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ARRA: What's in the Stimulus Plan for the Everyday Taxpayer?

It wouldn’t be too much of a stretch to answer, “Not much,” at least not in the way of direct benefits for those with jobs. The American Recovery and Reinvestment Act (ARRA), signed into law on Feb. 17, 2009, was more than generous in “Protecting the Vulnerable,” a category that consumed more than 10 percent of the stimulus plan’s overall $787 billion. Though promising “transparency,” however, the government’s stimulus Web site, www.Recovery.gov, provides little breakdown of the broad categories into their nitty-gritty components; but “Protecting the Vulnerable” can be assumed to include funds for social safety net programs, including welfare (TANF), food stamps, child support, and other forms of assistance for low-income individuals and families.

Two other categories—“Education and Training” and “State and Local Fiscal Relief,” comprising almost 20 percent of the total stimulus package—provide other forms of assistance, including the new COBRA subsidy, extensions of unemployment benefits, reinvigoration of career guidance and retraining programs, and cash infusions for state Medicaid, CHIP and Medicare programs. Suffice it to say that these are initiatives designed mostly for those who face socioeconomic challenges and those who are underemployed or unemployed—in other words, for people who don’t generally pay taxes, or if they do, qualify for low-income tax credits and receive transfer payments from Uncle Sam. Refunding and expanding these programs during the current recession is certainly desirable to catch new people falling into the net, but ARRA seeks permanent expansions through “reinvestment” to the point that some critics have argued they represent a return to “welfare as we knew it.”

What about the working Janes and Joes who don’t fit into the “vulnerable” category but who might need help?

ARRA does include some benefits for those who stay above the social safety abyss. Here are the ARRA programs and tax initiatives that are designed to aid the American worker:

Making Work Pay Credit: The bill provides a $400 credit per worker and an $800 credit per working couple, down from what President Obama asked for ($500 and $1,000). Unlike the 2008 tax credit under Bush, which was a lump sum payment, Making Work Pay is a weekly credit, so that take-home pay for individuals will go up by about $7 a week and by about $15 for working couples. The credit phases out at $75,000 in annual income for individuals and at $150,000 for couples. For those who don’t work, including the disabled, retirees and some veterans, there is a one-time $250 payment.

Alternative Minimum Tax (AMT) Relief:
The bill includes a one-year provision (which is generally renewed each year) to protect middle- and upper-middle-income families from having to pay the AMT. The Alternative Minimum Tax was originally designed to soak the rich who otherwise could avoid taxes altogether through various dodges, but as inflation soared over the years, the unadjusted-for-inflation AMT table began to engulf more and more middle-class taxpayers. Congress usually acts every year to adjust the code temporarily and compensate for “lost” alternative tax revenues, but for some reason, it has yet to permanently rewrite the AMT code itself or index it to inflation. In addition, the AMT penalizes those who live in high-taxation states because its formula excludes tax and other deductions, forcing the taxpayer into the AMT bracket.

Temporary Deduction for Automobile Purchases:
Those who buy a new car, light vehicle, recreational vehicle or motorcycle in 2009 can deduct state and local sales taxes as well as any excise tax from their federal income taxes. To qualify, one must earn less than $125,000 as an individual and less than $250,000 as joint filers.

New Qualified Plug-In Electric Vehicle Credit: Current tax law provides a credit for the purchase of certain battery-powered vehicles or "qualified plug-in electric drive motor vehicles." For qualified plug-in electric drive motor vehicles purchased after December 31, 2009, the ARRA provides a maximum credit of up to $7,500 for all such vehicles. The credit begins to phase out two quarters after the particular vehicle reaches sales of 200,000 in the U.S., but such sales must occur after December 31, 2009. The credit, however, is not subject to a termination date. (Was this written to benefit GM and its 2010 Chevy Volt?)

ARRA also provides for a new nonrefundable tax credit equal to 10 percent of the cost of electric drive low-speed vehicles, motorcycles, and three-wheeled vehicles purchased after February 17, 2009, and before January 1, 2012. The maximum credit is $2,500. This credit cannot be combined with the credit discussed above.

Temporary Credit for Home Buyers:
ARRA increases the existing first-time home buyer credit from $7,500 to $8,000. The bill also removes the provision in the current law that requires the credit to be repaid, but to quality the purchaser must occupy the home for three years.

Residential Renewable Energy Tax Credit:
ARRA removes the $2,000 maximum credit limit for all eligible technologies (except fuel cells) placed in service after 2008, a provision previously only available to solar PV. For its replacement, a taxpayer may now claim a credit of 30 percent of qualified expenditures for a system that serves a residential dwelling unit in the U.S. with the following eligible technologies: solar hot water, solar PV, wind, fuel cells, geothermal heat pumps, and other solar electric technologies.

