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The
Emergency Economic Stabilization Act of 2008 cleared the House Senate on
October 3rd and was signed into law the same day. The Emergency
Economic Stabilization Act has $150 billion in tax incentives and $44
billion in tax increasing offsets (measured over a 10 year period)
impacting both individuals and businesses. Combined with the
earlier passage of the 2008 Stimulus Act, tax planning opportunities
exist in 2008 and 2009.
INDIVIDUAL
INCENTIVES
Tax relief
for individual taxpayers extends existing provisions which are scheduled
to expire in 2008 and in some instances provide new tax savings
opportunities. Some of the more significant tax provisions of the
Act are as
follows:
Indebtedness Income
A temporary rule for cancellation of indebtedness
income has been extended to exclude from federal tax those
discharges of debt involving up to $2 million of indebtedness
($1 million for a married tax payer filing a separate return) secured by
a principal residence and incurred in the acquisition, construction or
substantial improvement of the residence through
2012.
The Mortgage Forgiveness Debt Relief Act also helps
homeowners whose mortgage debt may have been reduced through a
restructuring (also mortgage workouts) short sales and deeds-in-lieu-of-
foreclosures are also covered by this
provision.
AMT
Patch
Many taxpayers have been assessed an alternative
minimum tax when reporting significant capital gains income or taken
significant levels of itemized deductions. Under the new law, an
alternative minimum tax (AMT) patch establishes the AMT exemption amounts
as $69,950 for married couples filing jointly and surviving
spouses. Single taxpayers and heads of household have exemption
amounts of $46,200 and $34,975, respectively. This patch is designed to
insulate middle-income taxpayers from the reach of the AMT in
2008.
Nonrefundable
Personal Credits
The alternative minimum tax patch allows taxpayers to
use nonrefundable personal credits, such as the dependent care credit and
education tax credit, to reduce their AMT liability. The law also removes
limits in the AMT calculation on taking personal credits against regular
tax
liability.
Incentive Stock
Option
For those taxpayers who have incurred a tax liability
on ISO's which are now worthless or of little value, the new law abates
AMT liability arising from the exercise of incentive stock options
(ISO's) before 2008 as well as a portion of the related interest and
penalties.
The law allows all individuals, including those who
paid their ISO AMT liabilities, to accelerate the refund of the minimum
tax credit that has not been used.
State And Local Tax
Deductions
Since individuals have been allowed to deduct state
and local sales taxes in lieu of state and local income taxes for several
years, this provision which expired at the end of 2007 has been retroactively extended for
two years through December 31,
2009.
Higher Education
Tuition Deduction
The new law extends through December 31, 2009, the
above-the-line higher education tuition deduction. The deduction
allows eligible taxpayers to deduct the costs of qualified higher
education expenses paid during the year for themselves, a spouse, or a
dependent. This deduction is not available to married couples
filing separately or if a taxpayer can be claimed as an exemption on
another return.
The minimum deductible amount is $4,000 for taxpayers
with adjusted gross income not exceeding $65,000 ($130,000 for joint
filers). Taxpayers whose income exceeds that limit but does not
exceed $80,000 ($160,000 for joint filers) may deduct up to $2,000 in
qualified expenses. For many taxpayers, the HOPE of Lifetime
Learning credit is also an
option.
Additional Standard
Deduction for Real Property Taxes
The new law extends the additional standard deduction
for real property taxes for non-itemizers through 2009 which provides a
maximum $1,000 additional standard deduction for married couples. For
2008, the $10,900 standard deduction for joint filers will increase to a
maximum of $11,900 with the additional standard deduction or
non-itemizers.
Teachers' Classroom
Expense Deduction
For 2008 and 2009, teachers and other education
professionals can deduct, up to $250certain out-of-pocket classroom
expenses in determining adjusted gross income. Qualified costs include
the cost of books, supplies, equipment, and software used in the
classroom.
Tax-Free
Distributions from IRAs for Charitable Purposes
The new law permits taxpayers to make tax-free
distributions from IRA's for charitable purposes
through December 31, 2009. The maximum contribution
limit for 2008 and 2009 is $100,000. This treatment
applies to traditional and Roth IRA's. However, no charitable
deduction is allowed for any portion of these withdrawals that would have
been otherwise taxable.
BUSINESS TAX INCENTIVES
The new
law includes a host of incentives targeted to businesses, several of
which revise as well as extend tax benefits. Among the most
significant are revised research tax credits, enhanced depreciation for
leasehold and restaurant improvements, and energy saving and producing
deductions and
credits.
