Friday, February 27, 2009

A Readable Summary of the Recovery Bill!

Want details on the American Recovery and Reinvestment Act but don’t want to read all 407 pages? Read the summary of provisions prepared by the Advanced Markets division of our partner, ING Advisors Network through Financial Network. For a complementary investment review, contact Mike Pozzi at 630-983-2310. For specific details on how this act affects your individual situation, please see your tax advisor. (And if you still want to read all 407 pages of the bill, visit!) Here's a great summary:

American Recovery and Reinvestment Act of 2009 February 19, 2009

A memorandum from the Advanced Markets division of ING Advisors Network

President Obama signed the American Recovery and Reinvestment Act of 2009
(hereafter “the Act”), a $787 billion economic stimulus package, into law on February 17, 2009. The House approved the bill on February 13 by a 246-183 margin, while the Senate approved it by a vote of 60-38. It was a partisan vote, as no Republican Congressmen and only three
Republican Senators voted in favor of the bill.

The Act contains almost $300 billion in tax relief primarily aimed at middle-class
taxpayers. The Act creates new tax breaks and makes significant enhancements to existing
deductions and credits. Over 300 changes to the Internal Revenue Code (hereafter the “Code”)
are contained in the new law. This analysis will focus on the Act’s major tax provisions of
interest to most financial professionals. Due to the newness of this tax act, more official
explanatory information may be expected in the future. Additionally various of the tax Code
provisions will require further regulatory guidance from the Internal Revenue Service on specific
implementation issues.

In fulfilling the President’s desire to grant individual tax relief, the Act creates a Making
Work Pay credit. This is a credit against income tax in an amount equal to the lesser of 6.2% of
one’s earned income or $400 ($800 for married joint filers). The credit is retroactive to January
1, 2009 and will available once again in 2010. The full credit can be used by individuals with a
modified adjusted gross income (MAGI) not exceeding $75,000 ($150,000 for joint filers). It is
phased out at a rate of 2% above this threshold. Those who qualify will be able to adjust their
tax withholding accordingly or merely wait and take a lump sum credit at the time of filing their
income tax returns. Only individuals with earned income will qualify including those who are
self employed. The employer share of FICA (6.2%) remains unaffected.

A one-time Economic Recovery payment of $250 for 2009 only is available for
individuals who are on fixed incomes. This would involve recipients of Social Security,
disabled veterans and railroad retirees. These payments will reduce any Making Work Pay
credit they might be entitled to. Retired government workers who typically do not receive
Social Security are included. The methodology of distribution of these checks is to be

The Act also addresses an Alternative Minimum Tax (AMT) patch for 2009. This raises
the exemption amount only slightly above the 2008 rates. For 2009 it will be $70,950 for joint
filers and $46,700 for single filers. That is up from $69,950 and $46,200 for 2008 respectively.
The AMT patch is primarily designed to lessen the burden on more than 26 million middle
income individuals. This provision alone has a cost of $70 billion.
The First Time Homebuyer Credit has been greatly enhanced by the Act. The Housing
Assistance Tax Act of 2008 enacted July 30, 2008 established a credit in the sum of $7,500 for
qualifying home purchases after April 9, 2008 and before July 1, 2009. This earlier credit was
to be treated as a loan and to be repaid over 15 years unless the home ceased to be a principal
residence or was sold earlier. In that event the repayment was to be accelerated. This new Act
increases the credit to $8,000 and relieves one from repayment after only 36 months of
ownership. These new provisions are operative for purchases between January 1, 2009 through
November 30, 2009. The prior law is in effect for those purchases that predated January 1,
2009. The new credit is phased out starting with modified adjusted gross income (MAGI) in
excess of $75,000 single filers ($150,000 for joint filers). No credit is available when MAGI
exceeds $95,000 and $170,000 respectively.

A new “above the line” car deduction is available for any state and local sales or excise
tax incurred with the purchase of a new vehicle occurring after February 17, 2009 and for the
rest of 2009. This deduction directly reduces one’s gross income but still permits the use of
either the standard or itemized deduction. Only the purchase up to the first $49,500 is included.
If a vehicle costs more then that part of the sales tax is allowed. There will also be a phase-out
to the extent one's AGI exceeds $125,000 for individuals ($250,000 joint filers). The newly
purchased vehicle includes cars, SUV’s, light trucks and motorcycles with a weight not
exceeding 8,500 pounds.

