Tax Expert Breaks Down Stimulus Incentives

A significant portion of the economic stimulus package is devoted to tax cuts. Clint Stretch, managing principal of tax policy at Deloitte Tax, says the $400 Make Work Pay Credit that workers would get could give the economy a boost.

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MELISSA BLOCK, host:

So how much stimulus might end up in the pockets or checking accounts of the proverbial average American? We're going to sort through some of the numbers now with Clint Stretch. He's managing principal of tax policy at Deloitte Tax, here in Washington. Welcome to the program.

Mr. CLINT STRETCH (Managing Principal of Tax Policy, Deloitte Tax): Thank you, nice to be with you.

BLOCK: And let's talk first about the Making Work Pay tax cut. It's a shrunken down version of what President Obama wanted. Who gets it and how much will they get?

Mr. STRETCH: Well, it is the biggest thing in the bill, in terms of dollars of revenue. It's a $400 per worker credit. So it goes to everybody up to income levels of $75,000 for singles and $150,000 for married couples. So, a married couple up to that level will get $800 credit, single person up to that will get $400 credit. The way I like to think about this is: How much of a raise would you have to get in order to have $400 in your pocket, after you paid social security taxes and income taxes? The answer to that question is about 500 bucks. So, in this economy, getting a $500 raise is a pretty good deal.

BLOCK: And this is not what we saw a couple of years ago with a lump sum rebate check in the mail. It's a credit per paycheck, right?

Mr. STRETCH: That's right. It's not a lump sum. It's a credit that you can take in April, but they will adjust withholding tables so that you can get that money as you go along each week. And so, people will get, you know, $8 or $9 a week. Now sometimes people dismiss that - say it's not a lot of money. But if you've got $18 or $20 left in your paycheck every two weeks - maybe go out and have a meal in a restaurant, or go to movies or something like that. That's where the stimulus will be. This'll be much more likely to get spent than a lump sum check.

BLOCK: So you do think that $8 or $9 a week - that is stimulative to the economy?

Mr. STRETCH: Oh, absolutely. I've got a good friend who runs a small restaurant and he says people come in on Friday night if they have money left over, if they don't, they don't.

BLOCK: Another provision in here has to do with the Alternative Minimum Tax. And there's a $70 billion tax break for middle income Americans to try to avoid the AMT. Who's covered in that? How much might they save on their tax bill?

Mr. STRETCH: Well, what this does is it really just perpetuates the law that we currently have. We've been extending the AMT relief year by year for a number of years now, so nobody's going to notice this. This is going to mean that people who did not pay AMT last year are still not going to pay AMT this year. And people who paid AMT last year are probably still going to pay AMT this year.

BLOCK: There are a couple of tax credits also in here - one is for college tuition and expenses, how about that?

Mr. STRETCH: Sure. The college tuition thing is a campaign promise that the president made. What this bill does is take the current credit, which is $1800 - the Hope credit - moves it up to $2,500 a year. And more importantly, in some ways, increases the income limits. Right now, that credit goes away for people at 40,000 single and 80,000 married - that now is doubled. So, a married couple with up to $160,000 of income can get this education credit when they are sending their kids to school.

BLOCK: Okay, a couple of more things on the consumption end: For first-time homebuyers, there's something in the bill for them.

Mr. STRETCH: Sure. The first-time homebuyers get an $8,000 credit for home spot, essentially this year.

BLOCK: And what about car buyers?

Mr. STRETCH: Car buyers will get what we call, an above-the-line deduction, so, a deduction you get without having to itemize for the state and local sales tax that's on a vehicle - can't be more expensive than $49,500 worth of car. And it phases out for single people, as they go up above 125,000 of income or marrieds above 250,000 of income. So, it's a little bit of help in the purchase of a new car.

BLOCK: If you put all these things together, does it strike you that this is a genuine boost to the economy - that stimulus really is embedded in these things?

Mr. STRETCH: Well, I think it's clearly true in the case of the working credit that that's going to put cash in the pockets of people who are very likely to consume that. Some of these other things, I think, will be stimulative more in the way they attract interest to particularly activities than in the cash they put on the table. So, you know, for people, it would be talking about the tax advantages of buying their first home or the tax advantages of getting to the deduction for your sales tax on a car.

Those, in and of themselves, those tax advantages aren't going to cause somebody to go out to buy a house who couldn't afford it. But it's going to get them interested, it's going to get them talking and that'll help the market in that way.

BLOCK: Well, Mr. Stretch, thanks so much.

Mr. STRETCH: You're so welcome. Thank you.

BLOCK: Clint Stretch is managing principal of tax policy at Deloitte Tax in Washington.

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