Stimulating Tax Changes

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Stimulating Tax Changes
by Rande Spiegelman, CPA, CFP®, Vice President of Financial Planning, Schwab Center for Financial Research
February 17, 2009

The recently-passed American Recovery and Reinvestment Act of 2009 (aka "The Stimulus Bill"), contains a number of individual federal income tax changes that might significantly impact your financial life, or the financial life of a family member or loved one. Here are some of the highlights:

Alternative Minimum Tax relief
As part of the stimulus bill, Congress has passed yet another temporary Alternative Minimum Tax (AMT) patch. For 2009, the AMT exemption level increases to $70,950 (from $69,950) for married taxpayers filing jointly and $46,700 (from $46,200) for single filers.

Payroll tax credit
For 2009 and 2010 only, the new law provides a dollar-for-dollar income tax credit equal to the lesser of 6.2% of earned income or $800 for married taxpayers filing jointly ($400 for single filers), provided modified adjusted gross income (MAGI) is not over $150,000 ($75,000 for single filers). The credit is gradually phased out over that limit.

Expanded college credit
In 2009 and 2010 only, the law expands the maximum Hope education credit from $1,800 to $2,500 for any year of college, includes course materials under the definition of "qualifying expenses," and extends the MAGI phase-out level to $160,000 for married taxpayers filing jointly ($80,000 for single filers).

529 plans
The new law includes computers and computer technology under the definition of "qualified education expenses."

COBRA relief
If your employment is terminated between Sept. 1, 2008, and Jan. 1, 2010, and you meet eligibility criteria, you can elect to pay only 35% of your COBRA premium (versus up to 102% of the cost of the plan). Subject to certain limitations, your former employer will pay the remaining premium.

Expanded new home tax credit
For purchases after Dec. 31, 2008 and through Nov. 30, 2009, the new law raises the first-time homebuyer tax credit to $8,000 from $7,500 (subject to MAGI limitations), with no required repayment to the IRS (as required under the existing law) if you stay in the home for more than 36 months.

Auto purchase incentive
For 2009 only, the law provides for an above-the-line deduction (a reduction of adjusted gross income) for state and local sales taxes paid on the purchase of a new car (a number of limitations apply).

As always, be sure to check with your own tax professional for specific advice. If you're a Schwab client, you can log in to access tax tools and resources on Schwab.com. Simply log into your account, click on the Guidance tab, then go to Taxes in the menu bar. Here you'll find lots of valuable information from Schwab, as well as access to a comprehensive tax library and tools, including tax return preparation software. You can also check out Tax Provisions in the American Recovery and Reinvestment Act of 2009 at IRS.gov.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation.

The information included in this presentation is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, you should consult with a qualified tax advisor, CPA, financial planner or investment manager.

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