The Stimulus Plan and the Individual Taxpayer

By Margaret Jasper, Attorney

The American Reinvestment and Recovery Act of 2009, signed into law on February 17, 2009, is a $787 billion economic stimulus plan.

Most people are aware of the massive amount of money given the financial sector to stimulate the economy and get credit flowing again. Many are not aware that the plan also contains $282 billion in tax cuts and credits to help individual taxpayers in these difficult economic times.

The stimulus plan includes tax credits for the following:

  • First time homebuyers
  • Energy conservation projects
  • Auto purchases
  • Education
  • Earned income
  • Increase in the existing earned income tax credit
  • Increased eligibility for the existing child tax credit

First Time Homebuyer Tax Credit

If you're ready to purchase a home, you can benefit from the stimulus plan by taking advantage of the first time homebuyer tax credit. A first time homebuyer is defined as someone who has not owned a home within the prior three years.

Under the plan, first time homebuyers receive a tax credit of 10% of the purchase price up to $8,000. Since this is a tax credit and not a loan, you don't have to pay this money back. You must purchase the home before December 1, 2009, but if you sell the home within the first three years, your credit will be forfeited.

The tax credit is only available for the purchase of your principal residence. You can't apply the credit towards the purchase of a second home or rental property.

This tax credit is phased out based on the buyer's modified adjusted gross income (MAGI). Modified adjusted gross income is defined as a taxpayer's adjusted gross income plus various amounts excluded from income, such as certain foreign income, health and flexible spending accounts and 401K contributions.

For an individual taxpayer, the phase-out range is $75,000 to $95,000. For a married couple filing a joint return, the phaseout range is $150,000 to $170,000. This means that an individual will get the full tax credit if their MAGI is $75,000 or less, and married couples will get the full tax credit if their MAGI is $150,000 or less.

Energy Conservation Tax Credit

If you want to make your home more energy efficient, the plan provides a 30% tax credit of up to $1500 per project. Energy conservation projects include weatherization, such as installing energy efficient windows, doors, roofs and insulation. You can also claim the tax credit if you install a solar, small wind or geothermal energy system.

Auto Purchase Tax Credit

If you buy a car in 2009 costing up to $49,500, you will be able to deduct a portion of the state, local and excise taxes on the purchase. This tax credit is phased out beginning at MAGI levels of $125,000 for individuals and $250,000 for married couples who file jointly.

Education Assistance Tax Credit

The plan replaces the existing Hope education tax credit, which provided up to $1,800 per year for the first two years of college, with the "American Opportunity" education tax credit that provides $2,500 per year for all four years of college.

This tax credit is phased out beginning at MAGI levels of $80,000 for individuals and $160,000 for married couples who file jointly.

Making Work Pay Tax Credit

Under the plan's "Making Work Pay" tax credit, American workers will receive a refundable tax credit of 6.2% of earned income in 2009 and 2010. The amount of the tax credit is determined after federal taxes have been deducted. Under the plan, individuals will receive up to $400 per year and married couples will receive up to $800.

This tax credit has income limitations. There is a 2% reduction in the credit for any amount exceeding $75,000 of an individual's MAGI, and $150,000 of a married couple's MAGI if they file jointly.

Increase in Earned Income Tax Credit

The plan provides a temporary increase in the existing earned income tax credit for 2009 and 2010. The earned income tax credit provides a tax reduction to low income workers based on their income and family size. Under the plan, the earned income tax credit will be increased from 40% to 45% for taxpayers who have 3 or more children.

Increased Eligibility for Child Tax Credit

The plan increases eligibility for the existing child tax credit. The child tax credit provides a $1,000 tax reduction for each qualifying child depending on the family income. Under the plan, the minimum income level for eligibility was reduced from $12,550 to $3,000 for tax years 2009 and 2010, allowing lower income families to take advantage of the tax credit.


In addition to the tax credits discussed above, the stimulus plan includes further economic relief by extending unemployment benefits, reducing COBRA payments for individuals who lose their health care coverage, providing mortgage assistance to homeowners facing foreclosure and funding infrastructure projects that will provide much needed jobs.

Detailed information about the federal stimulus plan may be found on the government Web site. The Web site also provides a link to the full text of the Act.

Questions for Your Attorney

  • Can you review my situation to make sure the withholding from my paychecks are correct given the "Making Work Pay" tax credit?
  • How can a home purchase be structured to benefit from the first time homebuyer credit if a newly-married couple wants to buy a house and one of them has owned a home before?
  • Can you help me if my I'm having problems with COBRA payment reductions or the mortgage assistance programs offered under the economic stimulus plan?
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