Bailout Bill Includes Numerous Tax Provisions
The $700 billion Wall Street bailout received most of the attention. But there are also important tax provisions that have little to do with the bailout. We provide a summary.
The $700 billion Wall Street bailout portion of The Emergency Economic Stabilization Act of 2008 is appropriately receiving great media attention. But, the law also contains significant tax provisions. The law includes around 300 changes to the Internal Revenue Code. The combined cost for all the tax measures is around $150 billion. Offsetting tax increases total around $43 billion.
Important to tax lawyers and tax return preparers, the Small Business and Work Opportunity Tax Act of 2007 raised the tax return reporting standards for undisclosed, non-tax shelter transactions for tax return preparers to a strict, "more likely than not" standard. This is a higher standard than is required of taxpayers, which created a conflict of interest between tax preparers and their clients. The new law retains the "more likely than not" return preparer standard for tax shelters and Section 6662A reportable transactions. However, a "substantial authority" standard occurs for other transactions. The law states that, "No penalty shall be imposed under this subsection if it is shown that there is reasonable cause for the understatement and the tax return preparer acted in good faith."
Here are some of the more important tax changes:
AMT "Patch"
The Alternative Minimum Tax (AMT) exemption amounts for 2008 increase to $69,950 for married couples filing jointly and surviving spouses, $46,200 for single taxpayers and head of households, and $34,975 for married couples filing separately. In 2007, a temporary one-year fix provided for $66,250 in exemptions for married couples and $44,350 for individuals. Without the change for 2008, the exemptions would have reverted to $45,000 for couples and $33,750 for individuals. Like 2007’s patch, the 2008 AMT provision lasts for only one year.
The law removes limits in the AMT on taking personal credits, (such as the dependent care credit and education tax credits) against regular tax liability. It also provides relief to taxpayers whose worthless stock options triggered an AMT liability.
Energy Incentives
The new law expands the definition of some renewable energy sources eligible for tax incentives, extends some credits for as long as eight years, and ends or modifies caps on others.
Individuals can receive a $500 credit for the purchase of residential energy improvements. Eligible improvements include insulation, windows, and exterior doors. A wide range of other tax credits were established or extended.
The 30% solar electricity credit currently has a $2,000 cap. This limitation is removed, effective for solar electric property placed in service after December 31, 2008
Individual Taxes
The following individual tax deductions were extended through December 31, 2009:
1. $4,000 “above-the-line” tuition deduction for higher education
2. Up to $100,000 of tax-free distributions from IRAs for charities by taxpayers age 70 1/2 or older
3. $250 teachers' classroom expense deduction
4. The standard deduction for real property taxes for non-itemizers has been extended through 2009. This increases the standard deduction by (i) $1,000 to $11,900 for non-itemizing joint filers, (ii) $500 to $5,950 for non-itemizing individuals and (iii) $8,500 for non-itemizing heads of household.
5. State and local sales tax deduction for those states that do not assess income taxes
The income floor for the child tax credit was lowered from $12,050 to $8,500. The credit is refundable to the extent that 15 percent of the taxpayer's income exceeds the revised floor amount.
A greater number of homeowners losing a residence through foreclosure will not be taxed on the transaction. The recently-enacted elimination of income for home mortgage debt forgiveness (under Code Section 108) was extended for three years.
Business Tax Breaks
Many of business tax incentives apply to specific industries. These provisions received plenty of negative press as favoring industries represented by legislators who needed further encouragement to vote for the Act.
Two business incentives that could have wide application are the research tax credit and the new markets tax credit. The research tax credit is extended to amounts paid in 2007 or 2008. The credit is 20 percent of a taxpayer’s qualified annual research expenses that exceed the taxpayer’s annual base amount. The alternative simplified credit is increased from 12 percent to 14 percent for 2009.
The new market tax credit, which is extended through December 31, 2009, encourages loans to small businesses in economically distressed areas.
Leasehold improvements and qualified restaurant property can be written off over 15 years.
Tax Increases
The new law is expected to generate more than $43 billion in revenue, practically all of which involve business taxes. The largest tax increase eliminates foreign deferred compensation protection, which will produce an estimated $25.1billion in revenue.
A tax increase affecting most businesses involves an extension of the 0.2 percent surcharge of the federal unemployment tax.
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ABOUT THE AUTHOR: David Nolte
Mr. Nolte has 30 years experience in financial and economic consulting. He has served as an expert witness in over 100 trials. He has also regularly served as an arbitrator. Mr. Nolte has achieved the following credentials, CPA, MBA, CMA and ASA.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.
