Capital Gains

In short, if we do not act boldly and swiftly, a bad situation could become dramatically worse.

These are the words that President Obama used in January to urge Congress to pass a mammoth stimulus package meant to revive an ailing economy. After weeks of debate in both houses of Congress, Obama is now set to sign a compromise version of the stimulus package, the American Recovery and Reinvestment Act of 2009. Keep in mind that, until the ink is dry on the bill, changes are still possible.

The estimated price tag of the new bill is a staggering $789.5 billion. The good news is that is still significantly less than the $820 billion House version, the $838 billion Senate version or the reported $1 trillion cost of Obama’s wish list.

The bill is made up of a number of expenditures, tax cuts and tax “incentives” for businesses and for individuals. While most of the criticisms in the bill appear to have been levied at the expenditures in the bill — spending tax dollars — there are a number of provisions that will have a direct impact on tax bills for businesses and individuals. Here are a few that might affect you:

• Making Work Pay Credit. The big news to come out of the bill on the individual taxpayer side is that the stimulus plan does not include a second round of stimulus checks, a provision that had been rumored to be included since last summer. The cost of an additional round of checks was eventually deemed too expensive and inefficient — something most tax professionals agree on.

Instead, the new bill includes a tax credit, the Making Work Pay Credit, of $400 per individual worker and $800 per working married couple. This is a slight reduction in Obama’s campaign initiative to provide credits of $500 per individual and $1,000 per married couple. The full credit would be paid to people earning $75,000 or less ($150,000 per dual-earner couple). Phase-outs would allow a partial credit for individuals earning between $75,000 and $100,000 and couples earning between $150,000 and $200,000. The credit, which would be administered by cuts in federal withholding, would also be refundable.

My take: The credit works out to about $8 per week for qualified taxpayers, hardly enough to make a dent in consumer spending. Considering the $116 billion price tag attached to the credit, I don’t think it will give us the biggest bang for our tax buck.

• AMT relief. The bill includes yet another one-year provision, called a “patch,” to shield middle class taxpayers from the Alternative Minimum Tax.

My take: Fix it, for goodness’ sake. Every year, it seems, Congress works itself up about the AMT and fails to offer any long-term relief. The cost for this year’s one-time patch: $70 billion.

• Partial unemployment compensation exemption. Unemployment compensation paid by the federal government is normally includable in income for federal tax purposes. The new bill allows a federal income tax exemption for the first $2,400 in federal unemployment benefits.

My take: A relatively little cost, $4.7 billion, for a welcome hand-up in this economy.

• Sales tax deductions for new car buyers. A provision in the bill, lobbied for since the big three automakers came, hat in hand, to Congress last year, would allow taxpayers to deduct state and local sales taxes paid on the purchase of a new car, light vehicle, recreational vehicle or motorcycle on their federal income tax. Unlike real estate and other state and local tax deductions, this one would be above-the-line deduction, meaning that you don’t have to itemize to qualify. There’s a $49,500 limit on the cost of the car and income restrictions apply.

My take: Why limit the deduction for new cars? At a reasonable $1.7 billion cost, there was clearly some room in the bill to include the purchase of used cars. While I understand that this is a bone thrown to the automakers, consumption isn’t limited to “new” — why limit the tax breaks to new? At least the nearly $10 billion proposed break in personal interest for car loans was removed from the final bill.

• Temporary credit for home buyers. One of the most controversial pieces of the bill is the home buyer credit. The Senate version dramatically differed from the House version in terms of cost and scope. The final version of the bill increases the size of the existing temporary, refundable first-time home buyer credit to $8,000. The requirement that the credit be paid back over 15 years has been removed; however, if you sell the home within three years (some exceptions for hardship and divorce apply), the credit must be paid back.

My take: I’m not a fan of this credit, though I am pleased to see that the Senate version was pared down. At a cost of $6.6 billion, I don’t see the credit accomplishing its main goal of increasing home sales. The problem in the existing market is a lack of available credit, not available buyers. By limiting the income brackets to $75,000 for individuals and $150,000 for married taxpayers, you’re limiting the scale of whom this credit would apply to.

• American opportunity tax credit. A temporary credit that expands the existing Hope Scholarship tax credit is included in the bill. The two-year credit (for 2009 and 2010) could save students as much as $2,500 for higher education expenses. The credit is also partially refundable.

My take: This credit makes sense. In a country sadly void of manufacturing jobs, we need an educated work force. Making college more affordable, at a relatively low cost of $13.9 billion, is a smart move.

• Transit accounts. Employers who have offered employees the ability to establish pre-tax accounts for commuting can offer their employees a boost: If you commute to work by way of public transportation, the amount that you can put aside has increased to $230 per month.

My take: Finally! It has never made sense that those employees who take public transit were limited to nearly half of the amount afforded to those who drive and park. Public transit is not always cheap. (Have you ridden SEPTA lately?)

• 529 plan qualified expenses expanded. In 2009 and 2010, taxpayers can add computers and computer technology, which could include educational software and the Internet, to the list of expenses that qualify under a 529 plan.

My take: A good move. As technology moves forward, families need to make sure that students have all the right tools. By including tech in the list of qualified expenses, parents can save a few bucks in the process.

• Health insurance coverage extended. As the cost of health care skyrockets, the cost of paying for your own insurance after a layoff or other job loss can be nearly impossible. Under provisions of the new bill, the federal government will subsidize 65 percent of the health insurance premium for qualified taxpayers for up to nine months. Income limits and restrictions may apply.

My take: Another smart addition to the bill. Coverage for health care will be shouldered by the government in one manner or another if job losses continue: it’s good economic policy to try to keep people insured. The total cost of this provision, $24.7 billion, is likely less than the cost of paying for health care for the uninsured. Since checks for the subsidies will go to the employers, not the taxpayers, the bill essentially results in lower health insurance premiums for taxpayers and not a mere handout.

Other tax-related provisions in the bill extend unemployment benefits, increase food-stamp payments and expand availability for the child tax credit and the earned income credit. While necessary in the current economic climate, those provisions are not likely to “stimulate” the economy, so including them in the cost of a so-called “stimulus package” is a bit misleading.

Overall, while the bill has some missteps, some parts of the bill offer potential to get the economy back on track. I guess we’ll collectively hold our breath as a nation and see what happens in the weeks and months to come. •

Kelly Phillips Erb is a founding shareholder of The Erb Law Firm. She is a member of the bars of New Jersey and Pennsylvania and the Tax Supper Club, and she presents regularly on a wide range of topics before local and national organizations. Phillips Erb authors the blog “Taxgirl.”