good news ahead for most taxpayers. President Obama signed the American
Recovery and Reinvestment Act into law February 17 -- a new economic
stimulus bill that gives tax breaks to a large portion of Americans of
all ages and income levels, as well as to businesses.
Note: The changes won't affect the 2008 tax returns that individual taxpayers are filing now,
except in a very small number of cases. So most taxpayers can file now,
and not miss out on the new tax breaks that begin this year.
Most taxpayers will get more money in their pockets in 2009
new American Recovery and Reinvestment Act, according to the White
House, will give a direct tax break to 95 percent of workers and their
families . It includes tax breaks that provide a financial boost to
everyone from the unemployed, to families with children and children
in college, to first-time homebuyers and new car buyers. Some families
could save more than $13,000 total from all of the breaks the package
provides (see our visual breakdown here).
As more details about the tax changes become available, TurboTax will post them here, so check back often.
Making Work Pay Credit: Workers
and the self-employed would get a payroll tax credit for 2009 and 2010
of up to $400 a year for single taxpayers, and up to $800 for couples
The IRS will get the
money to taxpayers by adjusting the withholding tables, thereby
boosting paychecks. The increase could be as much as $40 per month per
worker, depending on when the withholding tables are changed.
Self-employed workers will claim the credit on their tax returns. In
the meantime, they can reduce their estimated tax payments for 2009.
single tax filers, the credit will begin phasing out at an Adjusted
Gross Income (AGI) of $75,000. For couples filing jointly, the phaseout
zone will start at $150,000 of AGI. (Adjusted Gross Income is your
total income from wages and other income minus certain adjustments,
such as deductible IRA contributions and alimony paid.)
Reduced taxes on unemployment income: Normally,
people receiving unemployment benefits must report them as income and
can be taxed on them. The new bill makes the first $2,400 of
unemployment income nontaxable.
Lowered cost for COBRA health insurance: This is a valuable benefit for workers who lose their health insurance when they lose their jobs. This government subsidy should help more unemployed people afford to keep their insurance.
First-time Homebuyer's Credit: The
tax package increases the $7,500 first-time homebuyer credit to $8,000
for primary residences purchased between January 1, 2009 and November
30, 2009, and eliminates the requirement that the credit be repaid, as
long as the house isn’t sold within three years.
Expanded Hope Credit: The
Hope Credit for college costs is increased to $2,500 for 2009 and 2010,
covering 100 percent of the first $2,000 of tuition and related
expenses per year and 25 percent of the next $2,000.
credit is available for all four years of college, up from only two
years, and covers the cost of books. It is 40 percent refundable, and
begins to phase out at $80,000 of Adjusted Gross Income for singles and
$160,000 of Adjusted Gross Income for married couples.
The bill also allows tax-free distributions from Section 529 College Savings Plans to cover computer purchases.
New car sales tax deduction: Buyers
of new cars, light trucks, SUVs, motorcycles and motor homes during
2009 can deduct the state sales or excise tax they pay, even if they
don’t itemize their deductions.
This break starts phasing out for single taxpayers with Adjusted Gross Income over $125,000 and couples with AGI over $250,000.
Expanded Earned Income Tax Credit (EITC): More couples who file jointly and have children will qualify for the Earned Income Credit.
tax package starts the phaseout range at $21,420, an increase of
$1,880. Also in 2009, the credit increases for families with three or
more children to 45 percent of the first $12,570 of earned income, up
from 40 percent.
Enhanced Child Tax Credit: Plus,
the Child Tax Credit will cover more low-income earners: For 2008, the
credit is refundable to the extent of 15 percent of an individual’s
earned income in excess of $8,500; for 2009 and 2010, that floor drops
Retirees, veterans and the disabled
One-time payment of $250: Because
the payroll tax credit only goes to employees and the self-employed,
the bill adds something for others as well: a one-time payment of $250
to recipients of Social Security benefits, Railroad Retirement
benefits, Supplemental Security Income payments, and pension and
disability benefits from the Veterans Administration.
Government retirees who don’t get Social Security will also get a one-time refundable tax credit of $250 in 2009.
Extended energy-saving credits: The
10 percent tax credit for energy-saving home improvements climbs to 30
percent and is extended through 2010. Improvements that qualify for the
credit include energy-efficient skylights, windows and outer doors,
along with energy-saving water heaters, central air conditioners and
The bill also
eliminates individual credit caps for the different types of property,
and instead imposes a $1,500 cap on all qualifying property.
