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Charlotte Amalie
Tuesday, June 18, 2024
HomeNewsArchivesCongress Provides Significant Tax Incentives for 2009 Filers

Congress Provides Significant Tax Incentives for 2009 Filers

The U.S. Government provides several tax benefits that taxpayers can claim on their 2009 income tax returns. For U.S. Virgin Islands residents, these incentives would be taken on Form 1040 as filed with the Virgin Islands Bureau of Internal Revenue (BIR) on April 15, 2010, or later with applicable extensions. Specifically, as part of the American Recovery and Reinvestment Act (ARRA) signed into law by President Barack Obama on February 17, 2009, Congress introduced many tax incentives that can help U.S. Virgin Islands residents save on their 2009 income taxes. These incentives apply to areas such as new home purchases, college tuition credits, energy savers, job credits, unemployment benefits, earned income credits and new car purchases. In some cases as noted where applicable, these benefits can also be taken on 2010 returns.

Credit for New Home Owners and New Home Buyers: ARRA provides tax incentives for new home owners as well as new home buyers who have previously owned a home and are purchasing a principal residence (not a second home or vacation property). The law extended applicable time frames to provide up to $8,000 in credits for new homes purchased by April 30, 2010. In addition, the new law includes up to $6,500 in credits for qualified move-up home buyers purchasing a principal residence after Nov. 6, 2009 and by April 30, 2010. (A move-up home buyer must have owned and resided in the same home for at least five consecutive years of the eight years prior to the purchase date.) In each case, if a binding sales contract is signed by April 30, 2010, the closing can take place up to June 30, 2010 and the purchase will still be eligible. If a house is being constructed, it is treated as having been purchased on the date that the owner first occupies the home.

Income limits have been increased from those available in prior years so that homeowners with modified adjusted gross incomes of up to $125,000, if single, and $245,000, if married, are eligible for a reduced credit. For incomes between $125,000 and $145,000 and $245,000 and $265,000 for single and married filers, respectively, the credit is reduced proportionally. It is not available for taxpayers with incomes above those amounts. Also, purchases of homes priced above $800,000 are not eligible for the credit.

Taxpayers who have already filed for 2009 and are eligible for the credit can still file an amended return with the BIR along with proof of the home’s purchase to take the credit. Taxpayers complete IRS Form 5405 to determine the credit amount and then claim this amount on line 67 of the taxpayer’s Form 1040 for 2009 returns. Home buyers must attach a copy of their HUD-1 settlement form to Form 5405 as proof of the completed home purchase.

The definition of “home” includes single-family detached homes, attached homes such as condominiums, manufactured or mobile homes, and houseboats.

Credit for College Tuition, Books, and Computers: College students and their parents can qualify for the American Opportunity Credit, which temporarily replaces the Hope Credit. (The Hope Credit, in place since January 1998, provided for a tax credit of up to $1,800 in qualified education expenses for each student enrolled in school.) The American Opportunity Credit can benefit taxpayers who do not owe any tax (that is, it is a refundable credit, up to a maximum refund of 40 percent of the amount of the credit for which the taxpayer is eligible) as well as those couples making more than $160,000 (although it is phased out for couples making more than that amount). Students with incomes of $80,000 or less qualify for a credit of up to $2,500 a year, an increase of $700 when compared to the Hope Credit. The American Opportunity Credit can be claimed for 2009 or 2010 for qualifying expenses such as college tuition, books, and computers. Students and parents can now claim the credit for four years of post-secondary education instead of just two years.

Residential Energy Property Credit: The U.S. Government is paying taxpayers to “go green” with its new Residential Energy Property Credit. This credit expands the incentives available to homeowners who make energy-efficient upgrades to their homes. The new law allows homeowners to claim up to 30 percent of home improvement costs up to $1,500, and the time frame for doing so has been extended through 2010. The energy credit is available for such projects as installing energy efficient windows, insulation, doors, furnaces (but hopefully not in the U.S. Virgin Islands), and air conditioners. Energy conserving appliances are not, however, eligible. Taxpayers can determine if upgrades qualify for the credit by checking with Energy Star, a U.S. Government subsidized program that determines energy efficiency.

The Making Work Pay Credit: The Making Work Pay Credit provides a refundable tax credit up to a maximum of $400 per worker or $800 per couple and is available for tax years 2009 and 2010. Working taxpayers who earn no more than $75,000, or couples who earn no more than $150,000, are eligible for this credit. Many taxpayers who qualify for this credit have already received the refund in their paychecks because of adjustments in federal income tax withholding tables also applicable in the U.S. Virgin Islands. Taxpayers who have not received the credit refund in their paychecks can use the calculators in www.irs.gov to figure out appropriate withholding.

