Selected Essays: On the American Recovery and Reinvestment Act (ARRA)

Tax Initiatives That You Can Use Now


March 26, 2009

Despite the hoopla regarding how expensive to taxpayers the “Stimulus Package” (American Reinvestment and Recovery Act) is, a large proportion of it focuses on immediate tax relief, making up close to 40% of the estimated cost of the plan. When the total of $787 Billion is mentioned, that includes $288 Billion in tax relief and incentives. Of these, $237 B are tax cuts directed to individuals and consumers, and the following should be highlighted:

• Payroll tax credit $400 per individual, $800 per couple –This directly increases every worker’s paycheck by about $50 starting April 1st. It is automatic but individuals should check with their employer regarding W-4 allowances. ($116 B in tax relief).

• Expansion of College Tuition credits ($14 B in tax relief). Included in this provision is use of college tax-exempt fund plans (such as Florida’s 529) for the purchase of computers and technology as a qualified educational expense, by allowing tax-free withdrawals from the fund.

• Expansion of child credits ($15 B in tax relief).

• Other tax relief measures are targeted to middle and lower income brackets through the Alternative Minimum Tax ($70 B in tax relief) and the Earned Income Credit ($4.7 B in tax relief), and to giving a helping hand to the unemployed by not taxing their unemployment benefits (another $4.7 B in tax relief). For this group particularly, but benefiting others whose employers have dropped health coverage as part of their cost cutting, there is included in the spending portion of the ARRA the extension of COBRA health insurance coverage ($24.7 B in spending).

In addition, to directly stimulate spending by consumers, the tax stimulus (cuts) include:

• Sales and excise tax deduction for vehicle purchases (only this year, deductible in 2009 filing). The deduction is progressively applied as income levels increase, favoring thus middle and lower income buyers (estimated $1.7 B in tax relief, applied when filing tax return). This is in addition to the $2,500 to $7,000 credits for hybrids and plug in vehicles for which, by the way, each manufacturer has a limited number they can tack it on to, based on the number of vehicles sold. After they have sold a certain amount of vehicles the credit phases out, to encourage early adopters of the hybrid models—so hurry up and buy one to get that credit!

• Home improvement for energy efficiency tax credit, allowing deductions of 30% of the cost up to a $1,500 deduction. Homeowners that choose to improve the energy efficiency of their homes save energy costs and have a tax deduction to boot! This may include installing efficient water heaters and air conditioners, for example (estimated $4.3B in tax relief, applied when filing tax return). For alternative energy installations at home there is no upper limit on the deduction—so bring on those solar panels!

• First time home buyer credit of $8,000 for houses bought in 2009 (estimated $6.6 B in tax relief, applied when filing tax return), and also for some bought in 2008 (applicable in the 2008 return).

Other tax related provisions include $51 billion in tax relief for businesses and an extension of the Tax Rebate for the 2008 filing, cutting the amount owed for 2008 (applicable in the 2008 return) for some qualifying individuals.

It is true, cutting taxes increases the deficit, but right now these cuts and incentives are designed to help consumers during a critical recovery period for our economy. Take into consideration that no Republican in Congress except for three Senators voted in favor of these tax relief provisions.