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Tax Provisions Bail Out “Rescue” Measure, CCH Says
(RIVERWOODS, ILL., October 3, 2008) – The Emergency Economic Stabilization Act of 2008, a “financial rescue” measure originally focused only on stabilizing financial institutions by removing “toxic” debt from their portfolios, finally passed both houses of Congress when some 290 changes to the tax code, appealing to a wide range of individuals and businesses, were added to its provisions, according to CCH, a Wolters Kluwer business and a leading provider of tax, accounting and audit information, software and services (CCHGroup.com). The bill has been signed by the President.
A Special CCH Tax Briefing is available at cch.com/rescue.
For both individuals and businesses, the main effect of the tax items in the measure is to remove uncertainty about a number of provisions that had expired, extending many of them through 2009 and beyond. But there are also tax benefits for individuals in the form of new, expanded or extended credits related to energy efficiency and tax-related relief for those impacted by Midwestern disasters and Hurricane Ike. Businesses also see an extension of existing credits, enhanced energy incentives and help with disaster-related expenses.
“Dozens of these tax proposals had been languishing in Congress for months,” noted Mark Luscombe, JD, LLM, CPA, CCH principal federal tax analyst. “For some reason, when combined with a financial ‘bailout’ that had failed passage in the House, the total package became irresistible.”
A “fix” or “patch” to the alternative minimum tax, or AMT, with the goal of minimizing the reach of the alternative levy (but not eliminating it) is a significant part of the tax provisions in the new law.
In 2007, the AMT exemption, which largely determines who falls under the alternative system, was set at $44,350 for single individuals and $66,250 for married couples filing jointly, but for this year these amounts were set to revert to just $33,750 for individuals and $45,000 for married couples filing jointly. The new l aw sets the exemption amounts at $46,200 for individuals and $69,950 for joint filers for 2008.
The measure also extends and liberalizes the ability to take personal tax credits against the AMT and mitigates the effects of AMT when it is triggered by “phantom income” from incentive stock options, through a refundable credit.
“Overall, these measures are estimated to keep about 21 million taxpayers free of the clutches of the AMT for 2008, but what will happen in 2009 and subsequent years is still anybody’s guess,” said Luscombe.
Deductions, Other Provisions Extended
Itemized deductions for state and local sales tax, the q ualified higher education expenses deduction and the ability of educators to take an above-the-line deduction for school supplies have been extended to the end of 2009 by the new law. So has the additional standard deduction for property taxes, added to the tax code only this year, and originally set to expire at its end.
Congress also extended the ability of people over age 70½ to contribute an IRA distribution of up to $100,000 to charity and exclude the amount from income.
“This allows people who have to take mandatory distributions from their IRAs an opportunity to avoid a tax ‘hit’ while helping out a favorite cause,” Luscombe noted.
Also helped are taxpayers whose mortgage debt has been reduced through foreclosure or reduced through a restructuring. This kind of reduction in debt traditionally counted as income under the tax code, but was made exempt in 2007. The new measure extends this protection from the end of 2009 through 2012.
The new law also enhances the child tax credit by lowering the “floor” for the refundability of the credit from approximately $12,050 to $8,500.
“This will allow more low-income people to claim the credit, and increase the size of the credit they can claim,” Luscombe said.
Breaks for Business, Others
A long list of credits and deductions for businesses, or aiding various worthy causes, also made it into the new law. The extension and expansion of the research tax credit is by far the largest on the list in terms of dollars, projected to cost the Treasury over $8 billion in 2009.
Other items include enhanced deductions for contributions of food to charitable organizations and contributions of books and computer equipment to qualifying school s; depreciation provisions benefiting leasehold, restaurant and retail improvements; the mine rescue training team credit; the Indian employment credit; the railroad track maintenance credit; the American Samoa economic development credit; Qualified Zone Academy Bonds, which subsidize construction of schools in low-income areas; and a credit to encourage first-time homebuyers in the District of Columbia.
“Some odd and specialized tax provisions usually are found in large tax laws, and this is no exception,” Luscombe observed. “There are provisions that help Puerto Rican and American Virgin Islands distillers, manufacturers of wooden practice arrows for children, owners of motorsports tracks and a continuation of a tax mechanism for aiding something called the Wool Research Fund.”
Save Taxes by Saving Energy
The new law continues and expands on a trend to use the tax code to promote energy efficiency. Most of the incentives in this area are aimed at business, but individuals can benefit from a number of new and extended provisions in the new law.
First, there is an extension of the credit for residential solar property for eight years through 2016, with no credit cap for solar electric investments. (The current credit cap is $2,000.) Added to the credit for residential energy-efficient property are residential small wind investments, capped at $4,000, and geothermal heat pumps, capped at $2,000, as qualifying property.
Credits for energy-efficient improvements to existing homes, such as energy-efficient doors and windows, have been extended through 2009 .
Plug-in electric cars are not yet commercially available, but when they are, purchasers will be eligible for a new credit, ranging from $2,500 to $7,500 for passenger vehicles and light trucks and up to $15,000 for heavier vehicles. The credit will expire at the end of the first calendar quarter after the quarter in which the total number of qualified plug-in vehicles exceeds 250,000. The credit is available against the AMT.
Employees who commute to work by bicycle may get some indirect help through their employers, who can offer limited fringe benefits to offset the costs of commuting, such as bicycle storage.
The new law contains special provisions regarding the “Midwestern Disaster Area” that mirror many of the ones enacted after Hurricane Katrina in 2005. The Midwestern Disaster Area encompasses presidentially declared disaster areas in Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska and Wisconsin between May 20, 2008 and before August 1, 2008.
Some of these include the increased ability to write off demolition, environmental remediation and clean-up costs and enhanced depreciation for qualified disaster property. Individuals benefit from an easing of rules on distributions and loans from qualified retirement plans. They can also take an additional exemption if they house a “Midwestern displaced individual.”
A smaller package of benefits, mainly oriented toward business and housing, is available for the Hurricane Ike Disaster Area, which encompasses parts of Louisiana and Texas, which were declared disaster areas by the president on September 13, 2008.
“None of these provisions is strikingly new, and all were probably destined to pass sooner or later,” Luscombe noted. “But the financial crisis provided an opportunity for bundling many tax provisions together and ensuring passage of the entire lot.”
About CCH, a Wolters Kluwer business
CCH, a Wolters Kluwer business (CCHGroup.com) is a leading provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. Among its market-leading products are The ProSystem fx® Office, CorpSystem®, CCH® Tax Research NetWork™, Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill.
Wolters Kluwer is a leading global information services and publishing company. The company provides products and services globally for professionals in the health, tax, accounting, corporate, financial services, legal and regulatory sectors. Wolters Kluwer has annual revenues (2007) of €3.4 billion ($4.8 billion), maintains operations in over 33 countries across Europe, North America and Asia Pacific and employs approximately 19,500 people worldwide. Wolters Kluwer is headquartered in Amsterdam, the Netherlands. For more information, visit www.wolterskluwer.com.
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EDITORS’ NOTE: CCH analysts are available to discuss tax, banking, securities aspects of the financial rescue plan. Please contact:
Leslie Bonacum (847-267-7153 or firstname.lastname@example.org);
Neil Allen (847-267-2179 or email@example.com); or
Brenda Au (847-267-2046 or firstname.lastname@example.org).
To access CCH resources on the plan, please visit cch.com/rescue. This site will be updated with new information, including briefings and white papers, on an ongoing basis.