The Hope Education Credit for 2009 and 2010 is increased to $2,500 per year from
$1,800 with an AGI phase-out starting at $80,000/$160,000 for individuals and joint filers
respectively. The Act now renames the Credit to the “American Opportunity Tax Credit”.
Forty percent of the credit is refundable. The maximum credit of $2,500 will be allowed with
100% of the first $2,000 and 25% on the next $2,000 of qualifying payments. Any tuition paid
during 2008 will still be under the old rules, even if the semester actually begun in 2009.
The 2009 and 2010 child tax credit which is refundable now has the income threshold at
$3,000. Additionally there is a temporary increase in the earned income credit. For 2009 and
2010 the credit is increased from 40 to 45% for those with three or more qualifying children.
This is available on the first $12,570 of earned income. Unemployment compensation has
historically been an item of income and now for 2009 up to $2,400 is excluded from income.
The Act also modifies the rules with regards to Qualified Tuition Programs. (Code
Section 529 programs). Distributions which are used to pay for a beneficiary's qualified
education expenses are tax-free. Other distributions are included in income and subject to
penalty. Now for 2009 and 2010 beneficiaries can have tax-free distributions to pay for
computers, computer technology and even internet services. These now have been included in
the definition of qualified education expenses.

The Act creates substantial benefits for businesses. The 50% first year bonus
depreciation created under the 2008 Economic Stimulus Act is extended to December 31, 2009.
This is retroactive to January 1, 2009. The Act also extends through 2010 the additional year of
bonus depreciation for transportation property with a depreciation schedule of more than ten
years. The bonus depreciation for new vehicles placed in service during 2009 now has an
increased cap of $10,960 for cars and $11,160 for light trucks and vans. Code Section 179
expensing (small business expensing) now permits the initial deduction up to $250,000. This is
designed to help small businesses more quickly recover certain capital expenditures rather than
using the normal depreciation schedule over many years.

The Act has special Net Operating Loss (NOL) rules for small businesses. A
small business for these purposes is one with gross receipts no greater than 15 million dollars per
annum. They now have the choice to carryback NOL’s for three, four or five years. Normally
the NOL carryback period is two years.

For those individuals whose income comes primarily from a small business the Act
grants 2009 estimated payment tax relief. They need only make payment based upon 90% of the
tax on their 2008 return not 100% as under prior law.
The prior law allowed investors to exclude 50% of the gain from the sale of certain small
business stock acquired and held for more than five years. The Act raises the exclusion to 75%
for stock acquired between January 1, 2009 and January 1, 2011. A small business must have
assets less than $50 million and one must be directly involved in the active trade or business.

Special COBRA changes are part of the Act as well. An individual who is separated from
employment between September 1, 2008 through January 1, 2010 may elect to pay only 35% of
their COBRA payment. The former employer is required to pay the remaining 65% on the
former employee’s behalf. The employer will be reimbursed by taking credit from the income
tax withholding and payroll taxes they are normally scheduled to pay to the government as an

The Act has various significant energy incentives for both individuals and businesses
alike. The Act increases the residential energy property tax credit from 10 to 30% under Code
Section 25C. The maximum cap is raised to $1,500 for installation in 2009 and 2010 and the
lifetime $500 cap is eliminated. The Act also removes the individual dollar caps for Code
Section 25D residential energy efficient property credit for solar hot water property, geothermal
heat pumps and wind energy property. The Act increases to at least 2012 the credit available
under Code Section 45 due to renewable sources such as wind. The Act modifies the existing
credit for plug-in electric vehicles. The base credit now will be $2,500 (and depending on
battery capacity may be as high as $7,500) and will be reduced once production records reach
200,000 units.

Although this Act was just enacted the Administration has indicated further legislation
may be forthcoming on involving tax related issues. The above is presented as an educational
overview of some of the salient tax issues involved with this sweeping new legislation.
Certainly, it is not meant to an exhaustive explanation of this broad and technical area.
Obviously, you should naturally be seeking appropriate tax advice from you tax professional
regarding this or any other future tax legislation.

Contact Mike Pozzi, Financial Network’s Investment Adviser Representative located at Hawthorne, at 630-983-2310

Disclosure: Securities and investment advisory services offered through Financial Network Investment Corporation, a registered broker/dealer and member of the SIPC. Financial Network Investment Corporation is not an affiliate of Hawthorne Credit Union.

Mutual funds annuities, and other investments available through Financial Network Investment Corporation are not insured by the FDIC, NCUSIF or any other federal government agency, are not deposits or obligations of nor guaranteed by Hawthorne Credit Union, or any other affiliated entity. Investments are subject to investment risks including loss of principal invested.

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