Tax Provisions in Bailout Bill
| Tax Provisions in Bailout Bill |
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We are writing to let you know about some recent changes to the tax laws Congress recently passed as part of the Bailout Bill you have heard so much about. Due to the large number of changes, economy of space dictates that we can only briefly touch on the topics that we consider most useful to our clients and their professionals. Please read the discussion below and contact one of the attorneys at McLaughlin & Quinn, LLC if you have any questions or want more information. I. The "Tax Extenders and Alternative Minimum Tax Relief Act of 2008" (the 2008 Extenders Act), which was enacted on October 3, 2008, provides extensions for several popular tax breaks and the addition of several new relief provisions, including disaster area tax relief. Here's an overview of the key provisions in the new legislation: Deduction of state and local general sales taxes. The option to deduct state and local general sales taxes is extended through 2009. Qualified tuition deduction. The above-the-line tax deduction for qualified higher education expenses is extended through 2009. Teacher expense deduction. The provision allowing teachers an above-the-line deduction for up to $250 for educational expenses is extended through 2009. IRA rollover provision. The provision allowing qualified taxpayers to make tax-free contributions from their IRA plans to qualified charitable organizations is extended through 2009. Additional standard deduction for real property taxes. The standard deduction for real property taxes for non-itemizers is extended through 2009. Research and development credit. The research tax credit is extended through 2009. In addition, the alternative simplified credit is increased from 12% to 14% for the 2009 tax year, and the alternative incremental research is repealed for the 2009 tax year. 15-year straight-line cost recovery for qualified leasehold, restaurant, and retail improvements. The 15-year write-off for qualified leasehold, restaurant and retail improvements is extended through 2008. Other extended provisions. Other provisions extended through 2009 include:
Additional tax relief provisions. In addition to the extensions of tax relief described above, the 2008 Extenders Act also includes liberalizations for the child tax credit, a 5-year write-off for certain farming equipment, and a change in the standards for imposition of the tax return preparer penalty. Disaster relief. Included in the new legislation is Midwestern disaster area tax relief for victims of the disaster in Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska and Wisconsin, and a new tax relief package for victims of all Federally-declared disasters occurring after December 31, 2007 and before January 1, 2010 (e.g., eased loss deduction rules, a new business write-off for demolition, cleanup and repair, a 5-year carryback for casualty losses or qualified disaster expenses, bonus 50% first year depreciation for property placed in service through December 31, 2011 (December 31, 2012 for real property), and increased expensing dollar limits). II. In addition to the foregoing items, the 2008 Extenders Act extend partial relief to individual taxpayers from the alternative minimum tax, or AMT. Earlier temporary measures to deal with the unintended creep of the AMT's reach expired at the end of 2007, meaning that more than 20 million additional taxpayers would have faced paying the tax on their 2008 returns without the new relief. Brief overview of the AMT. The AMT is a parallel tax system which does not permit several of the deductions permissible under the regular tax system, such as state, local and property taxes. Taxpayers who may be subject to the AMT must calculate their tax liability under the regular federal tax system and under the AMT system taking into account certain "preferences" and "adjustments." If their liability is found to be greater under the AMT system, that's what they owe the federal government. Originally enacted to make sure that wealthy Americans did not escape paying taxes, the AMT has started to apply to more middle-income taxpayers, due in part to the fact that the AMT parameters are not indexed for inflation. In recent years, Congress has provided a measure of relief from the AMT by raising the AMT "exemption amounts"-allowances that reduce the amount of alternative minimum taxable income (AMTI), reducing or eliminating AMT liability. (However, these exemption amounts are phased out for taxpayers whose AMTI exceeds specified amounts.) For 2007, the AMT exemption amounts were $66,250 for married couples filing jointly and surviving spouses; $44,350 for single taxpayers; and $33,125 for married filing separately. However, for 2008, those amounts were scheduled to fall back to the amounts that applied in 2000: $45,000, $33,750, and $22,500, respectively. This would have brought millions of additional middle-income Americans under the AMT system, resulting in higher federal tax bills for many of them, along with higher compliance costs associated with filling out and filing the complicated AMT tax form. New law provides one-year stopgap fix. To prevent the unintended result of having millions of middle-income taxpayers fall prey to the AMT, Congress has once again relied on a temporary "patch" to the problem, this time a one-year extension of the 2007 exemption amounts, increased slightly. Under the new law, for tax years beginning in 2008, the AMT exemption amounts are increased to: (1) $69,950 in the case of married individuals filing a joint return and surviving spouses; (2) $46,200 in the case of unmarried individuals other than surviving spouses; and (3) $34,975 in the case of married individuals filing a separate return. Personal credits may be used to offset AMT through 2008. Another provision in the new law provides AMT relief for taxpayers claiming personal tax credits. The tax liability limitation rules generally provide that certain nonrefundable personal credits (including the dependent care credit, the elderly and disabled credit, and the Hope Scholarship and Lifetime Learning credits) are allowed only to the extent that a taxpayer has regular income tax liability in excess of the tentative minimum tax, which has the effect of disallowing these credits against AMT. Temporary provisions had been enacted which permitted these credits to offset the entire regular and AMT liability through the end of 2007. The new law extends this temporary provision to tax years beginning in 2008. Extension and modification of AMT credit allowance against incentive stock options (ISOs). A further provision in the new law liberalizes the AMT refundable credit that was first enacted in 2006 to help taxpayers who were stung by the AMT as a result of exercising incentive stock options (ISOs). Under the regular tax, ISOs are not taxed upon exercise. Under the AMT, however, a taxpayer generally must pay tax on the stock value minus the price paid when the option is exercised. The economic downturn