American Recovery and Reinvestment Act: Tax Provisions
Individuals and Working Families
Making Work Pay Tax Credit
o The ARRA provides a refundable tax credit will be issued of up to $400 for working individuals and $800 for working families in 2009 and 2010.
o For individuals who receive a paycheck and are subject to withholding, the credit will typically be handled by their employers through automated withholding changes in early spring. These changes may result in an increase in take-home pay.
o The amount of the credit must be reported on the employee's 2009 income tax return filed in 2010. Taxpayers who do not have taxes withheld by an employer during the year can also claim the credit on their 2009 tax return.
Economic Recovery Payments
o Recipients of Social Security, SSI, Railroad Retirement, and Veterans Disability Compensation benefits will receive a one-time payment of $250. The one-time payment is reduced from any allowable Making Work Pay tax credit.
Refundable Credit for certain Federal and State Government Retirees
o The ARRA provides a one-time refundable tax credit of $250 to certain government retirees who are not eligible for Social Security benefits. The one-time credit is reduced from any allowable Making Work Pay credit.
Earned Income Tax Credit
o The ARRA provides a temporary increase in Earned Income Tax Credit for working families with three or more children.
Alternative Minimum Tax
o The ARRA provides a one-year patch for the 2009 tax year and increases the exemption amounts to $46,700 for individuals and $70,950 for joint filers.
Refundable First-time Home Buyer Credit
o The ARRA forgives the repayment requirement for the tax credit available for first-time home purchases made between January 1, 2009 and August 1, 2009 and boosts the credit from $7,500 to $8,000. The credit phases out for taxpayers with incomes over $75,000 ($150,000 joint). Repayment is still required if home is sold within three years.
Temporary Suspension of Tax on Unemployment Benefits
o The ARRA suspends federal income tax on first $2,400 in unemployment benefits.
Tax Deduction for Vehicle Purchases
o The ARRA provides all taxpayers with a deduction for state and local sales and excise taxes paid on the purchase of new cars, light trucks, recreational vehicles, and motorcycles through 2009. The deduction is phased out for taxpayers with incomes over $125,000 ($250,000 for joint returns).
Child Tax Credit
o For tax year 2009, families below certain income levels are allowed a credit against their federal income tax of $1,000 for each qualifying child.
o To qualify for the credit, the child must be an individual for whom the taxpayer can claim a dependency exemption. That means the child must be the son, daughter, grandson, granddaughter, stepson, stepdaughter, or an eligible foster child of the taxpayer. The child must be under the age of 17 at the close of the calendar year in which the taxable year of the taxpayer begins.
o The child tax credit may be refundable under certain conditions, which are different for families with different numbers of children. In 2009, families with one or two qualifying children may receive a refund of up to 15% of the taxpayer’s earned income in excess of $3,000. For example, a household with income of $15,000 would be eligible for up to a $1,800 refundable tax credit. The $3,000 threshold (floor) is for 2009 and 2010 only.
o Families with three or more children may qualify for a more generous refund of the credit. For them, the refundable credit amount is capped by the larger of the two amounts:
(1) the excess of taxpayer’s Social Security taxes over the earned income tax credit
(2) the amount by which 15% of their earned income exceeds $12,550 in 2009
o The child tax credit is phased out for taxpayers whose adjusted gross incomes (AGIs) exceed certain thresholds.
§ For married taxpayers filing joint returns, the phaseout range begins at a modified AGI of $110,000
§ for married couples filing separately at $55,000
§ for single or head of household filers the phaseout begins at an AGI of $75,000
These phaseout thresholds are not indexed for inflation. AGI used in this calculation is “modified” from AGI reported on the tax return by adding back certain items.
o The child tax credit is phased out by $50 for each $1,000 (or fraction thereof) by which the taxpayer’s AGI exceeds the threshold amounts. The upper end of the phase-out range depends on the number of qualified children and the amount of the credit authorized by law in a given year.