One-year "patch" on the Alternative Minimum Tax: To
keep millions of middle-income taxpayers from being forced to pay the
Alternative Minimum Tax (AMT) for 2009, the measure increases the
minimum tax exemptions to $70,950 for couples filing jointly and
$46,700 for single filers. Otherwise, the exemptions would top out at
just $45,000 for couples and $33,750 for singles.
Small businesses would most likely be affected by the following changes:
Special 50 percent, first-year bonus depreciation is revived for assets bought and placed in service during 2009.
that averaged $15 million or less in gross receipts over the past three
years will be allowed to carry back losses for five years instead of
two. The easing applies only to 2008 losses.
2009 Tax Law Changes
Stimulate Me. Taxpaying individuals will receive at
least $600 in the form of a rebate check this May thanks to the U.S.
government’s Economic Stimulus Package of 2008. This is going to cost
the government $145 Billion (msnbc.com, Jan 08) . The rebate check will be delivered to about 160 million American families (cnn.com, Apr 08).
So how much will you get? When will you get it? How will you get it? The answers are here:
How much will I get? Starting in May,
the Treasury will begin sending economic stimulus payments to more than
130 million households. To receive a payment, taxpayers must have a
valid Social Security number, $3,000 of income and file a 2007 federal
tax return. IRS will take care of the rest. Eligible people will
receive up to $600 ($1,200 for married couples), and parents will
receive an additional $300 for each eligible child younger than 17.
Millions of retirees, disabled veterans and low-wage workers who
usually are exempt from filing a tax return must do so this year in
order to receive a stimulus payment. (irs.gov, Mar 08).
When will I get it? As long as you filed your taxes before April 15 you can live by this payment schedule:
Last two SSN digits:
Payment will be transmitted:
00 through 20
21 through 75
76 through 99
Last two SSN digits:
Payments will be mailed by:
00 through 09
10 through 18
19 through 25
26 through 38
39 through 51
52 through 63
64 through 75
76 through 87
88 through 99
How will I get it? If you specified a
bank account for direct deposit on your 2007 tax return you’ll see the
money in your bank account soon enough. Otherwise, you’ll receive a
traditional paper check in the mail.
2008 Tax Law Changes
Emergency Economic Stabilization Act of 2008/$700 Billion Bailout
What’s in it for Individual Taxpayers?
Over 100 tax changes to the IRS tax code will go into effect with the $700 billion Emergency Economic Stabilization Act of 2008. Individual taxpayers will benefit from some measures immediately. Some of the highlights for 2008 and 2009 include:
Extended Tax Relief for Some Financially Distressed Homeowners
Homeowners experiencing “short sales” and foreclosures will get an
extended break for “debt-forgiveness” tax consequences. Instead of
treating cancellation of debt as taxable income on the foreclosure of a
principle home, no taxes will be levied on discharges of indebtedness
of up to $2 million dollars for married taxpayers filing jointly and of
up to $1 million dollars for a married taxpayer filing a separate
return through tax year 2012. TOP
Another Year of AMT Relief for Millions of Americans
An AMT “patch” for 2008 will prevent the Alternative Minimum Tax
from applying to millions of middle-class Americans and increasing
their taxes. This legislation sets AMT exemption amounts of $69,950 for
married couples filing jointly; $46,200 for single taxpayers and those
filing as head of household; and $34,975 for married taxpayers filing a
separate return. Now taxpayers will be able to claim nonrefundable
personal credits such as dependent care and education credits to reduce
their AMT tax liability. TOP
Child Tax Credit
For 2008, the child tax credit is refundable to the extent of 15
percent of the taxpayer’s earned income in excess of approximately
$12,050. Under the new law, the earned income floor falls to $8,500. TOP
“Extender” Tax Measures Will Continue Through 2009
The tuition and fees deduction will continue to be available to
eligible taxpayers to deduct up to $4,000 for qualified higher
education expenses for themselves or immediate family members.
Taxpayers will continue to have the option to deduct their state and
local sales taxes instead of state and local income taxes when they
itemize. This option is especially beneficial to taxpayers living in
states which have no state income tax.
