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.
The bulk of the tax relief for individuals involves expanding existing breaks. Here are the key changes to be aware of:
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. This would also include related expenses (including books) and 25% of the next $2,000 of such expenses. The maximum credit, for the first four years of postsecondary education is $2,500 per year. (The Hope credit only applied to the first two years of postsecondary education and the maximum credit available was $1,800.) The credit phases out anywhere from $80,000 to $160,000 for filers with AGIs.
529 savings plans. Usually tax free distributions included in the 529 plan are tuition, room, board, mandatory fees and books. ARRA will include computers and computer technology under the definition of qualified education for 2009 and 2010.
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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