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.
In addition to the credit for workers, it also pays out a one-time payment of $250 to fixed-incomers. Disabled vets and Social Security recipients will generally qualify. In a similar way, it will create a one-time refundable tax credit to specific government retirees that may normally not qualify for Social Security benefits. This $250 reduces any applicable 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. First-time homebuyers that qualified last year could receive a refundable credit equal to 10% of the purchase price of a principal residence. Originally set to expire on July 1, 2009, ARRA decided to extend this credit to purchases made before Dec. 1, 2009. The act would also increase the highest credit from $7,500 to $8,000, if the qualifying purchase was made after Dec. 31, 2008. Perhaps most noteworthy about the act, qualifying purchases that take place after Dec. 31, 2008 eliminate the repayment compulsion for taxpayers. The only exception to this would be when 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.
Laid-off workers receive help. This year, ARRA offers tax relief for laid-off workers by suspending income tax on the first $2,400 of unemployment benefits.
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