Higher Education Tax Credits
o The ARRA modifies the Hope Credit for 2009 and 2010, increasing the credit amount that can be claimed by taxpayers, allowing 40% of the credit to be refundable, and expanding the definition of qualified tuition and related expenses to include required course materials. In addition, availability of the Hope credit is expanded to include the first four years of college and the income eligibility thresholds have been increased, allowing more middle income households to claim the credit. Lastly, taxpayers may claim the credit against their alternative minimum tax liability.
o Specifically, the amount of credit was increased to a maximum of $2,500 per student (100% of taxpayers’ first $2,000 in qualified tuition and related expenses plus 25% of the next $2,000 in qualified tuition and related expenses).
o To qualify for the maximum amount of the Hope credit, a minimum of $4,000 in tuition and fees per eligible student must be expended, assuming the taxpayer has sufficient tax liability to take advantage of the credit’s partial refundability. The maximum credit a taxpayer may claim for a taxable year is $2,500 multiplied by the number of students in the family who meet the enrollment criteria.
o Refundability of the Hope credit is limited to 40% of the credit amount. The maximum refund amount is $1,000 (40%×$2,500). Refundable tax credits are more valuable to lower income households who would otherwise not benefit from the tax credit.
o In addition, taxpayers may claim the Hope credit against their alternative minimum tax liability. These added provisions increase the amount of taxpayers able to benefit from the credit.
o ARRA also temporarily expanded the eligibility requirements of the Hope tax credit in two ways.
§ First, ARRA increased the income limits above which the credit is gradually reduced from $48,000 ($96,000 for married taxpayers filing jointly) to $80,000 ($160,000 for married taxpayers filing jointly). Households with modified adjusted gross income above $90,000 ($180,000 for married taxpayers filing jointly) are ineligible for the credit. As a result, the Hope credit now provides more assistance to middle and upper-middle taxpayers.
§ Second, the credit is available for the first four years of college. Expanding eligibility to the later years of college may assist some households that have students closer to graduation and that have been impacted by the recent economic downturn.
§ Students in the Midwestern disaster area who qualify for expanded benefits under P.L. 110-343 may receive them in lieu of the provisions enacted by the ARRA. In addition, the definition of qualified tuition and related expenses for students in the Midwestern disaster area is expanded to include room, board, books, and fees.
§ This temporary expansion applies to tax years 2008 and 2009. President Obama proposed, in his FY2010 Budget, to make the ARRA changes permanent.
o The ARRA also expanded qualification for The Lifetime Learning credit, which may be claimed for the qualified tuition and related expenses of the students in the taxpayer’s family who are enrolled at eligible institutions. The credit amount is equal to 20% of the taxpayer’s first $10,000 of out-of-pocket qualified tuition and related expenses. The maximum credit a taxpayer may claim is $2,000.
o If a taxpayer is claiming a Hope credit for a particular student, none of that student’s expenses may be applied to the Lifetime Learning credit. As with the Hope credit, the Tax Extenders and Alternative Minimum Relief Act of 2008 temporarily expands the Lifetime Learning credit.
o Students who are attending undergraduate or graduate institutions in the Midwestern disaster area may claim up to 40% of the taxpayer’s first $10,000 of out-of-pocket qualified education expenses for a maximum credit of $4,000. In addition, qualified tuition and related expenses will include room, board, books, and fees. This temporary expansion applies to tax years 2008 and 2009. The amount a taxpayer may claim as a Lifetime Learning credit is gradually reduced for taxpayers in the same manner as the Hope credit.
o Comparing the Two Higher Education Tax Credits
o Taxpayers can claim more than one Hope credit on a tax return, provided that more than one individual (the taxpayer, the spouse, or a dependent) meets the qualifications. In contrast, the Lifetime Learning credit may be claimed only once on a tax return for a maximum of $2,000.
o The Lifetime Learning credit can include all of the qualifying educational expenses pooled together from the taxpayer, the spouse and/or their dependent(s). For 2009 and 2010 the Hope credit is partially refundable, which means that a taxpayer may receive a tax refund if the amount of their allowable education credit exceeds their income tax liability. In addition, the Hope credit is indexed for inflation, while the Lifetime Learning credit is not.
o Unlike the Hope credit, the Lifetime Learning credit can be used for graduate or undergraduate studies. The Lifetime Learning credit does not require the student to be in the first four years of undergraduate schooling (as does the Hope credit for 2009 and 2010 only). It only requires the student to be enrolled in one course at an eligible educational institution. The Hope credit requires that the student not have a felony drug conviction, which is not a requirement of the Lifetime Learning credit.
o Both credits disallow a double tax benefit for higher education expense. Some taxpayers can deduct the expenses of higher education from their income tax by claiming an above-the-line tuition and fees deduction or by claiming the expenses as business related. In doing so, the taxpayer cannot also claim an education credit for those same expenses.
o Taxpayers cannot claim an education credit on expenses paid with tax-free scholarship, grant, or employer-provided educational assistance. Pell Grants, veterans’ educational assistance, and tax-exempt scholarships are included in this category of tax-free educational assistance. Taxpayers must reduce qualified education expenses by the amount of any tax-free financial assistance before using the expenses to claim an education tax credit.