The educator expenses deduction for teachers and other qualifying
educators is extended for tax years 2008 and 2009. They can continue to
deduct up to $250 a year for out-of-pocket expenses paid for classroom
supplies whether they itemize or not. TOP
Tax-Free Distributions from IRAs for Charitable Purposes
Taxpayers can again make tax-free distributions from IRAs for
charitable purposes through December 31, 2009. This charitable
contribution option had expired January 1, 2008. The maximum
contribution limit for 2008 and 2009 is $100,000. TOP
Real Estate Tax Deduction for Non-itemizers Extended
Homeowners who are not able to itemize deductions can deduct their
real estate taxes as an additional standard deduction of up to $500
($1,000 if MFJ) for tax years 2008 and 2009. TOP
Residential Energy Efficient Property Credit Available Again in 2009
Certain energy efficient home improvements such as windows,
insulation materials and other property placed in service during 2009
can yield a credit of up to $500. The residential energy credit may
offer a tax break on a 2009 return if all installation is done and/or
work was completed in 2009. Residential energy credits apply to homes,
houseboats, mobile homes, condominiums, and qualifying manufactured
homes. This credit expired at the end of 2007 and is not available for
Provisions of the American Housing Rescue and Foreclosure Prevention Act of 2008
A New RefundableTax Credit for First-Time Homebuyers
This would provide an interest-free loan of up to $7,500.00 for
first-time home buyers who purchase residences between April 9, 2008
and July 1, 2009. Because this essentially functions as a loan,
taxpayers would have to pay this back to the government in equal
installment payments over 15 years. There’s a beginning income
phase-out level of $75,000 for single taxpayers and $150,000 for
taxpayers filing joint returns. The credit must be claimed on a 2008 or
2009 tax return.
Unmarried persons buying a home jointly for the first time may qualify for this credit by splitting the credit. TOP
Limited Property Tax Deduction for Non-Itemizers for 2008
Makes tax relief available to homeowners who have paid their
mortgage in full, but still must pay local and state property taxes.
The Act increases the standard deduction for non-itemizers by the
lesser of the amount of real property taxes paid during the year or
$500 for a single taxpayer/$1000 for a married couple. TOP
Foreclosure Protection for Military Personnel under the Servicemembers Civil Relief Act Provision
Mortgage lenders must reduce the interest rate of home loans granted
to active duty military personnel to no more than six percent. TOP
Reduced Home Sale Exclusion
Taxpayers who used their primary residence as a vacation home or
rental property and sell this property after December 31, 2008 may no
longer be able to take full advantage of the $250,000 exclusion for
single taxpayers/$500,000 exclusion for married filing jointly on the
gain from the sale of their personal residence. The taxpayer will only
be able to utilize this exclusion to the extent that it relates to the
period of time when the home was used as a principal residence. The
exclusion of the gain will be pro-rated such that the gain attributable
to the period of time the house was not used as the primary residence
cannot be excluded. This will apply to nonqualified usage after January
1, 2009. TOP
2006 Tax Law Changes
Code Sec. 911 , as amended by Tax Increase Prevention and Reconciliation Act § 515
While it's true that the Tax Increase Prevention and Reconciliation Act (TIPRA, P.L. 109-222 ) prevents various tax increases from occurring this year and defers others due to apply in future years, its title is a misnomer when it comes to certain Americans working abroad. That's because TIPRA has made retroactive changes to the foreign earned income and housing cost exclusions that can drastically increase the tax bills of Americans working abroad. The changes apply retroactively for tax years beginning after 2005.
Background. The U.S. generally taxes its citizens and residents on their worldwide income. An election applies to exclude earned income of a qualified individual who has his tax home in a foreign country and is either (i) a U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or (ii) a U.S. citizen or resident present in a foreign country or countries for at least 330 full days in any 12 consecutive month period. This is called the foreign earned income exclusion. Under pre-Act law, the maximum exclusion amount was to have been $80,000 for 2006 and 2007 and indexed for inflation after 2007.
A qualified individual also may elect to exclude certain foreign housing costs paid or incurred on his behalf (or claim a deduction where the costs are not paid by the employer). Under pre-TIPRA law, the amount of the housing cost exclusion was equal to the excess of a taxpayer's housing expenses over a base housing cost amount. Housing expenses include the reasonable expenses paid or incurred during the tax year for a taxpayer's housing (and a spouse's and dependents' housing if they live with the taxpayer) in a foreign country, including expenses attributable to housing such as utilities and insurance, but not interest and taxes. If the taxpayer maintains a second household outside the U.S. for a spouse or dependents who do not reside with the taxpayer because of dangerous, unhealthful, or otherwise adverse living conditions, the housing expenses of the second household also are eligible for exclusion.
Under pre-TIPRA law, the base housing cost amount above which costs were eligible for exclusion in a tax year was 16% of the annual salary (computed on a daily basis) of a grade GS-14, step 1, U.S. government employee, multiplied by the number of days of foreign residence or presence in the tax year. For 2006 this salary was $77,793, with the result that the 2006 base housing amount was to have been $12,447 for a taxpayer entitled to the exclusion for the entire year.
