The American Recovery and Reinvestment Act of 2009 (the Recovery Act), a stimulus bill that includes tax breaks for businesses and individuals was signed into law by President Obama on Tuesday, February 17th. Some of the changes in the Recovery Act affect the 2008 tax return filing season already in progress.

The Recovery Act includes many tax breaks for businesses and individuals as well as energy incentives and important bond changes, including the following:

• Tax breaks for business. These include extended bonus depreciation and increased expensing for 2009, longer NOL carrybacks for some (special election needed on 2008 returns), deferral on debt discharge income from reacquisitions of debt, reduced capital gains tax for holders of qualified small business stock, and a shortened S corporation built-in gain holding period. For overview, see RIA Special Study on Business Tax Changes in last Friday's Newsstand e-mail.
  
  Tax breaks for individuals. These include a refundable tax credit of up to $400 per worker ($800 per couple filing jointly), phasing out completely at $190,000 for couples filing jointly and $95,000 for single filers, eased child tax credit and earned income tax credit rules, a beefed-up tax credit for higher education, an enhanced credit for first-time home purchases with the removal of the repayment requirement (can be claimed on 2008 return), a tax deduction for state sales and excise taxes paid on the purchase of new cars, including light trucks and SUVs, motorcycles and motor homes, and a 65% subsidy for COBRA premiums for up to nine months.
  
  
• AMT relief. The Recovery Act boosts AMT exemption amounts for individuals for 2009, and also provides that for 2009, personal nonrefundable credits may offset AMT and regular tax. Additionally, interest on qualifying private activity bonds issued in 2009 or 2010 isn't treated as an AMT preference (nor is there an ACE adjustment for interest on tax-exempts issued in 2009 or 2010).
  
  
• Energy incentives. These include a three-year extension of the production tax credit (PTC) for electricity derived from wind (through 2012) and for electricity derived from biomass, geothermal, hydropower, landfill gas, waste-to-energy, and marine facilities (through 2013), extension through 2010 and expansion of tax credits for home energy efficiency for purchases such as new furnaces, energy-efficient windows and doors, or insulation, a tax credit of up to $5,000 for families that purchase plug-in hybrid vehicles and a new manufacturing investment tax credit for investment in advanced energy facilities, such as facilities that manufacture components for the production of renewable energy, advanced battery technology, and other innovative next-generation green technologies.

The tax provisions in the Recovery Act, which make up roughly 35% of the entire stimulus package, include the following:

Tax Incentives for Businesses

• Extended bonus depreciation and increased expensing for making investments in plants and equipment in 2009.
  
• Longer loss carryback for small businesses, a delay of the 3% withholding tax on payments to businesses that sell goods or services to governments, and a cut in the capital gains tax cut for investors in certain small businesses who hold stock for more than five years.
  
• Delaying the tax on businesses that have discharged indebtedness.
  
• Incentives to create new jobs with tax credits for hiring recently discharged unemployed veterans and youth that have been out of work and out of school for the 6 months prior to hire.

Tax Relief for Individuals and Families

• A Making Work Pay credit, consisting of a refundable tax credit of up to $400 per worker ($800 per couple filing jointly), phasing out completely at $200,000 for couples filing jointly and $100,000 for single filers.
  
• Expansion of the child tax credit (allowing families to begin qualifying for the child tax credit with every dollar earned over $3,000).
  
• Eased Earned Income Tax Credit rules (tax relief to families with three or more children and increased marriage penalty relief).
  
• A new, partially refundable $2,500 higher education tax credit.
  
• A one-year AMT patch.
  
• An enhanced credit for first-time home purchases with the removal of the repayment requirement.
  
• A tax deduction for state and local sales tax paid on the purchase of new cars, including light trucks and SUVs.
  
• Temporary suspension of tax on some unemployment benefits.
  
• A 60% subsidy for COBRA premiums for up to nine months.

Energy Incentives

• $20 billion in tax incentives for renewable energy and energy efficiency over the next 10 years.
  
• Three-year extension of the production tax credit (PTC) for electricity derived from wind (through 2012) and for electricity derived from biomass, geothermal, hydropower, landfill gas, waste-to-energy, and marine facilities (through 2013).
  
• Grants of up to 30% of the cost of building a new renewable energy facility to address current renewable energy credit market concerns.
  
• Extension through 2010 and expansion of tax credits for home energy efficiency for purchases such as new furnaces, energy-efficient windows and doors, or insulation.
  
• A tax credit of up to $7,500 for families that purchase plug-in hybrid vehicles.
  
• Clean renewable energy bonds for State and local governments.
  
• A new manufacturing investment tax credit for investment in advanced energy facilities, such as facilities that manufacture components for the production of renewable energy, advanced battery technology, and other innovative next-generation green technologies.

Tax Incentives for State and Local Economic Development

• Changes to enhance the marketability for state and local government bonds, which will reduce the costs they incur in financing state and local infrastructure projects.
  
• A new bond-financing program for school construction, rehabilitation, and repair.