Stimulus Bill 2.0 & Taxpayers Tax Credits and more – Part 1

America is been critised for all the recent bailouts to banks, insurance companies and auto makers. It is even called as Bailout nation these days. The 2 stimulus bills passed totalling apx 1.5 trillion feeding the bailouts are expected to tackle the malice created by subprime crisis. 

The recent stimulus package of 787 billions dollars which is in works is hope to slowly boost the economy in many different ways as per obama administration. Financial analyst say it will take atleast a year or two to know whether this new package really helped to stimulate the economy or not. 

The major diffference between the last stimulus package compared to this new one is gradual and slow infusion of money to the economy. Because Bush adminstration failed to boost economy by sending tax rebate cheques to tax payers and it really didn’t help. So this new stimulus bill will not quickly solve the historic problems besetting the economy, but it could reduce the damage by adding jobs, infusing money gradually thru tax credits and same time providing relief for the unemployed and the uninsured.

Lets first understand what is Tax credit and see what are various tax credits which many of us can take advantage from this stimulus package 2.0

What is a Tax credit?

A tax credit is a dollar for dollar reduction in your income taxes. If you have a $1000 tax credit, you will pay $1000 less tax that year regardless of your tax bracket. A good example is the hybrid vehicle credit, if you purchase one you can deduct the amount directly from the taxes you owe. If you owe $2500 US Dollars in taxes and you have a $2000 USD tax credit, you subtract that credit directly from $2500 USD, reducing total taxes owed to $500 USD.

Difference btw Tax Credit and Tax Deduction

It’s important to understand the distinctions between a tax credit and a tax deduction, since they are two different ways of reducing the total taxes you will pay. A tax credit lowers your tax bill dollar for dollar. A deduction shaves money off your taxable income, so the value depends on your tax bracket. If you’re in the 25% bracket, a $1,000 deduction lowers your tax bill by $250. But a $1,000 credit lowers the bill by the full $1,000, no matter in which bracket you are.

What are various Tax credits announced in Stimulus 2.0?

1. New Tax Credit for tax payers upto $800
2. Firsttime Homebuyer Tax credit
3. Energy Tax credit and
4. Extended Unemployment Benefit

1. From Paycheck: A $400 to $800 credit for many taxpayers

A key element of the stimulus bill would provide most Americans with a tax credit of $400, or $800 for married couples. The tax credit would phase out for single taxpayers with adjusted gross incomes of $75,000 to $90,000 and married couples with AGI of $150,000 to $190,000.

The tax credit would increase the average taxpayer’s paycheck by about $8 a week, prompting some to question whether it will do much to stimulate consumer spending. But for a single worker, the credit is the equivalent of a $500 salary increase, after taxes. In this economy, it is tough to get a hike and it will be even ridiculus to ask for one when lot of people don’t even have a job.

Instead of receiving a check from the government, most single taxpayers will see an adjustment to their tax withholding in their paychecks in 2009 and 2010, giving them about $45 extra per month for the rest of this year (married workers will receive an extra $65). If you’re self-employed, you can adjust your quarterly tax payments to benefit from the tax credit. Then you will claim the credit when you file your 2009 tax return next spring, bringing your tax bill in line with your reduced payments.

See Kiplinger article on How the Self-Employed Get Stimulus Money for the details.

Retirees who receive Social Security benefits and individuals on disability would receive a $250 tax credit. Because these individuals typically don’t have withholding, they’ll likely receive a check.

Vijai’s 2Cents: Don’t expect a rebate cheque this time. If you are employed, look out for a slight increase in your paycheck for 2009 and 2010 which can total to $400 (single) or $800(married) for each year. If you are self employed like me, you can either take the qtrly cut $100(single) or $200(married) from your estimated payment.

I already reduced my estimated payment for this quarter. This way you can save that money and earn some interest. If you don’t want to have the pain, just continue pay your estimated and when you file your return take the credit as a lumpsum. This way you miss out on interest for money you could have earned which is not big with 1-2% interest in savings account these days.

I will First time home buyer credit and other tax credits in my next blog post. Keep looking…

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