New Tax Legislation for Low Income Taxpayers ABA Tax Section May Meeting Committee on Low Income Taxpayers May 9, 2009 by Jon Forman Alfred P. Murrah Professor of Law University of Oklahoma jforman@ou.edu
Overview American Recovery and Reinvestment Act of 2009 (ARRA), Pub. L. No. 111-5 http://frwebgate.access.gpo.gov/cgibin/getdoc.cgi?dbname=111_cong_public_la ws&docid=f:publ005.111.pdf The 2010 Budget http://www.whitehouse.gov/omb/budget/ Task Force on Tax Reform and other reform possibilities 2
American Recovery and Reinvestment Act of 2009 Making Work Pay Tax Credit Earned Income Tax Credit Increase Child Tax Credit American Opportunity Ed. Credit First-Time Homebuyer Credit Portion of UI Benefits Nontaxable Sales Tax Deduction on New Cars 3
Making Work Pay Credit 4 New refundable credit I.R.C. 36A (ARRA 1001) Will cut taxes for working families Up to $400 ($800 if MFJ) Computed as 6.2 percent of earned income up to $400 ($800 if MFJ) Phase out for taxpayers with modified AGI > $75,000 ($150,000 MFJ) Claim credit on 2009 tax return Tax withholding decrease
IRS warns that Taxpayers that have more than one job at the same time are at risk for being under withheld Married taxpayers with both spouses working may also be under withheld Pension recipients with no earned income are not eligible for the Making Work Pay Credit and may be under withheld 5
Economic Recovery Payment SS, SSI, RR, Veterans Disability Recipients $250 one-time payment (not from IRS) Reduces Making Work Pay Credit, if eligible No phase out Not income for income tax purposes Contact respective agency for more information 6
Credit for Certain Government Federal and State Retirees Certain government retirees will receive a one time $250 refundable credit on their 2009 tax return filed in 2010 For government retirees who receive a pension from work not covered by Social Security 7
Earned Income Tax Credit (EITC) Increase New credit percentage for 3 or more qualifying children I.R.C. 32 (ARRA 2002) Temporary increase 2009 & 2010 Computed as 45% of earnings (up from 40%) Maximum credit increase = $5,028 to $5,657 Maximum AGI increase = $43,415 to $48,279 8
Child Tax Credit $1,000 per qualifying child I.R.C. 24 (ARRA 1003) Temporary expansion of eligibility for refundable credit More lower income families qualify: 2008 threshold amount was = $8,500 2009 threshold amount = $3,000 2010 threshold amount = $3,000 9
American Opportunity Education Tax Credit Expands HOPE Credit available for first 4 years of post-secondary education I.R.C. 25A (ARRA 1004) Temporary, for 2009 and 2010 maximum credit is $2,500 40% refundable Phase out for taxpayers with modified AGI > $80,000 ($160,000 MFJ) 10
First-Time Homebuyer Credit Amended Increased to $8,000 I.R.C. 36 (ARRA 1006) Refundable Homes purchased from 1/1/2009 through 11/30/2009 No repayment (must live in home 3 years) Can choose to claim on 2008 return Phase out for taxpayers with modified AGI > $75,000 ($150,000 MFJ) 11
Portion of Unemployment Benefits are Nontaxable Temporary suspension of the federal income tax on first $2,400 of unemployment compensation I.R.C. 85 (ARRA 1007) Unemployment compensation over $2,400 will be subject to federal income tax Any requested withholding on unemployment compensation will continue to apply to the full amount paid 12
Energy Conservation Incentives Federal Tax Credits for Energy Efficiency includes: I.R.C. 25C (ARRA 1121) Tax credits are available at 30% of the cost, up to $1,500, in 2009 & 2010 (for existing homes only) for: Windows and doors, insulation, roofs (metal and asphalt), HVAC, water heaters (non solar), biomass stoves 13
Sales Tax Deduction on New Vehicles State, local & excise taxes paid in 2009 I.R.C. 164 (ARRA 1008) Cars, light trucks, motor homes, motorcycles Purchases after 2/16/2009 Taxes paid on first $49,500 of cost Phase out for taxpayers with modified AGI > $125,000 ($250,000 MFJ) Do not have to itemize to take deduction 14
The 2010 Budget Make permanent New Making Work Pay Tax Credit New American Opportunity Tax Credit Lower floor for refundable Child Tax Credit to $3,000 & make permanent Expand saver s credit and automatic enrollment in IRAs and 401(k)s Expand the Earned Income Credit Eliminate advanced payment of EITC 15
2010 Budget (2009-2019 Revenue Changes in Billions, Tax Policy Center) Provisions Affecting Lower- and Middle- Income Households Provide Making Work Pay Credit -537 Expand Earned Income Tax Credit -33 Expand refundability of Child Tax Credit -71 Expand saver s credit and automatic enrollment in IRAs and 401(k)s -55 Provide American Opportunity Tax Credit -75 Eliminate Advanced EITC 1 16
Task Force on Tax Reform Formed by the Paul Volcker s President s Economic Recovery Board (PERAB) Austan Goolsbee is staff director Martin Feldstein, Laura D Andrea Tyson Three tasks Tax simplification Closing tax loopholes and reducing tax evasion Reducing corporate welfare Options for tax reform by 12/4/2009 17
National Taxpayer Advocate 2008 Annual Report focused on simplification Simplify the family status provisions Simplify education savings tax incentives 18
Other Opportunities Health care reform Change the exclusion to a credit? Energy and conservation Refundable tax credits? 19
Poverty Levels and Net Federal Tax Thresholds, 2009 Unmarried individual Single parent with 1 child Married couple with 2 children Married couple with 3 children 1. Poverty levels $10,830 $14,570 $22,050 $25,790 2. Simple income tax $9,350 $15,650 $26,000 $29,650 threshold (before credits) 3. Income tax threshold $13,391 $32,317 $50,233 $60,550 after credits 4. Employee payroll tax $0 $0 $0 $0 threshold 5. Combined income and payroll tax threshold $9,336 $25,667 $38,592 $43,743 20
Tax Liability Figure 1. Net Federal Tax Liabilities for Selected Households, 2009 $15,000 Unmarried Individual $10,000 Head of Household, 1 Child $5,000 Married Couple, 2 Children $0 Married Couple, 3 Children -$5,000 -$10,000 Income 21
Taxes at Poverty Level, 2009 Unmarried individual Single parent with 1 child Married couple with 2 children Married couple with 3 children 1. Poverty levels $10,830 $14,570 $22,050 $25,790 2. Income tax at poverty -$453 -$4,442 -$7,695 -$8,537 level (after credits) 3. Employee Social $829 $1,115 $1,687 $1,973 Security & Medicare tax at poverty level 4. Combined income and $376 -$3,328 -$6,008 -$6,564 payroll tax at poverty level 5. Combined tax as a percent of income at poverty level 3.5% -22.8% -27.2% -25.5% 22