NASFAA Summary of American Recovery and Reinvestment Act (ARRA)
President Obama signed the American Recovery and Reinvestment Act (ARRA) into law on February 17, 2009. The purpose of the Act (known as the Stimulus Bill) is to preserve and create jobs; promote economic recovery; assist those most impacted by the recession; provide investments needed to provide long-term economic benefits; and to stabilize state and local government budgets.
The entire text of the law (H.R.1) is available online. NASFAA summarizes here only the key provisions affecting student aid and other major provisions affecting the finances of individuals and families. These other provisions may be pertinent to financial aid officers in counseling needy families or in recognizing key 2009 and 2010 benefits. Decisions have not been announced as to what effect, if any, these provisions will have on financial aid formulas in future years.
The stimulus bill is notable not just for funding increases for student aid, but for a significant increase in refundable tax credits for 2009 and 2010. Refundable credits mean taxpayers may receive refunds even when they do not owe any tax, allowing low income students who have no tax liability to benefit.
The IRS notes that taxpayers who anticipate lower tax liability for 2009 as a result of ARRA changes may want to review their tax withholding. It has published an updated withholding calculator to help employees to ensure that they do not have too much or too little income tax withheld from their pay. Employers should now be using IRS Publication 15T: new wage withholding and advanced earned income credit payment tables, for wages paid through December 2009, to ensure proper computation of withholding.
Increased Support for Student Financial Aid Programs
As we have reported previously, the bill injects significant new funding into financial aid programs as follows:
- Title IV Programs: For Pell Grant, slightly more than $17 billion is provided to increase the maximum award to $5,350 in 2009-10 and $5,550 in 2010-11, and eliminate the Pell Grant shortfall. Work Study received an additional $200 million.
- Health Resources and Services Administration: $300 million was allocated to the National Health Service Corps, which provides scholarships, loans, and loan repayment programs for behavioral and mental health care providers, primary care physicians, and other health professionals. Another $200 million is divided between health professions training programs and HRSA Nursing Workforce Development programs such as the nursing loan repayment program.
Other College Financing Related Provisions
- Refundable American Opportunity Tax Credit for 2009 and 2010: The law provides approximately $13.5 billion for a temporary, more generous replacement of the HOPE tax credit for 2009-2010 and 2010-11. The new credit modifies the existing Hope Credit for tax years 2009 and 2010, making it available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses, and allows the credit to be claimed for four post-secondary education years instead of two. The credit can be as large as $2,500, of which up to 40 percent ($1,000) is refundable. Students in the Gulf Opportunity Zone can receive up to $3,600.
The modified AGI phase out now starts at $80,000 ($160,000 for a joint return). These income limits are higher than under the existing Hope and Lifetime Learning Credits. These changes are temporary, but President Obama's FY2010 budget proposes making them permanent.
- Qualified Expenses for 529 Plans Broadened: For 2009 and 2010, the law temporarily redefines qualified higher education expenses for 529 plan purposes. 529 funds can be used for expenses paid or incurred in 2009 or 2010 for the purchase of any computer technology or equipment, Internet access, and related services, if used by the beneficiary and the beneficiary's family during any of the years the beneficiary is enrolled at an eligible educational institution.
- Tuition and Fees Deduction Extension: This above-the-line tax deduction lets taxpayers exclude up to $4,000 in tuition expenses from income. The ARRA contains no changes, but the Emergency Economic Stabilization Act of 2008 (PL 110-343) extended the deduction, which had been set to expire, for tax years 2008 and 2009.
General Provisions for Individuals and Families
- New, Refundable, Making Work Pay Tax Credit for 2009 and 2010: In 2009 and 2010, the Making Work Pay provision provides a refundable tax credit of up to $400 for working individuals and up to $800 for married taxpayers filing joint returns. For people who receive a paycheck and are subject to withholding, the credit will typically be handled by their employers through automated withholding changes. These changes may result in an increase in take-home pay. The amount of the credit will be computed on the employee's 2009 income tax return filed in 2010. Taxpayers who do not have taxes withheld by an employer during the year can also claim the credit on their 2009 tax return.
- Increase in Earned Income Tax Credit for 2009 and 2010: The refundable Earned Income Tax Credit (EITC) is for low-income workers who meet certain eligibility requirements. Taxpayers who qualify and claim the credit can pay less federal tax, pay no tax, or even get a tax refund. Individuals do not need to have children to claim the EITC. Traditional college age students - those under 25 - are not eligible for the EITC, but adult learners and parents of fulltime students age 24 and younger may be eligible. The IRS provides an EITC calculator to help people figure out if they are eligible.
The American Recovery and Reinvestment Act provides a temporary increase in the EITC for taxpayers with three or more qualifying children. ARRA also increases 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 maximum credit is $5,657 in 2009.
One of the least well-known aspects of EITC is the Advance Payment option. This allows workers with at least one qualifying child to receive their EITC in installments throughout the year, instead of a lump sum once the tax return is filed. Advance EITC can add to a taxpayer's take-home pay year round. Individuals should complete the updated IRS advance payment form for 2009 and turn it in to their employer to start receiving tax credits in their paychecks.
