Misconception #1: Most people will get their stimulus money as a check this year.
In 2008 almost everyone got a rebate check. For 2009, Congress decided to deliver the stimulus in a different manner, as a tax credit called the Making Work Pay credit.
Most taxpayers are already receiving their money through reduced tax withholding from their paychecks. Single taxpayers should be getting about $45 in extra take home pay each month and married workers about $65.
However, there are exceptions:
- Social Security recipients. In addition to the reduced withholding, the new law provides a one-time payment of $250 to recipients of Social Security, Railroad Retirement and Veterans Administration benefits. The 55 million recipients should have received their money by check or direct deposit by the end of May.
- Retired government employees who don't receive Social Security. They won’t get the $250 payment, but can claim a $250 tax credit when they file their 2009 returns.
- Higher-income taxpayers. The Making Work Pay tax credit phases out as income rises between $75,000 and $95,000 on single returns and between $150,000 and $190,000 for couples who file joint returns. Because they won’t get the credit, top wage earners don’t benefit from reduced withholding either.
Misconception #2: You have to pay back the current reduced withholding when you file your taxes in 2010.
Some people worry that reduced withholding now will mean a smaller tax refund later.
But for most Americans, lower withholding simply reflects that they’ll owe less tax for 2009. The Making Work Pay credit will reduce tax bills by 6.2% of taxable wages received in 2009, up to a maximum credit of $400 for single taxpayers and $800 for married couples filing jointly.
However, some taxpayers might end up owing taxes or getting smaller refunds:
- Two-earner married couples could see their refunds drop. The new withholding tables give a married worker about $600 in extra take-home pay between April and the end of the 2009. So, a working couple will have $1,200 in reduced withholding but they’ll only get one $800 credit. That translates into a $400 reduction in next year’s refund.
- Older workers who are still on the job while receiving Social Security benefits and workers who are still claimed as dependents by their parents (such as high school and college students with summer jobs) might have to repay the reduced withholding by paying higher taxes or getting smaller refunds.
Misconception #3: The first-time homebuyer's credit needs to be repaid.
Not necessarily. It all depends on when you bought your home.
The $7,500 credit available for home purchases between April 9 and December 31, 2008, does have to be paid back at the rate of $500 per year for 15 years, starting with your 2010 tax return.
But if you buy a qualifying home between January 1 and November 30, 2009, you get an $8,000 credit that never has to be paid back, assuming you stay in the house for at least three years.
Both the 2008 and 2009 credits begin to phase out if your modified adjusted gross income is more than $75,000 (or $150,000 if you're married filing jointly). The credit disappears entirely after your income reaches $95,000 if you're single or $170,000 if married filing jointly.
You are considered a first-time home buyer if you (and your spouse if you are married) didn't own a primary residence in the three years leading up to the settlement date on the new home.
Misconception #4: You can't get the 2009 first-time homebuyer's credit until you file your tax return in 2010.
Actually, you can claim the credit for a 2009 purchase on your 2008 tax return. If you buy a qualifying home after you file your 2008 return, you can amend the return using Form 1040-X and get an $8,000 check from the IRS.
There's even a way to benefit from the credit before you buy your first home. If you are certain you’ll buy by the November 30 deadline, you can reduce withholding on your paychecks right away. The increased take home pay could help you with the down payment. File a new W-4 form with your employer to adjust your withholding. (And remember to re-adjust your withholding again next year.)
Misconception #5: You need to apply through the government to get the COBRA health-care subsidy.
Contact your former employer, not the government, to take advantage of the valuable new federal subsidy for health insurance under the law known as COBRA. If you were laid off between September 1, 2008 and February 28, 2010, the government will basically pay 65% of the cost of your health insurance for up to 15 months. You’ll pay the other 35%. (Your ex-employer will actually pay the subsidy and be reimbursed by the government.)
If you were laid off after September 1, 2008 but didn't sign up for COBRA coverage, or if you let your coverage lapse because you couldn’t afford it, you get a second chance to elect COBRA and benefit from the subsidy. You should have received a notice from your former employer about this opportunity. If not, contact your former employer right away.