The combined foreign earned income exclusion and housing cost exclusion cannot exceed the taxpayer's total foreign earned income. In addition, the taxpayer's foreign tax credit is reduced by the amount of the credit attributable to the exclusions.
A taxpayer with excludable income under Code Sec. 911 was subject to tax on his other income, after deductions, starting in the lowest tax rate bracket.
Acceleration of inflation adjustments to foreign earned income exclusion. Under the Act, the $80,000 maximum foreign earned income exclusion amount is adjusted for inflation after 2005. ( Code Sec. 911(b)(2)(D)(ii) , as amended by Act § 515(a)) As a result, the maximum 2006 exclusion is $82,400.
OBSERVATION: While this $2,400 increase in the maximum exclusion for 2006 could theoretically save taxes for some taxpayers, it must be viewed in the context of the other changes made by TIPRA, which can serve to increase taxes for Americans working abroad, as explained below.
Changes to exclusion for housing costs . TIPRA also amended the housing cost amount so that the base housing cost amount is 16% (computed on a daily basis) of the maximum foreign earned income exclusion (the $80,000 amount adjusted for post-2005 inflation) for the calendar year in which the tax year begins ( Code Sec. 911(c)(1)(B)(i) ), multiplied by the number of days of bona fide residence or presence for which the qualified individual is eligible for the exclusion.
OBSERVATION: Thus, the base housing cost amount is $13,184 ($82,400 × 16%) for 2006.
In addition, TIPRA limited the housing cost exclusion to 30% of the maximum foreign earned income exclusion (computed on a daily basis) for the calendar year in which the tax year begins, multiplied by the number of days of bona fide residence or presence for which the qualified individual is eligible for the exclusion. ( Code Sec. Sec . Code Sec. 911(c) ) For 2006, the maximum amount of the foreign housing cost exclusion is $11,536: [($82,400 × 30%) − $13,184] for a taxpayer entitled to the exclusion for the entire year.
IRS may issue regs or other guidance providing for the adjustment of the 30% limit on the basis of geographic differences in housing costs relative to housing costs in the U.S. ( Code Sec. 911(c)(2)(B) )
Exclusions no longer save tax at taxpayer's highest brackets. Where a taxpayer excludes income under the foreign earned income exclusion or the housing cost exclusion for any tax year, then, notwithstanding the regular income tax or alternative minimum tax rules, the following rules apply under TIPRA. The taxpayer's regular tax is equal to the excess (if any) of:
... the regular tax that would be imposed for the tax year if his taxable income were increased by the amount of these exclusions for the tax year ( Code Sec. 911(f)(1)(A) ) over
... the tax that would be imposed for the tax year if his taxable income were equal to the amount of these exclusions for the tax year. ( Code Sec. 911(f)(1)(B) )
ILLUSTRATION : For 2006, Andrew, a single taxpayer, is entitled to the foreign earned income exclusion and the foreign housing cost exclusion for the entire year. He is entitled to the maximum foreign earned income exclusion of $82,400 and a foreign housing cost exclusion of $10,000. (Andrew has actual housing cost expenses of $23,184 which is $10,000 more than the base housing cost amount of $13,184.) He has taxable income of $17,600 after taking the exclusions into account. Without the exclusions, Andrew's taxable income would be $110,000 ($17,600 + $82,400 + $10,000). Andrew's income tax for 2006 equals the excess of $25,132 (the tax on total taxable income of $110,000) over $20,204 (the tax on the total exclusion of $92,400). Thus, his total tax for 2006 is $4,928.
Under pre-TIPRA law, Andrew would have been entitled to a foreign earned income exclusion of $80,000, and a foreign housing exclusion of $10,737 (housing cost expenses of $23,184 less the base housing cost amount of $12,447). His taxable income would have been $19,263 ($110,000 less the total foreign exclusions of $90,737). The tax on $19,263 would have been $2,520, or $2,408 less than it is under TIPRA.
Similar rules apply in computing the tentative minimum tax for AMT purposes. ( Code Sec. 911(f)(2) )
OBSERVATION: The changes made by the Act will have the most adverse impact on Americans working abroad in low tax areas, such as Bermuda, Hong Kong, the Middle East and Singapore. On the other hand, because of the continued available of the foreign tax credit, they will have far less impact on Americans working abroad in high taxed European and Latin American countries.
2006 ESTIMATED TAXES AND PLANNING: You should review your estimated taxes for 2006 and may wish to make revisions based on the new tax law. We can assist you with revised estimates and with planning for these new tax increases for U.S. expatriates working abroad.