The ARRA and Tax Incentives

The American Recovery and Reinvestment Act includes several provisions that will lower federal taxes for many Iowa individuals, families and businesses. (NOTE: These provisions apply to federal, not state, taxes.)

Tax Cuts for Iowa Families

Making Work Pay Credit: For 2009 and 2010, this new, refundable Making Work Pay Credit is equal to the lesser of 6.2% of earned income or $400 ($800 for married couples filing jointly). The credit is reduced for taxpayers with adjusted gross incomes exceeding $75,000 ($150,000 for married couples filing jointly.)

Earned Income Tax Credit: For 2009 and 2010, the Earned Income Tax Credit (EITC) is increased for families with 3 or more qualifying children. The EITC for married couples will also phase out at $5,000 more than for single filers, reducing the marriage penalty. Taxpayers will generally receive these benefits when they file their income tax returns.

Child Tax Credit: For 2009 and 2010, the income threshold for taxpayers to receive a portion of the excess Child Tax Credit as a refund is lowered, resulting in larger refunds. Taxpayers will claim the increased refunds on their annual income tax returns.

American Opportunity Tax Credit: This provision expands the maximum credit for post-secondary education expenses to $2,500 for tax years 2009 and 2010 and allows taxpayers to claim the credit for up to four years. The credit, generally benefitting parents of dependent students, will be claimed on the taxpayer's 2009 federal income tax return. The credit is partially refundable, so low-income, independent students may also qualify.

Suspension of Taxation of Unemployment Benefits: The first $2,400 of unemployment compensation is excluded from gross income in 2009. This exclusion will reduce taxable income for taxpayers on both their federal and state tax returns.

Refundable First-Time Home Buyer Credit: The existing credit for first-time home buyers is increased from a maximum of $7,500 to $8,000 and the credit is made refundable for qualifying home purchases made between January 1, 2009 and November 30, 2009. The elimination of the pay-back provision, combined with the refundable feature, effectively converts the credit from an interest-free loan to a cash grant for first-time buyers. Taxpayers will claim this credit on their 2009 income tax return.

One-Year Patch for Alternative Minimum Tax: The Alternative Minimum Tax, or AMT, is an alternative tax designed to ensure that taxpayers are unable to exploit tax deductions and exemptions and avoid paying any federal income tax. The AMT calculation does not currently affect most taxpayers. However, the exemption amount for the AMT is not permanently adjusted for inflation, and Congress passes legislation each year to adjust the exemption amount and avoid a large increase in the number of taxpayers paying the AMT. The patch for tax year 2009 raises the exemption amount to $70,950 for married couples and $46,700 for single filers.

Economic Recovery Payment to Retirees: A one-time payment of $250 will be available for retirees, disabled individuals, and SSI recipients receiving benefits from the Social Security Administration, Railroad Retirement, or the U.S. Department of Veterans Affairs. This payment reduces any Making Work Pay credit for which the recipient would be eligible.

Tax Benefits for Iowa Businesses

Bonus Depreciation: Businesses are generally allowed to claim a deduction for the wear and tear on business capital (machines, equipment, computers, tractors, etc.). The deduction, called depreciation, is calculated over the useful life of the capital. For tax year 2009, businesses that make expenditures on new capital will be allowed to immediately write-off 50 percent of those expenditures as a deduction against current income. This represents an extension of a similar provision enacted in 2008.

Expanded Small Business Expensing: Small businesses are allowed to recover the cost of certain capital investments more quickly by immediately expensing rather than depreciating new capital investments over time. Expensing allows the business to recover the cost of the investment more quickly through a lower tax bill. The benefits of expensing are limited to $125,000 of total expenditures are phased out for firms that have total capital expenditures of more than $500,000 per year. For 2009, the amount of new expenditures that may be eligible for expensing is raised to $250,000, and businesses may have up to $800,000 in aggregate investment expenditures and still qualify for the full expense amount.

5-Year Carryback of Net Operating Losses for Small Businesses: Net operating losses (NOLs) may be used to offset taxable income in the two prior tax years or carried forward for up to twenty years. It is generally more advantageous to offset prior income, if possible, because the business may claim an immediate refund for taxes paid previously.

Deferral of Certain Income from Cancellation of Debt: A taxpayer generally has to recognize income whenever the taxpayer is able to cancel debt or repurchase the debt for an amount less than the adjusted issue price. The income recognized is the difference between the adjusted issue price and the re-purchase price. For tax years 2009 and 2010, certain businesses will be allowed to defer paying tax on income from the cancellation of debt for four or five years, and then pay the tax evenly over five years. This timing shift will save the affected firms from paying tax during these difficult economic times.

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