Energy Savings and Green Jobs
Renewable Energy Production Tax Credits (PTC)
o The ARRA extends for three years the production tax credit (PTC) for electricity derived from wind (through 2012) and for electricity derived from biomass, geothermal, hydropower, landfill gas, and waste-to-energy facilities (through 2013).
o The law also provides grants of up to 30 percent of the cost of building a new renewable energy facility in 2009 and 2010 or permits that business to claim a 30 percent investment credit instead of a production tax credit.
Clean Renewable Energy Bonds
o The ARRA authorizes an additional $1.6 billion of new bonds to finance facilities that generate electricity for qualified renewable sources.
Qualified Energy Conservation Bonds
o The ARRA authorizes an increase to $3.2 billion for qualified bonds to finance state, municipal, and tribal government programs that reduce greenhouse gas emissions.
Energy Efficient Home Tax Credits
o The ARRA promotes energy efficient investments in homes by extending and expanding tax credits through 2010 for investments such as new furnaces, energy-efficient windows and doors, or insulation.
o The law increases the credit from 10 percent to 30 percent of the cost of the investment and raises the credit cap from $500 to $1,500, saving American families money on their energy bills.
Plug-In Hybrid Tax Credit
o The ARRA spurs the next generation of cars by providing a tax credit for families that purchase plug-in hybrid and all-electric vehicles of up to $7,500.
New Manufacturing Investment Tax Credit
o The ARRA establishes a new manufacturing investment tax credit for advanced energy facilities, such as facilities that manufacture components for the production of renewable energy, advanced battery technology, and other innovative next-generation green technologies.
Alternative Fuel Pumps
o The ARRA Increases incentives to install pumps that dispense alternative fuels including E85, biodiesel, hydrogen, and natural gas.
Business Owners & Investors
Bonus Depreciation
o The ARRA provides an extension of the provision allowing businesses to recover the costs of capital expenditures faster than normal depreciation for purchases incurred in 2009.
Increase in Limits for Small Business Expensing
o The ARRA allows small businesses to fully write-off certain capital expenses in the year they are made, rather than depreciating them over time.
Defer Taxes on “Cancellation of Debt” Income
o The ARRA allows certain businesses to recognize “Cancellation of Debt” income over 10 years, deferring the tax for the first five years, and recognizing the income ratably over the following five years.
Work Opportunity Tax Credit (WOTC)
o The ARRA provides a tax credit equal to 40 percent of the first $6,000 of wages paid to employees of one of nine targeted groups. These targeted groups are
o Qualified TANF Recipients
o Qualified Veterans
o Qualified Ex-Felons
o Qualified Designated Community Residents (DCR)
o Qualified Vocational Rehabilitation Referrals
o Qualified Summer Youth
o Qualified Food Stamp Recipients
o Qualified Supplemental Security Income (SSI) Recipients
o Qualified Long-Term Family Assistance Recipients
o The ARRA also adds two new targeted groups
o Unemployed Veterans
o Disconnected Youth
New Markets Tax Credits (NMTC)
· The ARRA provides a non-refundable tax credit intended to encourage private capital investment in eligible, impoverished, low-income communities.
o The tax credit value is 39% of the cost of the qualified equity investment and is claimed over a seven-year credit allowance period. In each of the first three years of the investment, the investor receives a credit equal to 5% of the total amount paid for the stock or capital interest at the time of purchase. For the final four years, the value of the credit is 6% annually. Investors must retain their interest in a qualified equity investment throughout the seven-year period.
o Only eligible investments in qualifying low-income communities are eligible for the NMTC. Qualifying low-income communities include census tracts that have at least one of the following criteria:
(1) a poverty rate of at least 20%
(2) is located in a metropolitan area, a median family income below 80% of the greater of the statewide or metropolitan area median family income; or
(3) is located outside a metropolitan area, a median family income below 80% of the median statewide family income. As defined by the criterion above, about 39% of the nation’s census tracts covering nearly 36% of the U.S. population are eligible for the NMTC. Additionally, designated targeted populations may be treated as low-income communities.