There are income limits on this subsidy. If your adjusted gross income for 2009 exceeds $125,000 (or $250,000 on a joint return), you’ll have to pay back all or part of any premium reduction when you file your 2009 tax return.
Misconception #6: The COBRA subsidy lasts for as long as you need the insurance.
Unfortunately, that’s not the case. Although COBRA coverage generally lasts for 18 months, the 65% subsidy is limited to no more than fifteen months for workers laid off between September 1, 2008 and February 28, 2010. After that, the premiums will jump back to the full price. The average employer health insurance plan costs $12,680 per year for family coverage, according to the Kaiser Family Foundation.
If you have health issues, COBRA may still be your best bet despite the hefty price tag. But many people can find a better deal by buying their own health insurance. You can get price quotes for individual policies at eHealthInsurance.com, or find a local health insurance agent at the nahu.org, the National Association of Health Underwriters website. Check out your options at least one month before your COBRA subsidy expires so you'll have plenty of time to find out how much an individual policy would cost.
The subsidy ends if you find a job that offers health care coverage or you become eligible for Medicare. And COBRA does not apply if your former employer stops offering health coverage to current employees or shuts down entirely.
Misconception #7: The number of weeks you can receive emergency unemployment benefits has been extended.
The 2009 stimulus bill does not provide additional weeks of benefits for people who use their 33 weeks of emergency unemployment compensation benefits; it just expands the dates that the program will be available.
A federal law passed in 2008 provides an extra 20 weeks of emergency unemployment compensation to workers who exhausted their regular unemployment benefits, plus an additional 13 weeks of extended benefits for residents of states with high unemployment rates (contact your state unemployment benefits office for details).
The emergency unemployment compensation program was scheduled to expire on August 27, 2009, and the last day to apply for benefits was originally set to be March 31, 2009. But now, unemployed people who exhaust their regular benefits have until December 31, 2009 to apply for extended benefits and can receive compensation until May 31, 2010.
Misconception #8: The stimulus package lets you write off sales taxes on all car purchases.
Many car purchases qualify, but there are some limits.
If you buy a new car, light truck, motor home or motorcycle between February 17, 2009, and December 31, 2009, you can deduct state and local sales taxes and excise taxes paid on up to $49,500 of the car's cost. The deduction doesn't apply to used car purchases.
And the deduction phases out for single taxpayers who have adjusted gross income between $125,000 and $135,000 and for married couples filing a joint return who have AGI between $250,000 and $260,000. If your AGI is halfway through the phase-out range, for example, your sales tax deduction would be cut in half.
The IRS says there’s no limit on the number of qualifying vehicles for which you can deduct the sales tax. If you buy one new car for $30,000 and another new car for $30,000, for example, you can deduct the sales tax on $49,500 of the combined $60,000 purchase price.
Misconception #9: Anyone can benefit from the new car sales tax deduction.
While the deduction is available to taxpayers who claim the Standard Deduction, as well as to those who itemize deductions, two groups of taxpayers will not benefit from this new break:
- Higher-income taxpayers.
- Taxpayers who itemize and choose to deduct state sales taxes instead of state income taxes (generally those who live in states that don’t charge an income tax), get no added benefit. They already get to deduct state sales tax on auto purchases.
Misconception #10: The new college credit merely increases the size of the Hope Credit for paying college costs.
The new American Opportunity tax credit replaces the Hope credit for 2009 and 2010, and it increases the amount from $1,800 to $2,500. But there’s more.
This new credit can be used in the first four years of college (not just the first two years, as was the case with the Hope credit). And more families can qualify thanks to increased income limits. Last year, you could qualify for the Hope credit only if your modified adjusted gross income was less than $58,000 if single, or $116,000 if married filing jointly. You can now receive the American Opportunity credit as long as you earn less than $90,000 if single, or $180,000 if married filing jointly.
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