Tax Benefits for Individuals
“Making Work Pay” Tax Credit
One objective of the 2009 Act is to get money into the hands of individual taxpayers as quickly as possible. To this end, the new law creates a refundable income-tax credit of up to $400 for eligible single filers and $800 for eligible couples filing a joint tax return. (A credit is a dollar-for-dollar offset against tax; a refundable credit is one for which the tax law allows a refund of the unused credit when tax liabilities are not high enough to take full advantage of the credit.)
The Making Work Pay credit may be claimed either as a reduction in the federal income tax that is withheld from a worker’s paycheck or through a credit claimed on the taxpayer’s income-tax return. Most eligible individuals will be able to realize this tax benefit through a reduction in withheld income taxes and, thus, a higher take-home pay. Individuals who may be claimed as dependents and nonresident aliens are not eligible.
The credit is calculated at a rate of 6.2% of earned income, up to the $400/$800 credit maximum. The credit begins to be phased out when annual modified adjusted gross income (AGI) exceeds $75,000 ($150,000 for married persons filing jointly) at a rate of 2% of the excess over the $75,000/$150,000 amounts. The credit is fully phased out when modified AGI reaches $95,000 ($190,000 for joint filers).
EXAMPLE:
Marge
and Homer have a joint modified AGI of $160,000
in 2009. Their Making Work Pay tax credit would
be $600 — i.e., $800 reduced by a phaseout
amount of $200 ($160,000 – $150,000 = $10,000;
$10,000 × 2% = $200).
The Making Work Pay tax credit is in effect for tax years beginning in 2009 and 2010.
Economic Recovery Payment
The 2009 Act provides a one-time economic recovery payment of $250 to adults who are eligible for Social Security benefits, Railroad Retirement benefits, veterans’ disability compensation or pension benefits, or qualifying individuals who are eligible for Supplemental Security Income (SSI) benefits. Only individuals who were eligible for one of the four programs for any of the three months prior to the month of the new law’s enactment will receive an economic recovery payment.
An individual shall receive only one $250 economic recovery payment regardless of whether the individual is eligible for a benefit from more than one of the four federal programs. If the individual is also eligible for the Making Work Pay credit, that credit will be reduced by any economic recovery payment made.
The 2009 Act also provides for a one-time refundable tax credit of $250 in 2009 to certain government retirees who are not eligible for Social Security benefits. The credit is $500 on a joint return if both spouses are eligible. This credit also is a reduction to any allowable Making Work Pay credit.
First-time Homebuyer Credit
Pre-2009
Act tax law allows a first-time homebuyer a refundable
tax credit equal to the lesser of $7,500 ($3,750
for a married individual filing separately) or
10% of the purchase price of a principal residence.
A taxpayer is considered a first-time homebuyer
if the taxpayer had no ownership interest in a
principal residence in the U.S. during the three-year
period prior to the purchase.
The credit is allowed for qualifying home purchases on or after April 9, 2008, and before July 1, 2009. The credit phases out for individual taxpayers with modified AGI between $75,000 and $95,000 ($150,000 and $170,000 for joint filers) for the year of purchase. The credit is generally allowed for the tax year in which the taxpayer purchases the home.
Under pre-2009 Act law, the new homebuyer credit generally was to be paid back to the government ratably over 15 years with no interest charge, beginning in the second tax year after the tax year in which the home is purchased. In effect, the credit was a no-interest loan.
Under the 2009 Act, the maximum credit amount is increased to $8,000 ($4,000 for married persons filing separately) and the credit is extended so that it applies to purchases made prior to December 1, 2009. In addition, for homes bought after December 31, 2008, and before December 1, 2009, the credit does not have to be repaid unless the home is resold or otherwise ceases to be the taxpayer’s principal residence within 36 months of purchase.
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