however. The credit is reduced or completely eliminated over the following adjusted gross income (AGI) ranges:

* $75,000 to $95,000 for singles and married folks who file separately.
* $150,000 to $190,000 for joint-filing married couples.

The IRS will issue new federal employment-tax withholding tables to allow employees to collect their credits in advance via reduced payroll tax withholding for the rest of 2009. So the cash will come through in the form of slightly higher paychecks. Frankly, you aren’t going to notice a big difference (maybe 8 to 10 extra bucks a week). Self-employed folks can collect their credits in advance by reducing their quarterly estimated tax payments.

Mainly geared toward retirees, the one-time $250 Economic Recovery Payment will be doled out to the following government program recipients.

* Adults eligible for Social Security benefits and anyone eligible for Supplemental Social Security Income (SSI) except those who receive them while in a Medicaid institution.
* Adults eligible for Railroad Retirement benefits
* Adults eligible for veteran’s compensation or pension benefits.

To cash in, you must have been eligible for at least one of the programs listed above for at least a month during the three-month period that includes November and December of 2008 and January of 2009.

The IRS is figuring out how to get payments underway within the next four months.

Note: If you receive the $250 Economic Recovery Payment, it gets subtracted from any Making Work Pay credit that you would otherwise be entitled to collect.

The Stimulus Act includes a comparable $250 free-money goodie for certain government retirees. This payment comes in the form of a one-time 2009 refundable tax credit of $250 for each eligible individual or $500 for a joint-filing married couple when both spouses are eligible.

You have to meet all three of the following requirements to be eligible.
1. During 2009, you receive retirement benefits for past service as an employee of the U.S. or other government entity based on earnings that were not subject to Social Security tax withholding at the time.
2. You’re ineligible for the aforementioned $250 Economic Recovery Payment deal
3. You report a Social Security number on your 2009 Form 1040.

Note: If you’re eligible for this $250 credit, it gets subtracted from any Making Work Pay credit that you would otherwise be entitled to collect.

The Stimulus Act extends the first-time homebuyer credit deal for another five months, covering purchases through November of 2009. It also makes this refundable credit a bit more generous. But the biggest change is that the earlier requirement to pay back the credit over 15 years no longer exists for 2009 purchases.

For a qualified purchase of a principal residence between January 1, 2009 and November 30, 2009, the maximum credit under the revamped rules equals the lesser of: (1) 10% of the purchase price or (2) $8,000 or (3) $4,000 if you use married filing separate status. These credit maximums are up from the $7,500 and $3,750 amounts that apply for 2008 purchases.

You’re only eligible for the credit if you have not owned a principal residence in the U.S. during the three-year period that ends on the purchase date. If you’re married, both you and your spouse must pass this test (whether or not you file jointly). For a newly-constructed home, the purchase date is deemed to be the date you move in.

The credit is phased out over the following AGI ranges:

* $75,000 to $95,000 for singles and married folks who file separately.
* $150,000 to $170,000 for married joint-filing couples.

Credit Must Be Repaid in Some Cases
Even under the liberalized new rules, you may have to repay the credit if you sell the home for a gain within three years of the purchase date or stop using it as your principal residence within that timeframe.

Claiming Credit for 2009 Purchase on Your 2008 Return
If you buy a home between January 1, 2009 and November 30, 2009, you can choose to treat the deal as if it occurred in 2008. Then you can claim the credit on your 2008 Form 1040 and get the benefit that much quicker. The 15-year repayment rule won’t apply to you even though you’re claiming the credit on your 2008 return. However, the old-law credit maximum of $7,500 (or $3,750 if you use married filing separate status) apparently will apply.