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The American Recovery and Reinvestment Act (ARRA) delivers tax breaks for individuals.
Workers, retirees and other Social Security recipients will receive new tax relief. The ARRA created a new tax credit called the Making Work Pay credit. It provides anywhere from $400 to $800 for filers, without a phase-out for higher income households. Unlike 2008's recovery rebate check, this credit will be distributed through a reduction in income tax withholdings.
The act also provides a one-time payment of $250 to many people on fixed incomes, such as Social Security recipients and disabled veterans. Similarly, it provides a one-time refundable tax credit of $250 to certain government retirees who aren't eligible for Social Security benefits. Both the $250 payment and the $250 credit reduce any allowable Making Work Pay credit.
Most of the tax breaks in this act are expansions of existing breaks. The keys that everyone should be aware of are:
Credit for first-time homebuyers. Last year, a refundable credit equal to 10% of the purchase price of a principal residence was made available to qualified first-time homebuyers. This credit was set to expire July 1, 2009, but ARRA extends its availability to purchases made before Dec. 1, 2009. For qualifying purchases made after Dec. 31, 2008, the act also increases the maximum credit from $7,500 to $8,000. Perhaps most significant, the act eliminates the repayment obligation for taxpayers whose qualifying purchase occurs after Dec. 31, 2008 except in situations where a home is sold within three years of purchase.
American Opportunity education credit (previously called the Hope credit). For 2009 and 2010, ARRA expands this credit to cover 100% of the first $2,000 of tuition and related expenses (including books) and 25% of the next $2,000 of such expenses. The maximum credit is $2,500 per year for the first four years of postsecondary education. (The maximum Hope credit was $1,800 and applied to only the first two years of postsecondary education.) The credit phases out for joint filers with AGIs exceeding $160,000 and for other filers with AGIs exceeding $80,000.
529 savings plans. Generally under the 529 plan, tax free distributions for education expenses include tuition, room, board, mandatory fees and books. For education expenses paid in 2009 and 2010, ARRA includes computers and computer technology.
Help given to laid-off workers. Although the ARRAs typical focal point is on working Americans, it also offers tax relief for laid-off workers by suspending federal income tax on the first $2,400 of unemployment benefits.
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