50 Percent Bonus
Depreciation
Under the new law, a taxpayer is entitled to
depreciate 50 percent of the adjusted basis of certain qualified property
placed in service in 2008. This is similar to the
special depreciation allowance previously available back in
2005. The qualified property does not include used property. Under
these provisions, a business can take $10,960 of depreciation on a passenger
vehicle first placed in service in
2008.
Section 179
Under the new law, a qualifying business can expense
up to $250,000 of section property purchased in 2008. The $250,000
amount provided under the new law is reduced if the cost of all section
179 property placed in service during the year exceeds $800,000.
The new law does not alter the section 179 limitation on sport
utility vehicles, which have an expense limit of $25,000.
Research Tax
Credit
The new law extends the research tax credit to amounts
paid or incurred in 2008 and 2009. It also modifies the credit,
increasing the alternative simplified credit while repealing the
alternative incremental research credit. The alternative simplified
credit is increased from 12 to 14 percent of qualified research expenses
that exceed 50 percent of the average qualified research expense for the
three preceding tax year.
Charitable
Contributions
The Tax Code gives businesses enhanced deductions for
contributions of food to charitable organizations, as well as for
contributions of books and computer equipment to qualifying
schools.
Leasehold and
Restaurant Improvements
Under the new law, qualifying restaurant and leasehold
improvements made in 2008 and 2009 will be eligible for 15-year cost
recovery rather than a 39 year cost recovery period. Similarly, certain
improvements to retail space qualify for 15-year recovery period. The
treatment applies to retailers that own their buildings as well as
retailers that lease.
New Market Tax Credit
The new law extends the temporary higher investment
limit for New Market Tax Credits through December 31, 2009. The New Market
Tax Credit encourages taxpayers to invest in or make loans to small
businesses in economically distressed areas. Extension of the New Market
tax Credit may prove especially valuable to those
businesses.
Energy Efficiency and Property
The new law extends several energy-efficiency and
energy property tax as follows:
The code Sec. 179D deduction for energy efficient
commercial buildings is extended through December 31,
2013.
The Code Sec. 25D residential energy efficient
property credit is extended through December 31, 2016, along with adding
incentives for residential small wind investments and geothermal
heat pumps and authorizing taxpayers to use credit to offset AMT.
A credit of up to $500 is available for non-business
energy property that meets the requirements for qualified energy efficiency
improvements or qualified residential energy property expenditures.
Eligible improvements include insulation materials, exterior windows,
including skylights and exterior doors.
Renewable Energy
The credit for producing electricity from qualified
wind facilities has been extended through December 31, 2009. The
credit for producing electricity through biomass and other qualifying
renewable sources has been extended through September 30, 2011. The
credit for solar energy, fuel cell, and micro-turbine property is
extended through December 31,
2016.
Transportation Fringe Benefit
Employees can exclude certain employer-provided transportation fringe
benefits, up to $20 per month, from income, such as transit passes
and van pooling. The new law extends this treatment to
employer-provided transportation fringe benefits paid to employees who
commute by bicycle.
FUTA Surtax
The law extends the 0.2 percent surtax on FUTA
(unemployment) taxes through 2009. FUTA tax is 6.2 percent of
wages. The change is expected to raise $1.5 billion. The tax is
imposed on the first $7,000 paid to each employee.
Broker Basis Reporting Reporting
of capital transactions by brokers has been expanded to include the sales
proceeds and the adjusted basis of the taxpayer. Brokers must now
report the adjusted basis of publicly-traded securities when reporting
sales transactions and indicate whether such gain is long-term or
short-term. Securities subject to the new reporting requirement
include stocks, bonds, debentures, commodities, derivatives, and other
financial instruments designated by Treasury. Reporting will take
effect for stock acquired in 2011, mutual funds acquired in 2012, and
other securities acquired in 2013.
The provision is estimated to raise $6.7 billion over
10 year.
OTHER PLANNING
CONSIDERATIONS
Mutual Fund
Due to the current market crisis, many equity mutual
funds sold positions this year and may have realized gains although
market values have substantially declined. Please pay close attention
to your brokerage statement of any notification of mutual fund gains as
you may want to sell some shares in order to match the pass through
mutual fund gains with losses from the declines in market values.
Gift and Estate Tax
Exemptions
You can exclude gifts up to $12,000 per person
annually or $24,000 per person if your spouse elects split the
gift. As market values of stocks are substantially lower than in
previous years, the gifting of securities rather than cash may allow for
the transfer of securities with the potential for substantial market appreciation.
The federal estate tax
exemption for 2008 is $2 million and increases to $3.5 million in 2009.
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