o All taxable investors are eligible to receive the NMTC. Once the investor begins claiming the NMTC, the credit can be recaptured if the Community Development Entity (CDE)
(1) ceases to be a CDE
(2) fails to use substantially all of the proceeds for eligible purposes
(3) redeems the investment principal
Almost all qualified equity investments (QEI) in low-income communities or serving low-income populations could be eligible to receive the NMTC.
o These eligible investments are referred to as qualified low-income community investments (QLICIs). QLICIs are categorized in four ways:
(1) loans or investments to qualified active low-income community businesses (QALICB)
(2) the provision of financial counseling
(3) loans or investments in other CDEs
(4) the purchase of loans from other CDEs
o To receive an allocation, a CDE must submit an application to the CDFI, which asks a series of standardized questions about the track record of the CDE, the amount of NMTC allocation authority being requested, and the CDE’s plans for any allocation authority granted. The application covers four areas:
(1) the CDE’s business strategy to invest in low-income communities
(2) capitalization strategy to raise equity from investors
(3) management capacity
(4) expected impact on jobs and economic growth in low-income communities where investments are to be made
In addition, priority points are available for addressing the statutory priorities of investing in unrelated entities and having demonstrated a track record of serving disadvantaged businesses or communities.
o The application is reviewed and scored to identify those applicants most likely to have the greatest community development impact and ranked in descending order of aggregate score. Tax credit allocations are then awarded based upon the aggregate ranking, until all of the allocation authority is exhausted. In each of the four completed NMTC rounds, significantly more CDEs applied for allocations than were able to receive allocations, with only 22% of applicants receiving allocations.
Extension of Carryback Period for Net Operating Losses
o The ARRA provides small business taxpayers with an opportunity to extend the carryback period for up to five years for NOLs incurred in 2008.
o To qualify as an eligible small business, a taxpayer must have $15,000,000 or less in gross receipts.
o The intent of the NOL carryback/carryforward provision is to give taxpayers the ability to smooth out changes in business income, and therefore taxes, over the business cycle. Extending the carryback period enhances the ability of firms to smooth income by allowing losses to be offset against a longer period of past profits rather than having them carried forward.
o In general, a taxpayer with an NOL can carry it back to the 2 taxable years preceeding the NOL year, and/or carry it forward to each of the 20 taxable years following the NOL year. The ARRA provides small business taxpayers with an opportunity to extend the carryback period for up to five years for NOLs incurred in 2008.
o An NOL may not be used to offset more than 90% of a taxpayer’s alternative minimum taxable income (AMTI) in any one year.
Low-Income Housing Tax Credit (LIHTC)
o The ARRA directs the Secretary of the Treasury to make grants to states in lieu of a portion of their 2009 LIHTC credit volume limit.
o The change allows a state to elect to receive as grants up to 85% of 10 times the sum of the state’s unused and returned credit allocation from 2008, 40% of their 2009 LIHTC credit allocation, and 40% of any allocation in 2009 made to the state from the national LIHTC pool.
o The allocation process begins at the federal level with each state receiving an annual LIHTC allocation in accordance with federal law. State housing agencies than allocate credits to developers of rental housing according to federally required, but state created, allocation plans. The process typically ends with developers exchanging allocated credits for equity with outside investors.
§ Federal Allocation to States - LIHTCs are first allocated to each state according to its population and are typically administered by each state’s Housing Finance Agency (HFA). For example, HFAs originally received annual tax credits equal to $2 per person in 2008, with a minimum small population state allocation of $2,325,000.
· For 2009, the per capita state allocation is $2.30, and the minimum small state allocation is $2,665,000. The state allocation limits do not apply in the case of development projects that are financed with tax exempt bond proceeds.
· Tax credits that are not allocated by states are added to a national pool and then redistributed to those states that apply for the excess credits. To be eligible for an excess credit allocation, a state must have allocated its entire previous allotment of tax credits.
§ State Allocation to Developers - State Housing Finance Agencies (HFAs) allocate credits to developers of rental housing according to federally required, but state created, Qualified Allocation Plans (QAPs).
· Federal law requires that the QAP give priority to projects that serve the lowest income households and that remain affordable for the longest period of time.
