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Sarah Delano Pavlik and Tom Pavlik write a monthly column on legal and business issues for the Springfield Business Journal.


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There are many provisions affecting individuals and businesses in the American Recovery and Reinvestment Tax Act of 2009 (the "Act"). Here are some that may apply to you.

First Time Home Buyer Credit. A first-time home buyer who purchased a home between April 8, 2008 and January 1, 2009 for use as a principal residence may claim a credit of up to $7,500 that may be used to offset federal income tax. The credit is based on 10% of the purchase price of the home. A taxpayer who is married filing separately may claim up to $3,750. The credit will be phased out for taxpayers who are married filing jointly who have a modified adjusted gross income ("AGI") of $150,000 or more and for other taxpayers who have an AGI of $75,000. The credit for 2008 is not a true credit, however, because it must be repaid, without interest, over a fifteen years beginning two years after the credit is claimed. For example, if the credit is claimed for 2008, repayment must begin in 2010. The credit must be repaid in full if the home is sold or transferred during the fifteen year period. The first-time home buyer who purchases a home in 2009, but before December 1, receives greater benefits. The maximum amount of the credit increases to $8,000 ($4,000 if married filing separately). The credit does not have to be repaid, unless the home is transferred in the three years following the year of purchase. The income limits are the same. If you buy a home in 2009 but would benefit more from a purchase in 2008, you may elect to treat the purchase as occurring in 2008.

COBRA Benefits. COBRA is a federal law that allows employees and their families to keep their health insurance coverage for up to 18 months after losing a job. The former employee must pay the full premium,. Certain laid-off workers are entitled to a 65% COBRA health insurance premium subsidy for up to 9 months. As with ordinary COBRA premiums, the employer does not pay the subsidy but the employer is responsible for administering the COBRA coverage. Under the Act, the federal government will help pay for the COBRA benefit of any individual who is involuntarily terminated between September 1, 2008, and December 31, 2009, and whose income does not exceed certain limits. The employee pays just 35% of the premium to the company as the plan sponsor. The company will be reimbursed by the federal government for the remainder of the premium by a credit against the company's payroll taxes. If an employee was laid off after September 1, 2008, and declined COBRA coverage, the company must give that employee another chance to elect coverage. Your company must notify all COBRA-eligible individuals of the subsidy and ordinary COBRA benefits.

Deduction for Automobile Sales Taxes. The Act allows you to deduct state and local sales and excise taxes on the purchase of passenger automobiles, light trucks, motorcycles, and motor homes even if you do not itemize your deductions. The purchase must be made between February 17, 2009, and January 1, 2010; and the deduction is limited to the taxes paid or incurred on a purchase price of up to a $49,500 ($24,750 for separate returns by married individuals). This deduction begins to phase out for taxpayer's with modified adjusted gross incomes of $250,000 ($125,000 for married filing separately).

American Opportunity Tax Credit. This is a credit of up to $2,500 per year for each qualified student for tuition and related expenses paid for each of the first four years of the student's post-secondary education. The credit is applicable for 2009 and 2010, applies against alternative minimum tax, and is partially refundable. The credit is phased out for taxpayers with modified AGIs of $80,000 - $90,000 ($160,000 - $180,000 for married filing jointly).

529 Plans. The cost of computers and related technology can be paid for from 529 plans in 2009 and 2010.

Making Work Pay Credit. The Act allows a credit for the lesser of 6.2% of earned income or $800 ($400 for single taxpayers) for 2009 and 2010. The credit is reduced for taxpayers with AGIs of $75,000 ($150,000 for joint returns). You cannot receive the credit if someone else claims you as a dependent.

Child Tax Credit. The Act potentially increases the refundable portion of the child tax credit for 2009 and 2010. For those years, the refundable credit is amended to apply to 15% of earned income in excess of $3,000, depending on your particular circumstances.

AMT Relief. The Act allows nonrefundable credits, such as the child tax credit and the credit for adoption expenses, to offset alternative minimum tax for the 2009 tax year.

Depreciation. The Act extends the current amount of $250,000 and the $800,000 phase-out amount under Section 179 through 2009. Section 179 is the section of the Internal Revenue Code that allows certain business equipment to be deducted in full in the year of purchase rather than be depreciated over time. The Act also extends the 50% additional first-year depreciation through 2009 .

Net Operating Losses. Taxpayers with gross receipts of less than $15,000,000 may elect a three, four, or five-year carryback of 2008 net operating losses, instead of the otherwise two-year period.

Tax Imposed on Certain Built-in Gains. Effective for tax years beginning in 2009 and 2010, the S corporation built-in gains holding period is reduced from ten years to seven years.

As with all tax laws, there are exceptions and the devil is in the details. If you want to know how these provisions and the other provisions of the Act apply to you, consult your tax advisor.
Posted in: March, 2009
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