Tax Benefits for Individuals
AMT Exemption Increase
The alternative minimum tax (AMT) is designed to ensure that individuals who have high incomes and significant income-tax deductions or credits pay a minimum amount of tax. The tax law provides each taxpayer an AMT exemption, which phases out at higher income levels. However, those exemption amounts are not tied to inflation. As a result, many middle-income taxpayers find themselves being hit with AMT.
Over the past decade, Congress has passed temporary increases in the AMT exemptions to reduce the number of middle-income taxpayers who have to pay AMT. The latest increase expired at the end of 2008. For 2009, the exemptions were to decrease to the exemption amounts in place before the temporary increases were implemented.
The 2009 Act extends the higher AMT exemption amounts to taxable years starting in 2009 and increases them for 2009. In addition, taxpayers may use various nonrefundable tax credits to offset regular tax and AMT.
Private Activity Bond Interest and AMT
In general, tax-exempt interest on so-called “private activity” municipal bonds (e.g., those used to fund private sector projects) is included as a tax preference for AMT purposes. Thus, interest that is tax exempt for regular tax purposes is taxable to the extent AMT applies. Under the 2009 Act, tax-exempt interest on private activity bonds issued (or, in certain cases, reissued) in 2009 and 2010 is not considered an AMT tax-preference item.
Deduction for Taxes on Car Purchases
The 2009 Act allows an income-tax deduction for state and local sales and excise taxes paid on the purchase of qualified motor vehicles on or after the 2009 Act's enactment date and before 2010. The deduction is allowable for AMT purposes, as well. The new deduction is not allowed to taxpayers who elect to claim an itemized deduction for state and local sales taxes.
For purposes of the new deduction, a “qualified motor vehicle” is generally defined as a new passenger automobile, light truck, motorcycle, or motor home. (Certain limits apply.) The deduction is available only for taxes paid on up to $49,500 of the cost of a qualified vehicle. Further, the amount of taxes that can be deducted is phased out for taxpayers with modified adjusted gross income between $125,000 and $135,000 ($250,000 and $260,000 for married couples filing jointly).
EXAMPLE:
Roberta, who is single and has 2009 modified AGI
of $50,000, buys a new light truck in March 2009
for $27,000 and pays $2,200 in sales taxes. Those
sales taxes are deductible in full on Roberta’s
2009 federal tax return, even if she does not itemize
deductions.
Child Tax Credit
Eligible taxpayers may claim a tax credit of $1,000 ($500 after 2010) for each qualifying child under age 17. For taxpayers whose regular tax and AMT liabilities are not high enough to take full advantage of the credit, the tax law allows a refund of the unused credit to the extent of 15% of the taxpayer’s earned income in excess of a certain “floor” amount ($8,500 in 2008). The child tax credit is phased out for taxpayers with income over specified levels.
The 2009 Act expands the child tax credit by reducing the income “floor” so that the credit is refundable to the extent of 15% of the taxpayer’s earned income in excess of $3,000 for tax years beginning in 2009 and 2010.
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