Tax Exemption for Unemployment Benefits: Under ARRA the first $2,400 of unemployment benefits an individual receives in 2009 will be tax free. This provision applies only to benefits received in 2009. However, this benefit applies to every person who receives unemployment benefits during 2009 so for a married couple, if both spouses receive unemployment benefits during 2009, each may exclude from income the first $2,400 of benefits they receive. Normally, unemployment benefits are taxable. Individuals who received unemployment benefits in 2009 should ensure that they do not treat them as fully taxable.

Earned Income Tax Credit Increase: ARRA provided a temporary increase in the earned income tax credit (EITC) for taxpayers with three or more qualifying children. The maximum EITC for this new category is $5,657. ARRA also increased the beginning point of the phase-out range for the credit for all married couples filing a joint return, regardless of the number of children. These changes apply to 2009 and 2010 tax returns. The earned income tax credit is a refundable credit that begins to phase out at $21,420 for married taxpayers filing a joint return with children and completely phases out at $40,463 for one child, $45,295 for two children and $48,279 for three or more children. For married taxpayers filing a joint return with no children, the credit begins to phase out at $12,470 and completely phases out at $18,440.

The definition of “qualifying child” also changed in 2009. To be a qualifying child, the child must be younger than the taxpayer unless the child is permanently and totally disabled (in which case the term “child” includes a person of any age). A qualifying child who is not permanently and totally disabled must be under age 19 at the end of 2009 unless a student, in which case the child can be under age 24. Further, the child cannot be a qualifying child if he or she files a joint return unless the return was filed only as a claim for refund. Finally, if the parents of a child can claim the child as a qualifying child but do not do so, then no one else can claim the child as a qualifying child unless that person’s adjusted gross income is higher than the highest adjusted gross income of either of the child’s parents who can claim the child but do not do so.

Tax Benefits for Purchase of New Vehicles: Taxpayers who purchased new vehicles between Feb. 17, 2009 and Dec. 31, 2009 may deduct any sales or excise taxes paid on those new vehicles. The IRS has indicated in a press release issued on June 10, 2009, that taxpayers who purchase a new motor vehicle in states that do not have state sales taxes are entitled to deduct other fees or taxes imposed by the state or local government. The fees or taxes that qualify must be assessed on the purchase of the vehicle and must be based on the vehicle’s sales price or as a per unit fee. Accordingly, it appears to apply to the four percent gross receipts tax that purchasers of new cars pay in the U.S. Virgin Islands even though the gross receipts tax is not separately stated. However, it should be noted that the IRS press release does not specifically address the application of the deduction in a mirror code jurisdiction and the BIR has not issued a press release on this issue. In the case of Johnson v. International Business Machines Corp., D.C.V.I. 1973, 10 V.I. 294, the Court held that “a gross receipts tax is similar to a sales tax, and the similarity is increased where, as in the Virgin Islands, the gross receipts tax is a general, across-the-board tax rather than a limited, special one.” The deduction does not appear to apply to the highway user’s tax since that tax is imposed at the time of importation, not purchase, of a vehicle and is also based on weight, not price. The deduction would also benefit U.S. Virgin Islands residents who purchase and import cars from states that do have sales taxes on vehicle sales.

Qualifying vehicles include passenger automobiles, motorcycles, motor homes, and trucks weighing less than 8.5 tons. The deduction is limited to the sales and excise taxes and similar fees paid on up to $49,500 of the purchase price of a new vehicle. The deduction is reduced for joint filers with modified adjusted gross incomes between $250,000 and $260,000 and other taxpayers with such incomes between $125,000 and $135,000. Taxpayers with higher incomes do not qualify. The special deduction is available regardless of whether taxpayers itemize deductions on their returns. Taxpayers who do not itemize will add this additional amount to the standard deduction on their 2009 tax returns as calculated on Form 1040 Schedule L.

A separate tax credit is applicable for vehicles “placed in service” from Jan. 1, 2006 and purchased before Dec. 31, 2010 in connection with the purchase of hybrid, fuel cell, alternative fuel, and advanced lean burn technology vehicles.

Marjorie Roberts, Travis Wright, and Michele Hyndman are tax attorneys with the firm of Marjorie Rawls Roberts, P.C., which was founded in 1999.

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