TheMoneyGeek Unplugged

The biggest benefit from the $787.2 billion federal stimulus package will hopefully be a noticeable improvement in the nation’s economy.  But on an individual level, it’s wise to check if you might be eligible for benefits in health care, education, various tax credits, and housing.

A visit with a tax expert or a financial adviser such as a Certified Financial Planner^TM professional can help you determine the best ways to use the following provisions that may affect you.  It’s also a good idea to get a financial checkup in an uncertain economy such as we are experiencing for the following reasons:

• As much as it might hurt to look at the performance of your current retirement accounts and other investments, the economy will recover.  When an upturn comes, it’s wise to position your holdings to take full advantage of the recovery.
• Your future plans with regard to spending for your home, your family and your education come into sharp focus under the stimulus plan, and making these provisions work for you in the short-term should be part of a long-term plan.
• If you fear that your job might be in danger in the coming months, or if you might be facing pay or benefit cuts, it’s good to talk through your personal finances before your employer makes a move.  The best time to prepare for a job loss is while you’re still making a salary.  Not only is it a good opportunity to build an emergency fund, but it’s generally easier to look for new opportunities while you still have your current one.  Your emergency fund should be at least 3-9 months of salary, with a minimum of $1,000.

Here’s a quick summary of the stimulus plan provisions that may affect your finances:

Educational provisions:

College student aid: The package awards $15.6 billion to increase maximum individual student Pell grants by $500.

American Opportunity Tax Credit: This credit temporarily provides taxpayers with a new tax credit of up to $2,500 of the cost of tuition and related expenses, though it phases out for taxpayers with adjusted gross income in excess of $80,000 ($160,000 for married couples filing jointly).  Forty percent of the available credit is refundable, which means that you could receive a refund even if you have no tax liability.

529 Plans: The scope of allowable education expenses expands to now include computers and computer technology.

Tax credit provisions:

One more cap for the Alternative Minimum Tax (AMT): Lawmakers put one more patch on the AMT to protect a wider number of people from getting hit.  This latest break for potential AMT targets increases the exemption amounts to $46,700 ($70,950 for married couples).  The bill would also exclude interest on all private activity bonds issued in 2009 and 2010 from the AMT.  Normally, interest on private activity bonds is added back as an AMT “preference item,” thereby increasing the AMT .

“Making Work Pay” Tax Credits:  This is the refundable tax credit of up to $400 for individuals and $800 for families for 2009 and 2010 that phases out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 for married couples).  This isn’t a lump sum payment, but instead is reflected in reduced payroll taxes starting in April or May of this year.

Car Buyers Tax Credit: This allows a deduction for state and local sales and excise taxes paid on the purchase of a new vehicle through 2009.  This deduction is phased out for taxpayers with adjusted gross income in excess of $125,000 ($250,000 in the case of a joint return).

Expanded Child Credit: This increases the eligibility for the refundable child tax credit in 2009 and 2010 by reducing the minimum income for eligibility to $3,000.

Earned Income Tax Credit: This provision will create a temporary tax credit increase for working families with three or more children.

Housing provisions:

Refundable First-Time Home Buyer Credit: First-time home buyers (generally, someone who hasn’t owned a home in the last three years) can claim a credit worth $8,000 – or 10 percent of the home’s value, whichever is less – on their 2008 or 2009 taxes.  The added bonus is that the credit is refundable, which means that filers will see a refund of the full $8,000 even if their total tax bill is less than that amount.  Note that the term “first-time home buyer” has several conditions, so you may be qualified even if you have actually owned a home in the past.

If you’ve already filed your 2008 income tax return, and you’ve completed a qualified purchase in 2009, then you can amend your 2008 return or claim the credit on your 2009 return.  Alternatively, if you are contemplating a home purchase by October 15, then you may want to request an automatic extension by filing form 4868 with the IRS by April 15.

Married couples do not qualify for the first-time home buyer credit if either spouse has owned a home in the last three years.

Unemployment and Healthcare-Related Benefits:

Extension of Unemployment Benefits: The package provides 33 weeks of extended benefits through Dec. 31, 2009.

Unemployment Compensation: The first $2,400 a person receives in unemployment compensation benefits in 2009 won’t be taxed.

Short-Term COBRA Subsidy for Involuntarily Terminated Workers: This provides a 65 percent subsidy for COBRA premiums for up to 9 months, which will put a dent in the considerable cost of COBRA health benefits for the unemployed.  The subsidy phases out for high income individuals.

Sam H. Fawaz CFP®, CPA is president of YDream Financial Services, Inc.,a registered investment advisory firm.  All material presented herein is believed to be reliable, but we cannot attest to its accuracy.  Investment recommendations may change and readers are urged to check with their investment advisors before making any investment decisions. Opinions expressed in this writing may change without prior notice.

This column is based on content provided by the Financial Planning Association, the membership organization for the financial planning community, and is provided by YDream Financial Services, Inc., a local member of FPA.