Tax Provisions of Recovery Act
Most taxpayers to receive benefits
By Kaye A. Thomas
Posted February 13, 2009
Updated February 17, 2009
Includes sales tax deduction for purchasers of new cars.
Legislative language for the tax provisions in the final version of the American Recovery and Reinvestment Act of 2009 became available last night. Here's a summary of key provisions for individuals and families.
Making work pay credit
This new tax credit, which will apply to years 2009 and 2010, effectively returns to you the first $400 of social security tax you pay ($800 for a married couple filing jointly). The credit is reduced by 2% of the amount by which your income exceeds $75,000 ($150,000 if filing jointly). This credit is the centerpiece of the Act, providing some $116 billion in tax relief to workers.
AMT patch
Believe it or not, the second largest tax provision in this law is one simply designed to prevent millions of taxpayers from being hit with alternative minimum tax (AMT) this year. This provision avoids and increase in your tax bill, rather than providing a decrease, but it provides a lot of tax relief any way you look at it: nearly $70 billion. (The new numbers for the AMT exemption amount are available in our Reference Room.)
First-time homebuyer credit
Last year, Congress created a special credit for "first-time homebuyers" (actually, taxpayers who had not owned a home in the preceding three years). It was set up to act essentially as an interest-free loan of $7,500, repaid in the form of credit recapture over a period of 15 years. The new law enhances the credit:
- It will be available for purchases through the end of November 2009.
- The dollar amount is increased to $8,000.
- Most importantly, the benefit has been converted from an interest-free loan to an outright grant, provided that you continue to own the home and use it as your principal residence for a period of three years.
These changes apply only if you bought your home in 2009. Qualifying individuals who bought in 2008 receive the $7,500 credit allowed for that year, and remain subject to the recapture rules that treat the credit as an interest-free loan.
Sales tax on auto purchase
You might as well get a new car to go with your new home. There's a provision making it easier to deduct state and local sales and excise tax on this purchase, and get full value for that deduction. This benefit is available only for purchases occurring on or after February 17, 2009 (the date of enactment of this law) and on or before December 31, 2009.
It's possible to deduct sales tax on an auto purchase without using this provision, but to do so you have to itemize, and you have to choose to deduct sales tax instead of income tax. What's more, the alternative minimum tax (AMT) can deprive you of some or all of the benefit.
The new provision is available for light trucks, motorcycles and motor homes as well as passenger autos (there's a weight limit of 8,500 pounds for vehicles other than motor homes), but you can't be buying a used vehicle: it has to be really new ("the original use of which commences with the taxpayer"). If the purchase price exceeds $49,500 you can claim this benefit only on the sales and excise tax relating to the portion of your purchase price up to that amount. The deduction is phased out when income exceeds $125,000 ($250,000 on a joint return). You don't have to itemize to claim this deduction, and it's insulated from the effects of the AMT. However, you can't use this provision in conjunction with the sales tax deduction provided for itemizers who elect to forgo the deduction of state and local income tax.
[This section has been updated to remove a warning against buying before the date of enactment and provide the dates during which purchases may qualify.]
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