Tax breaks in stimulus plan

By: Carol Hazard | Times-Dispatch
Published: March 01, 2009

Taxes: Q&A

Take note of 2008 tax return quirks

The government's new stimulus plan offers tax breaks that will help millions of taxpayers when they do their 2009 returns next year.

The American Recovery and Reinvestment Act of 2009, approved Feb. 17, offers perks for workers, the unemployed and retirees.

Here is what you might want to keep in mind for next year's returns.

If you are involuntarily terminated and you are offered an extension of medical benefits through COBRA, the government will pay 65 percent of the costs for up to nine months.

"Congress put this in the plan to encourage people to carry COBRA instead of running up Medicaid costs," said Tom Turner, a certified public accountant with Dooley & Vicars in Carytown.

Employees who were involuntarily terminated between Sept. 1, 2008 and Dec. 31, 2009 would qualify. Workers who declined COBRA coverage because of the cost will be given another chance to elect it and receive the subsidy.

Also, for tax year 2009, the federal income tax will be suspended on the first $2,400 of unemployment benefits. In 2008 returns, the entire benefit is taxed at the same rate as regular income, but only at the federal level. Virginia does not tax unemployment benefits.

The new stimulus plan also contains a 33-week extension of unemployment benefits and it increases weekly unemployment benefits by $25 through 2009.

"All the changes will help people who have lost their jobs" said Sheila Clark, operations director at Peoples Income Tax, a Richmond-based tax preparation service.

"It's important that these things are being done, because unemployment compensation is not enough to live on. When people find out they have to pay taxes on unemployment, it's even more damaging."

Unemployment compensation in Virginia ranges from $54 to $378 a week.

For workers, the Making Work Pay credit will result in more take-home pay this year and next.

For most, the credit will automatically show up in their paychecks this spring.

The credit, for 2009 and 2010 tax years, is 6.2 percent of earned income with a maximum credit of $800 for a married couple filing jointly and $400 for other taxpayers.

It is phased out for married couples making more than $150,000 and other taxpayers making more than $75,000.

If you're like most people, you lost money in the stock market last year and stock prices may be so low that you're waiting for the market to recover. But if you are 70½ or older, you had no choice in the past. You had to pull money out of your account. This year, you will be given a reprieve from the required minimum distribution, allowing time hopefully for the market to turn.

Contact Carol Hazard at (804) 775-8023 or chazard@timesdispatch.com.