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Stimulus, Tax Credits and AMT

3 min readBy: Mark Robyn

Included in the stimulus bill signed by the President last week are a number of provisions relating to the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. . We have released a new Fiscal Fact (Update: The Tax Savings from Final Fiscal Stimulus) showing the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. savings for typical families from the stimulus bill. The Fiscal Fact includes examples for a family with college expenses, a family who purchases a home, and an elderly couple.

As expected, some of the broadest savings come from the Making Work Pay credit. The backbone of Obama’s tax plan, the Making Work Pay credit is a new refundable credit worth 6.2% of earned income up to a maximum credit of $400 ($800 for a two-earner couple). The credit phases out for taxpayers with income between $75,000 and $95,000 ($150,000 and $190,000 for married couples). This credit is designed to be a sort of payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. holiday and may be passed on to taxpayers in the form of reduced withholdingWithholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount of the employee requests. on their paychecks for part of 2009.

The American Opportunity credit also provides an increased benefit for taxpayers currently paying college tuition and expenses. This new credit, which replaces and expands the old Hope credit, provides increased tax savings both because the maximum credit was increased (from $1800 to $2500) and because the credit was made partially refundable. The Earned Income credit has also seen a modest expansion in the stimulus. People who can expect to see a benefit are low income families with 3 or more children and certain low income married couples. The first –time homebuyer credit saw a slight increase in the stimulus bill (from $7500 to $8000). However more significantly, the credit no longer has to be repaid, which means it is now truly a refundable tax creditA refundable tax credit can be used to generate a federal tax refund larger than the amount of tax paid throughout the year. In other words, a refundable tax credit creates the possibility of a negative federal tax liability. An example of a refundable tax credit is the Earned Income Tax Credit (EITC). , and not an interest free loan as it has been since its passage last summer.

Another benefit seen to taxpayers from this stimulus bill comes from the AMT patch. As described in the Fiscal Fact, an AMT patch not only keeps lower income people off the AMT by increasing the exemption amounts, but it also allows them to benefit more from certain tax credits that might be limited in the absence of a patch. This means that many modest income taxpayers will see a benefit from the AMT patch. Because of this, the AMT patch is one of the largest provisions in the stimulus. Indeed, the Joint Committee on Taxation has estimated that the AMT patch for 2009 will cost just under $70 billion. The only tax provision in the stimulus that will cost more is the Making Work Pay credit (at $116 billion), and no other provision even comes close to the cost of either of these.

This brings up an interesting point, which is that even thought the AMT patch was included in the stimulus bill, it will not have a stimulative effect on the economy. The patch is a routine piece of legislation that gets passed one way or another every year. This year it made its way into the stimulus bill, but had it not the patch would almost certainly have been passed at some later date. Because everyone expects that a patch will be passed every year, when it is passed behavior does not change in any significant or stimulative way. So actually the $787 billion stimulus bill could be thought of as costing only $717 billion since $70 billion of the price tag is for a provision that is not really stimulative and would have been passed anyway.

Read what we’ve previously written about the stimulus here, here, and here.