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Retirees Eligible For Many Tax Cuts In Recovery Act

There’s something for almost everybody in the American Recovery and Reinvestment Act of 2009. The stimulus legislation is brimming with tax breaks for wage-earners, including the highly publicized Making Work Pay Credit and enhanced fringe benefits for employees. Though provisions are largely targeted at low- and middle-income taxpayers—and are phased out for those earning more—some might lighten your tax load this year, even if you’re already retired. Consider these new tax provisions:

One-time payments to people living on fixed incomes. The act authorizes a one-time payment of $250 for certain individuals living on a fixed income. The primary recipients are Social Security beneficiaries, railroad retirees, and disabled veterans. In addition, retired government workers who are not eligible for Social Security benefits may receive the $250. (If you’re entitled to a Making Work Pay Credit—up to $400 for single filers and $800 for joint filers—your credit will be reduced by a payout under this provision.)

Relief on capital gains for investors in small businesses. If you invest in qualified small business stock (QSBS), you can normally exclude tax on 50% of the gain from selling shares you have held for at least five years. For the purposes of this tax break, a small business is one that has gross assets not exceeding $50 million. Under the recovery act, the tax exclusion is increased to 75% for QSBS acquired after February 17, 2009 and before January 1, 2011.

Credit for new homeowners. As long as you haven’t owned a home during the past three years, you’re eligible to claim a tax credit for “first-time homebuyers.” The recovery act raises the maximum credit to $8,000 (up from $7,500 in 2008) for a principal residence purchased after December 31, 2008 and before December 1, 2009. Also, unlike the rules in effect for 2008 home purchases, the new provision doesn’t require you to repay the credit to the IRS as long as you live in the home for at least three years. But the credit phases out for certain high-income tax filers. Update: The credit has since been extended to May 1, 2010, with certain modifications, including higher phase-out levels and availability to a wider group of homebuyers.

Car buyer tax break. The recovery act creates a brand-new tax break for car purchases. It allows you to deduct sales and excise taxes attributable to the first $49,500 of the price of a new vehicle bought after February 17, 2009 and before January 1, 2010. This deduction applies to any vehicle weighing up to 8,500 pounds, including cars, SUVs, and light trucks. Motor homes may also qualify. But the deduction is phased out for single filers with an AGI of $125,000 and joint filers making $250,000, and you can’t claim the new deduction if you elect to deduct state and local sales taxes instead of state income tax in 2009.

Alternative minimum tax relief. In each of the past several years, Congress has enacted last-minute legislation sparing thousands of taxpayers from the AMT. This time, it acted early, building relief into the recovery act. The legislation lets individuals continue to use personal credits as AMT offsets in 2009 while bumping up AMT exemption amounts once again—to $46,700 for single filers (up from $46,200 in 2008) and $70,950 for joint filers (compared with $69,950 in 2008).

Energy efficiency credit. The stimulus bill boosts the residential energy credit to 30% of the cost of qualified expenses (up from 10%) and increases the maximum dollar amount to $1,500. This credit covers insulation materials; exterior windows (including skylights); exterior doors; central air conditioners; natural gas, propane, and oil-fired water heaters or furnaces; hot water boilers; electric heat pump water heaters; certain metal roofs; stoves; and advanced air-circulating fans. These provisions are in effect for installations made during 2009 and 2010.

Tax reduction on unemployment benefits. Finally, if your retirement has been hastened by a layoff or downsizing, the recovery act exempts from federal income tax the first $2,400 of unemployment benefits received in 2009. For a retiree in the 25% tax bracket, this amounts to a tax cut of up to $600.

Beyond these tax breaks, you might be able to benefit from bigger education credits for paying college tuition for your grandchildren, reduced tax liability for some S corporation shareholders and other potential advantages. We can work with you and your tax advisor to gauge the law’s impact on your financial situation.


This article was written by a professional financial journalist for Legend Financial Advisors, Inc. and is not intended as legal or investment advice.

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