in 2000 resulted in many individuals having to pay tax on "phantom income" because the stock prices dropped dramatically after the date of exercise. In 2006, Congress provided relief for these situations by increasing the amount of the minimum tax credit allowed to individuals generally and providing for a partial refund, but this relief did not correct the ISO problem entirely. The new law provides additional relief to affected taxpayers by accelerating the refund attributable to AMT paid on the phantom ISO income (and other AMTI amounts) and by stopping further IRS efforts to collect unpaid amounts. Specifically, the new law allows 50% of long-term unused minimum tax credits to reduce tax over each of two years (instead of 20% over each of five years as was allowed under pre-2008 Extenders Act law), eliminates a rule that limited the relief available to higher-income taxpayers, and abates any underpayment of tax (and applicable interest and penalties) outstanding on October 3, 2008 that is attributable to pre-2008 phantom ISO income. III. Furthermore, the 2008 Extenders Act extends several expired charitable giving tax breaks and provides several new tax incentives for charitable giving. Here is a brief overview of the charitable provisions in the new legislation. Charitable giving provisions extended for two years. Several popular charitable incentives expired at the end of 2007 and would not have been available to taxpayers on their 2008 tax returns if Congress had not acted. The new law restores the provisions and extends them for two years (through 2009). The extended provisions include:
New tax incentives for charitable giving. New incentives for charitable giving contained in the new legislation include:
IV. In addition to the 2008 Extenders Act, Congress passed the Emergency Economic Stabilization Act of 2008, which was signed into law on October 3, 2008. the following discusses details about three tax provisions in the Emergency Economic Stabilization Act of 2008. Those provisions are: (1) a three-year extension of income tax relief when home mortgage debt is forgiven, (2) tax relief for community banks that invested in Fannie Mae and Freddie Mac preferred stock, and (3) a tax crackdown on compensation and severance pay for certain executives of financial companies. Here are the key details regarding those provisions. Three-year extension of home mortgage debt forgiveness relief. The new law provides assistance to homeowners who have either lost their homes to foreclosure or are trying to save their homes by restructuring their mortgages. Under 2007 tax legislation, taxpayers can generally exclude up to $2 million of mortgage debt forgiveness on their main home. This relief provision had been scheduled to expire at the end of 2009. The new law extends this debt relief provision through the end of 2012. To understand the importance of this relief provision, one needs to know that a discharge of indebtedness-that is, a forgiveness of debt- generally gives rise to taxable income. Under the law that applied to debt discharges before 2007, there were no special rules applicable to discharges of mortgage debt on the taxpayer's main home. For example, assume a taxpayer who wasn't in bankruptcy or insolvent owned a main home subject to a $200,000 mortgage debt for which the taxpayer was personally liable. The creditor foreclosed and the home was sold for $180,000 in satisfaction of the debt. If this scenario had occurred in 2006, the debtor would have had $20,000 of debt discharge income. The result would have been the same if the creditor had restructured the loan and reduced the principal amount to $180,000. Effective for discharges on or after January 1, 2007, the tax law was temporarily changed to allow taxpayers to exclude up to $2 million of mortgage debt forgiveness on their main home. The exclusion applies to debt used to acquire, construct, or substantially improve the taxpayer's main home and secured by that home. Refinanced debt is eligible for the exclusion up to the amount of the old mortgage principal just before the refinancing. Assume in the example provided above that the discharge occurred in 2007 instead of 2006. In that case, the debtor would have no debt discharge income when the creditor (1) foreclosed with the result that the $200,000 debt was satisfied for $180,000 or (2) restructured the loan and reduced the principal amount to $180,000. However, this debt relief provision was scheduled to expire at the end of 2009. The new legislation extends the provision through 2012. Apart from providing this three-year extension, no other changes were made to the provision. Tax relief for banks. Many banks had huge losses on their Fannie Mae and Freddie Mac preferred stock holdings which became worthless when the government bailed those companies out. Without a tax change, these banks would have had capital losses on these holdings that they couldn't utilize. The new legislation allows banks (and certain other financial institutions) to treat losses on their Fannie Mae and Freddie Mac preferred stock as ordinary losses that can offset ordinary income. This provision, which applies to any preferred stock that was owned on September 6, 2008, or sold between January 1, 2008, and September 6, 2008, allows banks to claim the book benefit of the loss on their tax returns, thereby reducing their need to obtain additional capital from the FDIC or investors. Tax crackdown on compensation and severance pay for certain financial executives. Under the new law, when a company sells assets to the Treasury through an auction, and the total of assets purchased from the company exceeds $300 million (including direct purchases), (1) "golden parachute" payments are banned for top executives hired while the Treasury rescue is in effect and (2) tax provisions kick in to strengthen the tax treatment of remaining executive compensation and severance packages. Specifically, the deductibility of executive compensation for companies will be cut in half from pre-Act levels, from $1 million to $500,000. Companies won't be able to get around this limit by giving their executives "performance-based compensation," such as stock options. Companies will also lose deductions available under pre-Act law for excessively large severance packages. Executives receiving severance packages will continue to face a 20% excise tax on payments once they reach a certain threshold. That tax will be due if the executive is fired or leaves in connection with the employer's bankruptcy, liquidation, or receivership-not just if the company changes hands, as under pre-Act law. We hope the brief discussion of the changes is useful for you. The attorneys at McLaughlin & Quinn, LLC have spent innumerable hours sifting through the details of these changes and reading reams of commentary by the leading tax experts. Our goal is to provide you with timely updates on changes to the law that may affect you. Please do not hesitate to contact any of the attorneys at McLaughlin & Quinn, LLC to discuss any specific questions you may have. |
