A First Look at Obama's Recovery Tax Plan

Congress is in the middle of considering the American Recovery and Reinvestment Act (HR 598), the first major tax bill of the year. Already HR 598 has passed the House Ways and Means Committee on January 22, 2009. Senators have their own version of the law to be discussed by the Senate Finances Committee on January 27. Update: the House passed the bill on January 28, 2009, by a vote of 244 in favor to 188 against, largely along party lines. The bill now goes to the Senate for consideration.

The legislation proposes several tax breaks that were touted by President Obama during his campaign, such as the Making Work Pay Tax Credit and reworking of the Hope education tax credit into the American Opportunity Tax Credit. The legislation also proposes to expand the child tax credit and earned income credit, and would revise the first-time home buyer tax credit.

The legislation contains more than just tax cuts. It also contains about $550 billion in spending measures. To see where the spending is going, the Economix blog of the New York Times has compiled a nice little pie chart.

Here's a summary of the major tax provisions:

Marking Work Pay Tax Credit
A new tax credit of $500 per person to offset a worker's FICA taxes on the first 6.2% of earned income (wages or self-employment). The tax credit is phased out once a person's modified adjusted gross income exceeds $75,000 (or $150,000 for joint filers). The credit would be retroactive to January 1, 2009, and could be taken either through a reduction in withholding or as a credit on a person's tax return. This tax credit is not available to dependents who have a job, and the credit does not effect the employer's share of FICA taxes.

Modification of the First-Time Home Buyer Tax Credit
The first time home buyer tax credit provides a tax credit of up to $7,500 ($3,750 for separate filers). The tax credit must be repaid over 15 years in what is essentially a zero-interest loan from the Treasury. The credit is available for people who buy a home after April 9, 2008, and before July 1, 2009. HR 598 proposes to eliminate the repayment requirement for homes purchased after December 31, 2008.

American Opportunity Tax Credit
HR 598 proposes to expand the current Hope education tax credit. Currently worth a maximum credit of $1,800 for students in their first two years of college education, HR 598 would expand this maximum to $2,500. It would also expand the list of qualifying expenses to include text books (currently only tuition is a qualifying expense), and it would make 40% of the tax credit refundable, meaning this amount could be refunded to the taxpayer if their tax liability was reduced to zero by using various tax credits. In a novel twist, HR 598 would ask the Treasury Department to conduct a study to see if the government could require community service as a condition for being eligible for the tax breaks for higher education.

Refundable Child Tax Credit
HR 598 would make the child tax credit refundable for 2009 and 2010. Currently, the child tax credit is refundable based on the 15% of earned income in excess of $8,500. HR 598 would remove this threshold, and thus make the tax credit fully refundable. That means more taxpayers would be able to receive the child tax credit even if they have zero tax liability.

Expands Earned Income Credit
The legislation would expands the earned income credit to provide higher earned income credit for families with three or more children. Currently, the EIC maxes out at 40% of the first $12,570 of earned income for families with two or more children. The leglistation would add a new maximum of 45% of the first $12,570 of earned income for families with three or more children.

Extends Tax Breaks for Energy Efficiency
Increases the tax credit amount to 30% of the cost of qualifying energy-efficient products such as storm windows, doors, skylights, and insulation; and increases the maximum credit to $1,500 for years 2009 and 2010. The nonbusiness energy property credit is currently limited to 10% of expenses, and capped at $500. Also would remove the maximum limits on the residential energy efficient property credit for solar hot water, geothermal and wind energy equipment. The residential energy tax credits are not available for tax year 2008.

Enhanced Depreciation for Business Assets
Extends the 50% bonus depreciation for 2009 and 2010. Section 179 expenses limits of $250,000 would be extended an additional year to 2009.

Net Operating Loss Carrybacks for Businesses
Businesses would be allowed to carryback a net operating loss five years instead of two years under current law, and would be available for losses booked in 2008 or 2009. By carrying back their losses, businesses can obtain a refund of taxes paid in a previous year.

Work Opportunity Tax Credit for New Hires
Businesses would be eligible for a tax credit based on hiring certain types of employees. HR 598 would add two new classes of employees for which businesses could claim a tax credit: unemployed veterans and disconnected youths.

What do you think of these proposals? Do they do enough to stimulate the economy? Will they help lower your taxes? What sort of tax breaks should Congress be considering? Speak out by leaving a comment.

More information:

• Tax Relief included in "The American Recovery and Reinvestment Plan" (summary from the House Ways and Means Committee, 8 pages, pdf)
• CCH Tax Briefing: American Recovery and Reinvestment Plan (summary from CCH, 8 pages, pdf)
• Congress Moves on Stimulus Bill and Bailout Money (New York Times)
• House Passes Stimulus Plan With No G.O.P. Votes (New York Times)