It is estimated that 20-25 percent of Americans who qualify for EITC do not claim it. "People ... should check out their eligibility. This is a significant credit that can make their lives a little easier," said IRS Commissioner Doug Shulman. "EITC can provide a real dollars and cents boost when it's needed most." The IRS is running a public awareness campaign and media collateral is available in English and in Spanish.
- One-Time Payment to Recipients of Social Security, SSI, Railroad Retirement and Veterans Disability Benefits: The bill provides a one-time payment of $250 to retirees, disabled individuals and SSI recipients receiving benefits from the Social Security Administration, Railroad Retirement beneficiaries, and disabled veterans receiving benefits from the U.S.Department of Veterans Affairs.
- Increased Eligibility for Refundable Child Tax Credit in 2009 and 2010: More families will be eligible for the additional child tax credit because of a change to the way the credit is figured. ARRA reduces the minimum earned income amount used to calculate the additional child tax credit to $3,000; previously, the minimum earned income amount was set to rise to $12,550. Taxpayers who could not previously take full advantage of the child tax credit because the credit is more than the taxes they owe can now receive a payment for some or all of the credit not used to offset their taxes.
Assistance for the Unemployed
- Tax-Free Unemployment Benefits for 2009: Under ARRA, the first $2,400 of unemployment benefits an individual receives in 2009 are tax free.This provision applies only to benefits received in 2009. Normally, all unemployment benefits are taxable, and benefits over $2,400 will still be subject to federal income tax.
- Extension of Emergency Unemployment Compensation: The bill extended the Emergency Unemployment Compensation program, which was scheduled to expire on Aug. 27, 2009, to Dec. 31, 2009. It provides up to 33 weeks of extended unemployment benefits to workers exhausting their regular benefits. It also created a new temporary federal additional compensation program that boosted weekly unemployment benefits by an additional $25 through 2009. Additional provisions extend unemployment compensation for 13 weeks to railroad workers, who are not included in the Federal/state unemployment system.
- Health Insurance Premium Subsidies under COBRA Continuation Coverage: The bill provides a 65% subsidy for COBRA health care continuation premiums for up to 9 months for workers who have been involuntarily terminated, and for their families. Eligible individuals pay only 35 percent of their COBRA premiums and the remaining 65 percent is reimbursed to the coverage provider through a tax credit. To qualify for premium assistance, a worker must be involuntarily terminated between September 1, 2008 and December 31, 2009. Workers who were involuntarily terminated between September 1, 2008 and enactment, but failed to initially elect COBRA because it was unaffordable, were given an additional 60 days to elect COBRA and receive the subsidy. This subsidy is available to those whose income does not exceed $125,000 for individuals and $250,000 for families.
- Refundable First-time Home Buyer Credit for 2009: First-time homebuyers can receive up to $8,000 in a refundable tax credit for home purchases made before December 1, 2009. The credit does not have to be paid back, for homes purchased in 2009, unless the home ceases to be the taxpayer's main residence within a three-year period following the purchase. The credit phases out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 in the case of a joint return).
- Increased Tax Credits for Energy-Efficient Improvements to Existing Homes: For 2009 and 2010, taxpayers who purchase and install energy-efficient windows, insulation, doors, roofs, and heating and cooling equipment in existing homes can receive a tax credit for 30% of the cost, up to $1,500. Taxpayers who install solar energy systems (including solar water heating and solar electric systems), small wind systems, geothermal heat pumps, and residential fuel cell and microturbine systems can receive a 30% tax credit for systems placed in service before December 31, 2016; the previous tax credit cap no longer applies.
- Transportation Income Exclusion and Allowable Tax-Free Fringe Benefits: The monthly tax exclusion for employer-provided commuter highway vehicle transportation and transit pass benefits increased to $230, effective from March through December 2009. Employees may exclude from income $230 per month in transit benefits and $230 per month in parking benefits, up to a maximum of $460 per month.
- New Sales Tax Deduction for New Vehicle Purchases: All taxpayers can receive a deduction for state, local, sales and excise taxes paid on the first $49,500 spent on the purchase of new cars, light truck, recreational vehicles, and motorcycles bought between February 17, 2009 and January 1, 2010. Even taxpayers who don't itemize deductions will be allowed a qualified auto purchase deduction above and beyond the standard deduction. This deduction is subject to a phase-out for taxpayers with adjusted gross income in excess of $125,000.
- Plug-in Electric Vehicle Credit: The bill modifies and increases a tax credit passed into law at the end of last Congress for each qualified plug-in electric drive vehicle placed in service during the taxable year. The credit for passenger vehicles and light trucks ranges from $2,500 to $7,500, depending on battery capacity. Hybrid vehicle owners who purchase a qualified plug-in hybrid conversion kit are eligible for a 10% credit, capped at $4,000, through 2011.
Publication Date: 4/20/2009