· Many states have two allocation periods per year. Developers apply for the credits by proposing plans to state agencies. On average, one project out of five may receive an allocation of tax credits. Developers of housing projects compete for tax credits as part of the financing for the real estate development by submitting proposals to the HFA.
· Types of developers include nonprofit organizations, for-profit organizations, joint ventures, partnerships, limited partnerships, trusts, corporations, and limited liability corporations.
· In order to be eligible for the LIHTC, properties are required to meet certain tests that restrict both the amount of rent that is assessed to tenants and the income of eligible tenants. The “income test” for a qualified low-income housing project requires that the project owner irrevocably elect one of two income level tests, either a 20-50 test or a 40-60 test.
o In order to satisfy the first test, at least 20% of the units must be occupied by individuals with income of 50% or less of the area’s median gross income, adjusted for family size.
o To satisfy the second test, at least 40% of the units must be occupied by individuals with income of 60% or less of the area’s median gross income, adjusted for family size.
o A qualified low-income housing project must also meet the “gross rents test” by ensuring rents do not exceed 30% of the elected 50% or 60% of area median gross income, depending on which income test the project elected.
· The types of projects eligible for the LIHTC are apartment buildings, single family dwellings, duplexes, or townhouses. Projects may include more than one building.
· Tax credit project types also vary by the type of tenants served. Housing can be for families and/or special needs populations including the elderly. Enhanced LIHTCs are available for difficult development areas (DDAs) and qualified census tracts (QCTs) as an incentive to developers to invest in more distressed areas: areas where the need is greatest for affordable housing, but which can be the most difficult to develop. In these distressed areas, the LIHTC can be claimed for 130% (instead of the normal 100%) of the project’s total cost excluding land costs. This also means that available credits can be increased by up to 30%.
§ Developers and Investors - Upon receipt of a LIHTC allocation, developers typically exchange the tax credits for equity. For-profit developers can either retain tax credits as financing for projects or sell them; non-profit developers sell tax credits.
· Taxpayers claiming the tax credits are usually real estate investors, not developers. The tax credits cannot be claimed until the real estate development is complete and operable. This means that more than a year or two could pass between the time of the tax credit allocation and the time the credit is claimed. If, for example, a project were completed in June of 2008, depending on the filing period of the investor, the tax credits may not begin to be claimed until sometime in 2009.
· Trading tax credits, or selling them, refers to the process of exchanging tax credits for equity investment in real estate projects. Developers recruit investors to provide equity to fund development projects and offer the tax credits to those investors in exchange for their commitment. When credits are sold, the sale is usually structured with a limited partnership between the developer and the investor, and sometimes administered by syndicators who must adhere to the complex provisions of the tax code.
o As the general partner, the developer has a very small ownership percentage but maintains the authority to build and run the project on a day-today basis.
o The investor, as a limited partner, has a large ownership percentage with an otherwise passive role.
· Typically, the investor does not expect the project to produce income. Instead, investors look to the credits, which will be used to offset their income tax liabilities, as their return on investment. The investor can also receive tax benefits related to any tax losses generated through the project’s operating costs, interest on its debt, and deductions such as depreciation and amortization.
· The type of tax credit investor has changed over the life of the LIHTC. Upon the introduction of the LIHTC in 1986, public partnerships were the primary source of equity investment in tax credit projects, but diminished profit margins have driven some syndicators out of the retail investment market. Although there are individual tax credit investors, in recent years, the vast majority of investors have come from corporations, either investing directly or through private partnerships.
· Neither individuals nor corporations can claim the LIHTC against the alternative minimum tax.
· Different types of investors have different motivations for investing in tax credits. An estimated 43% of investors are subject to the Community Reinvestment Act (CRA), and investment in LIHTCs is favorably considered under the investment test component of the CRA. Other investors include real estate, insurance, utility, and manufacturing firms, many of which list the rate of return on investment as their primary purpose for investing in tax credits. Tax sheltering is the second-most highly ranked purpose for investing. The LIHTC finances part of the total cost of many projects rather than the full cost and, as a result, must be combined with other resources. The financial resources that may be used in conjunction with the LIHTC include conventional mortgage loans provided by private lenders and alternative financing and grants from public or private sources. Individual states provide financing as well, some of which may be in the form of state tax credits modeled after the federal provision.
· Additionally, some LIHTC projects may have tenants who receive other government subsidies such as housing vouchers.
.
|