New Temporary College Credit:
The American Opportunity Tax Credit, contained in ARRA, covers both 2009 and 2010 and replaces the existing Hope Scholarship with a new $2,500 tax credit for tuition and other expenses, including textbooks. The new credit will benefit lower-income families who do not pay taxes because 40 percent ($1,000) is refundable. It is also available to families with higher incomes, but it is phased out for people making $80,000 ($160,000 for families with a joint income).

Refund and Increase Pell Grants:
ARRA funding will increase the maximum Pell to $5,350 in 2009-10 and $5,550 in 2010-11.

Hiring Incentives: Businesses may claim a partial tax credit on the salary of a new hire if that person is a disconnected youth or an unemployed veteran.

Five Year Carry-Back Provision for Operating Losses of Small Businesses: If you’re an individual who owns his or her own business, ARRA extends the carry-back period for net operating losses (NOL) from two to five years for tax years 2008 and 2009. An eligible NOL includes the NOL for any taxable year, ending in 2008, or if the taxpayer chooses, any taxable year beginning in 2008. An election under this provision may only be taken for one taxable year.

Temporary Increase of Refundable Portion of Child Tax Credit:
Current law provides taxpayers with a $1,000 tax credit ($500 after 2010) for each qualifying child under age 17. (The credit phases out for taxpayers with modified adjusted gross income above specified amounts.) The credit is generally refundable to the extent of 15 percent of the taxpayer's earned income exceeding a threshold amount, adjusted for inflation (this is referred to as the earned income formula). This threshold amount was set at $12,550 for 2009 under pre-ARRA law. ARRA expands eligibility for this credit for 2009 and 2010 by modifying the earned income formula to apply to 15 percent of earned income in excess of $3,000. As a result, more low-income taxpayers will now be eligible for the credit.

CHIP: The Children’s Health Insurance Program, or CHIP, has been refunded and expanded and now includes a health care premium assistance provision that can be implemented at the discretion of the state. As eligibility rules have expanded to include more and more children, families of four earning $44,500 or less (higher in some states that received federal waivers) can now quality for free or low-cost health insurance for their children up to age 18. CHIP is a federal block-grant program that each state designs and co-funds on its own. Some states fold CHIP into Medicaid, set up a parallel CHIP program, and/or offer premium assistance. If the premium system option is available, employers were to have notified employees on April 1, 2009, of the availability of the program.

Other programs will benefit those who lose their jobs or those whose spouses or partners lose their jobs, and these involve the COBRA health insurance program and unemployment insurance payments.

COBRA Premium Subsidy:
A 65-percent subsidy on COBRA continuation premiums is being offered for up to nine months to those who qualify (who are “involuntarily terminated”). The subsidy is available to individuals if they become eligible for COBRA at any time between September 1, 2008, and December 31, 2009. Individuals need pay their 35-percent portion of the premium on the due date, and the employer will then forward that plus the 65-percent remainder to the insurer. Employers will get the money back as a tax credit on their quarterly payroll taxes. The subsidy phases out at incomes of between $125,000 and $145,000 for individuals and between $250,000 and $290,000 for joint filers.

Unemployment Benefits: ARRA retains the extended 33-week unemployment compensation period, suspends income tax on the first $2,400 of unemployment benefits, and increases benefits for everyone receiving unemployment by $25 per week. It is possible for each state to access hundreds of millions of dollars in additional unemployment support from the federal government by passing certain laws and following certain rules and procedures. Thus, New Jersey, for instance, now offers unemployment insurance benefits for 72 weeks. If you are let go from a company due to foreign competition, or if your job has been shipped overseas, you may be eligible for a program known as Trade Adjustment Assistance (TAA) that offers unemployment benefits--and even training--for up to 154 weeks with an 80-percent COBRA subsidy. However, several restrictions exist and your participation must be approved. Read our News Alert on the subject for further details.

To sum it up: If you’re employed and looking to buy a car or a home (for the first time), you’ll get some tax abatement. Likewise, if you’re sending a kid through college, the tax benefits have been incentivized but mostly for low-income taxpayers. If your luck runs out and you find yourself unemployed, the safety net has been beefed up and stretched to cover you longer. If you keep falling, well, you’ve become “vulnerable,” and ARRA was pretty much developed with you in mind.

As usual, Personnel Concepts has kept its clients, subscribers and Web visitors continually and immediately updated on ARRA and other recession-fighting initiatives and will continue to monitor the political terrain as a service to all. We were also the first to offer a COBRA Premium Reductions Poster for workplace display, as well as an American Recovery and Reinvestment Act Poster. Personnel Concepts, as it has done for 20 years, will continue to function as “Your Trusted Compliance Partner” through thick and thin.

About the author:
Gary McCarty is a researcher and Web Content Manager for Personnel Concepts.

Note: The details in this white paper are provided for informational purposes solely. All answers are general in nature, not legal advice and not warranted or guaranteed. Readers are cautioned not to rely on this information. Because laws change over time and in different jurisdictions, it is imperative that you consult an attorney in your area regarding legal matters and an accountant regarding tax matters.