Home and Car Buyers get Tax Breaks in Stimulus Package

WASHINGTON (By Sandra Block, USA Today) February 17, 2009 — These days, most workers would welcome even a small increase in their paychecks. Still, a $400 tax credit probably isn't going to cause a lot of cash-strapped families to do a happy dance around the kitchen table. Most workers will end up with an extra $8 a week.

But the $787 billion economic stimulus package, which President Obama is expected to sign today, contains numerous provisions that could save you much more than that, depending on your circumstances. Here's a closer look at who stands to gain from the American Recovery and Reinvestment Act:

•  First-time home buyers. First-time home buyers are eligible for an $8,000 tax credit. And unlike the $7,500 credit enacted last year, this one doesn't have to be repaid, unless you sell your home within three years.

The credit is available to taxpayers who buy a primary residence between Jan. 1 and Dec. 1, 2009. The credit phases out for taxpayers whose AGI exceeds $75,000, or $150,000 for married couples.

•  New car buyers. Purchasers of new cars and trucks will be allowed to deduct sales or excise taxes. This is an above-the-line deduction, so you don't have to itemize to claim it.

The deduction is limited to sales tax on purchases of up to $49,500. The deduction phases out for single taxpayers with adjusted gross income of more than $125,000, and married taxpayers whose AGI exceeds $250,000.

The amount you save will depend on your state sales tax rate and the price of your car or truck. If your state imposes a 4% sales tax and your car costs $40,000, the deduction will reduce your adjusted gross income by $1,600, says tax publisher CCH.

The deduction is limited to car and truck purchases made between the date the bill becomes law and Dec. 31, says Tom Ochsenschlager, vice president of taxation for the American Institute of Certified Public Accountants. Congress "is trying to get people to buy cars right away," he says.

The bill also expands a tax break for people who take public transit to work. The bill allows employees to set aside up to $230 a month in pretax dollars to cover the cost of a bus, train or van pool, up from $120. Employees were already allowed to set aside up to $230 a month for parking. If the employer subsidizes public transportation, employees can receive up to $230 a month without paying taxes on the benefit.

•  Parents of college-bound students. The bill contains a more generous tax credit for higher education than the existing Hope college credit. Parents will be allowed to claim a tax credit of up to $2,500 a year to cover higher-education expenses. The income phaseouts are also higher than those for existing higher-education tax credits. Single filers with AGI of up to $80,000 can claim the full credit. Married couples can have AGI of up to $160,000 and claim the full amount.

In calculating expenses that count toward the credit, parents and independent students can also include the cost of textbooks and other course materials. That change could benefit students who attend community colleges or other schools with modest tuition rates, says Mark Luscombe, tax analyst for CCH. Including textbooks will increase the amount of the tax credit these students can claim, he says.

•  Unemployed workers. If you're not drawing a paycheck, you're probably not worrying much about taxes. But that mindset can get you in trouble, because unemployment benefits are taxable. This stimulus package excludes the first $2,400 in unemployment benefits from taxes in 2009. Most jobless workers don't have taxes withheld from their unemployment checks, so this won't provide an immediate increase in their income. The change will, however, mean they won't have to scramble to come up with the money when they file their 2009 taxes.

The stimulus package could also make it easier for some unemployed Americans to continue their former employer's health insurance coverage.

The federal Consolidated Omnibus Budget Reconciliation Act, or COBRA, lets laid-off employees continue their former employer's coverage for up to 18 months. In the past, though, they were required to pay 102% of the premiums.

The stimulus bill will subsidize 25.3% of COBRA premiums for up to nine months. The subsidy is limited to workers who were laid off between Sept. 1, 2008, and the end of this year.