Individual Income Tax Changes for 2009

There have been numerous changes affecting individual income taxes from 2008. Below are a number of those changes but more changes may occur before the end of the year as the federal government is still concerned with the economic recovery.

Nontaxable income includes the following:

• The Economic Recovery Payment
• “Cash for Clunkers” to buy or lease a new car
• The 65% subsidy for payment of COBRA health care coverage continuation premiums (subject to a recapture rule for certain high-income taxpayers – see explanation later)

For 2009, the first $2,400 of unemployment compensation isn’t included in gross income.

On September 24, 2009 the IRS issued additional guidance on the waiver of 2009 required minimum distributions (RMDs) from retirement plans or IRAs. In general, retirement plan or IRA withdrawals that were made despite the 2009 waiver of RMD’s won’t be subject to tax if rolled over to a retirement plan within 60 days.   

An individual is allowed a maximum deduction of $3,000 for single coverage ($5,950 for family coverage) for contributions to a Health Savings Account.

The IRA contribution limit is $5,000 ($6,000 if over 50 at the end of 2009).  (No change from 2008.) For 2009, the Adjusted Gross Income phase-out ranges for making deductible contributions to regular IRA’s that are active participants in an employer-sponsored retirement plan are higher (i.e. $55,000 to $65,000 for single taxpayers and $89,000 to $109,000 for joint filers).

The maximum annual contribution to a Roth IRA is phased-out for taxpayers with modified adjusted gross income over certain levels. For single taxpayers, the phase-out is between $105,000 and $120,000 and for married filing joint the range is between $166,000 and $176,000.

For purchases of qualified motor vehicles on or after February 17, 2009 and before January 1, 2010, a deduction for qualified motor vehicle taxes will be available to both itemizers and those claiming the standard deduction. Qualified motor vehicle taxes are state or local taxes or excise tax imposed on the purchase of a qualified motor vehicle on that portion of the cost not exceeding $49,500.

The standard deduction for single taxpayers increases to $5,700 and $11,400 for joint filers. A taxpayer may be able to increase the standard deduction by the new motor vehicle tax paid for purchases occurring after February 17, 2009, real estate taxes of up to $1,000 or a net disaster loss. A new form, Schedule L, was added in 2009 to determine the increase in the standard deduction.

The personal exemption has increased to $3,650. The exemption starts to phase out if the adjusted gross income exceeds $166,800 for single taxpayers, $125,100 for married filing separately, $250,200 for joint filers and qualifying widowers and $208,500 for heads of household.

The Alternative Minimum tax exemption amounts are increased to $70,950 for married individuals filing jointly and surviving spouses, $46,700 for unmarried individuals and $35,475 for married individuals filing separately.

For 2009, the American Opportunity Tax Credit increases the per-student education credit from a maximum of $1,800 to a maximum of $2,500 of the cost of tuition and related expenses. The credit is available for the first four years of post-secondary education, an increase from the previous two years. Up to $1,000 is refundable even if the taxpayer owes no taxes.

For 2009 and 2010, individual taxpayers are allowed a personal income tax credit, known as the non-business energy property credit, equal to 30% (up to $1,500) of the sum of: 1) the amount paid for qualified energy efficiency improvements, and 2) the amount of residential energy property expenditures (i.e., items such as exterior windows, doors, central air conditioning and natural gas furnaces, etc.).

The maximum self-employment income subject to FICA tax increases to $106,800 with no ceiling on the Medicare wage base.

A recapture tax applies if a premium subsidy is provided for COBRA continuation coverage of the taxpayer (or spouse or any dependent) and the taxpayer’s modified adjusted gross income exceeds $125,000 ($250,000 for joint returns). If the modified adjusted gross income is exceeded, the taxpayer’s income tax is increased by part, or all, of the amount of the premium subsidy.

The Making Work Pay credit is available to individuals for tax years beginning in 2009. The credit is the lesser of: 1) 6.2% of an individual’s earned income, or 2) $400 for a single ($800 for a joint return). Most individuals have received this credit in advance through lower income tax withholding. The credit is computed on a Schedule M, new for 2009.

The earned income formula has been modified in 2009 for the determination of the refundable child credit to apply 15% of earned income in excess of $3,000, a decrease of $5,500.

Eligible first-time homebuyers buying a principal residence after December 31, 2008 and before December 1, 2009, may claim a refundable tax credit equal to the lesser of 10% of the purchase price or $8,000 on their 2009 return. The credit is phased-out as modified adjusted gross income exceeds $75,000 ($150,000 if filing jointly).