According to the newly launched stimulus-tracking website Recovery.Gov (www.recovery.gov), $288 billion of the Act's projected $787 billion cost is allocated for tax relief. Central to the new tax relief provisions is the Making Work Pay tax credit, which reduces federal income taxes for the majority of working families. However, the legislation includes other new tax measures and extends expired or expiring federal tax breaks, as well. 

The new law provides an individual tax credit for 2009 and 2010―Making Work Pay―that is estimated to provide relief for 95 percent of American workers. This credit, like other tax credits, reduces your tax liability on a dollar-for-dollar basis.  

The amount of your credit is equal to 6.2 percent of your earned income, up to a maximum of $400 for single taxpayers and $800 for married couples filing joint returns. It phases out based on your adjusted gross income (AGI), with some modifications for highly specialized income. The credit phases out at a rate of two percent of your AGI above $75,000 if you're single―$150,000 if you're married and file a joint return. Your credit is reduced to zero with an AGI of $100,000 if you're single and $200,000 if you're married. 

Nonresident aliens do not qualify for this credit. Neither do estates, trusts, or individuals who can be claimed as a dependent on someone else's return.

Economic Recovery Payments
The Making Work Pay tax credit is based on taxable wages, so it is not available―or only partially available―to many retirees and other people with income not derived from wages.

If you don't qualify for the full Making Work Pay credit, the new law includes a one-time payment of $250 for retirees, disabled individuals and SSI recipients receiving benefits from the Social Security Administration, Railroad Retirement beneficiaries, and veterans receiving disability compensation and pension benefits from the U.S. Department of Veterans' Affairs. The one-time payment is a reduction against any allowable Making Work Pay credit.

Refundable Credit for Federal and State Pensioners
The new law provides a one-time refundable tax credit of $250 in 2009 to certain government retirees who are not eligible for Social Security benefits. This one-time credit is a reduction against any allowable Making Work Pay credit.

Alternative Minimum Tax (AMT)
To protect approximately 26 million middle-class families from falling subject to the AMT, the legislation increases the AMT exemption amounts for 2009 to $46,700 for single taxpayers and $70,950 for married couples filing joint returns and surviving spouses. These amounts were $46,200 and $69,950, respectively, for 2008―but were scheduled to return to the significantly lower 2000 exemption amounts without legislative action.

The new law also allows personal credits in calculating the AMT.

American Opportunity Education Tax Credit
The new law includes a measure aimed at making college more affordable for low and moderate-income students during 2009 and 2010. The new provision temporarily enlarges the Hope tax credit, renamed the American Opportunity tax credit.

The maximum amount of the credit is $2,500 per year for the first four years of college. The actual amount of the credit is calculated based on the following amounts paid during the tax year:

  100 percent of the first $2,000 of tuition and related expenses, including books, and 

  25 percent  of the next $2,000 of tuition and related expenses.

This credit is also subject to a phase-out if you're single and your AGI exceeds $80,000 or you're married filing jointly with an AGI that exceeds $160,000. This phase-out is higher than was the case for the Hope credit, providing a benefit to taxpayers with somewhat higher incomes.

While the Hope credit was nonrefundable― it could reduce your regular tax bill to zero but couldn't generate a refund―the American Opportunity tax credit is refundable up to 40 percent. This means even a taxpayer who doesn't owe any taxes can benefit from the credit, up to a maximum of $1,000

Incentives for Car Purchases
The new law allows taxpayers to deduct state and local sales taxes paid on the purchase of a new automobile―including light trucks, SUVs, motorcycles, and motor homes. It covers vehicles purchased between the enactment date of the legislation and the end of 2009. However, it only applies to $49,500 of the vehicle's price.

The deduction is available whether or not you itemize. However, you cannot take the deduction if you elect to deduct state and local sales taxes in lieu of state and local income taxes. And the deduction begins to phase out for taxpayers earning $125,000 per year―$250,000 for joint returns.

The new law also provides a tax credit for purchases of plug-in electric drive vehicles. The amounts range from $2,500 to $7,500, depending on battery capacity. In addition, the legislation restores and updates the electric vehicle credit for plug-in electric vehicles that would not otherwise qualify for the larger plug-in electric drive vehicle credit, and provides a tax credit for plug-in electric drive conversion kits.

529 College Savings Plans
For tax years beginning in 2009 and 2010, computers and computer technology qualify as "qualified education expenses" for 529 college savings plans.

First-time Homebuyers Credit
The new legislation helps first-time homebuyers and, hopefully, strengthens the housing market by enhancing the current credit for first-time home purchases. The new credit applies to homes purchased on or after January 1, 2009 and before December 1, 2009.

Last year's Housing Act created a first-time homebuyer's credit equal to 10 percent of the purchase price, up to a maximum of $7,500. It applied to homes purchased between April 8, 2008, and July 1, 2009, by single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000. The credit is widely acknowledged to have failed in its objective of encouraging home purchases, in large part because it had to be paid back to the government over a period of 15 years―or earlier if the house was sold.

The new legislation eliminates the repayment requirement and increases the maximum credit amount from $7,500 to $8,000. However, the new law retains the recapture provisions if the house is sold within three years of purchase.

Earned Income Tax Credit
The new legislation expands the Earned Income Tax Credit by providing tax relief to families with three or more children and increasing marriage penalty relief.

Energy Tax Credits
The new law extends the tax credits for energy-efficient improvements to existing homes through 2010―including purchases of new furnaces, energy-efficient windows and doors, or insulation.

For 2009 and 2010, the amount of the tax credit is increased from 10% to 30% of the amount paid or incurred for qualified improvements made during the tax year. The property-specific limits are eliminated and an aggregate $1,500 maximum applies to all property qualifying for the credit.

The new law also removes the dollar limits on certain energy credits― e.g, the limit for qualified small wind energy property ($4,000), for qualified solar water heating property ($2,000), and qualified geothermal heat pumps ($2,000).

Unemployment Benefits
The legislation temporarily suspends taxation of certain unemployment benefits. For unemployed individuals, the first $2,400 of unemployment benefits are exempt from federal income tax for 2009.

Making Work Pay Tax Credit