Lewes CPA
officeProgar & Company, P.A.
Certified Public Accounting services for businesses and individuals
How individuals are affected by tax changes in the Emergency
Economic Stabilization Act of 2008
Dear Reader,
As I'm sure you're aware, on Oct. 3, 2008, the President signed into
law the Emergency Economic Stabilization Act of 2008 (P.L. 110-343).
Although virtually all of the press coverage of this law has
concentrated on its hotly debated $700 billion financial industry
bailout plan, the legislation also contains scores of tax changes,
mostly beneficial, for individuals and businesses alike.
Here's a brief review of the tax provisions individuals need to know
about right now.
AMT relief:
In general terms, to find out if you owe alternative minimum tax
(AMT), you start with regular taxable income, modify it with various
adjustments and preferences (such as addbacks for property and
income tax deductions and dependency exemptions), and then subtract
an exemption amount (which phases out at higher levels of income).
The result is multiplied by an AMT tax rate of 26% or 28% to arrive
at the tentative minimum tax. You pay the AMT only if the tentative
minimum tax exceeds your regular tax bill. Although it was
originally enacted to make sure that wealthy individuals did not
escape paying taxes, the AMT has wound up ensnaring many
middle-income taxpayers. One reason is that many of the tax figures
(such as the tax brackets, standard deductions, and personal
exemptions) used to arrive at your regular tax bill are adjusted for
inflation, but the tax figures used to arrive at the AMT are not.
For 2008 only, the new law provides some relief. It increases the
maximum AMT exemption amount over its 2007 level by $3,700 for
married taxpayers filing joint returns, and by $1,850 for unmarried
individuals and married persons filing separately. However, after
2008 the maximum AMT exemption amount will drop precipitously to
where it was in the year 2000 unless Congress provides yet another
fix.
Another provision in the new law provides AMT relief for those
individuals claiming certain “nonrefundable” personal tax credits
(such as the credit for dependent care and the Scholarship and
Lifetime Learning credits). For 2008, these credits may offset an
individual's regular tax and AMT. After 2008, unless Congress acts,
these credits will be allowed only to the extent that an individual
has regular income tax liability in excess of the tentative minimum
tax.
The new law also liberalized the AMT refundable credit amount that
was first enacted in 2006 to help taxpayers who were stung by the
AMT as a result of exercising incentive stock options (ISOs). The
changes are highly technical but their essence is that for tax years
beginning after 2007: (1) eligible individuals may claim this credit
more rapidly (i.e., over fewer years) than would have been the case
without the change; and (2) the AMT refundable credit amount no
longer phases out at higher levels of adjusted gross income (AGI).
In addition, the new law wipes out any tax underpayments (plus
interest & penalties) outstanding on Oct. 3, 2008, that are
attributable to pre-2008 phantom ISO income under the AMT rules.
Retroactively resuscitated and extended tax breaks:
All of the following tax breaks had expired at the end of last year.
The new law retroactively resuscitates them so that they apply for
2008, and also extends them for one year so that they will apply for
2009 as well:
The option to claim an itemized deduction for state and local
general sales taxes instead of the itemized deduction for state and
local income taxes.
The above-the-line deduction for qualified tuition and related
expenses for higher education paid during the tax year.
The up-to-$250 eligible educator's above-the-line deduction for
books, supplies, computer equipment, etc., used by him or her in the
classroom.
The up-to-$100,000 annual exclusion from gross income for taxpayers
age 70 1/2 or older who make direct transfers of otherwise taxable
individual retirement account (IRA) distributions to qualified
charitable organizations.
The new law also extends for one year the nonitemizers' additional
standard deduction for State and local property taxes paid. The
deduction can't exceed the lesser of state and local property taxes
actually paid or $500 ($1,000 for joint return filers). This
deduction was supposed to have been available only for 2008, but the
new law makes it available for 2009 as well.
Deductions for energy saving home improvements extended and
expanded:
Two tax credits are available for taxpayers who make energy saving
improvements to residences. They've both been extended by the new
law and expanded as well:
(1) A generous tax credit is available to individuals who add solar
energy equipment or fuel-cell equipment (new technology that
converts fuel into electricity using electromechanical methods, and
meets other detailed requirements) to their residences. The new law
extends this credit through 2016. It also liberalizes the credit in
an important way: For 2008, you can claim a tax credit of 30% of the
cost of equipment that uses solar energy to generate electricity
(photovoltaic property), up to a $2,000 maximum tax credit. After
2008, there's no dollar limitation on the credit. For example,
suppose you spend $8,000 buying and installing solar heating panels
on your residence. If you make the improvement this year, you may
claim a maximum credit of $2,000, but if you make the improvement
next year, you may claim a credit of $2,400 (30% of $8,000).
Additionally, starting with 2008, the new law makes the credit
available for more-exotic energy generating/retaining equipment:
wind turbines; and geothermal heat pumps.
(2) For equipment installed before 2008, you could claim a credit
for the cost of buying an assortment of energy saving improvements
and installing them in your main home. The credit depends on the
type of improvement (e.g., 10% of the cost of energy efficient
building envelope components, such as insulation and windows, and an
up to $150 credit for a natural gas, propane, or oil furnace or hot
water boiler) and there's an overall $500 lifetime dollar limit for
all improvements.
The new law does not extend this credit for qualifying
equipment bought and installed in 2008, but it does make it
available once again for qualifying equipment bought and installed
in 2009. Also, for 2009, the new law makes the credit available for
certain types of energy efficient biomass fuel stoves and certain
types of energy saving asphalt roofs.
New tax relief for victims of Presidentially declared disasters:
Individuals may deduct personal casualty losses (e.g., unreimbursed
damage to a car due to a storm) or personal theft losses only if
they exceed a $100 limit per casualty or theft and only to the
extent these losses in the aggregate exceed 10% of adjusted gross
income (AGI). If the disaster occurs in a Presidentially declared
disaster area, an individual may elect to take into account the
casualty loss in the year immediately preceding the year in which
the disaster occurs. Before 2008, only itemizers could deduct
casualty losses.
The new law waives the 10%-of-AGI limit for victims of disasters
declared to be federal disasters in 2008 and 2009, plus, for these
years, permits nonitemizers to claim a deduction for federal
disaster losses. However, for 2009 only, the new law boosts the $100
per casualty limit to $500 (which will have the effect of reducing
deductions).
The new law also gives a number of extra tax breaks to victims of
the storms and hurricanes that pummeled ten Midwest states during
2008.
More detailed reporting of securities transactions – after 2010:
Stock brokers must file an information return (Form 1099-B) for
securities transactions they handle. Currently, brokers report the
name and address of the customer, when the sale took place, what was
sold, and the gross proceeds of the sale. Starting with stocks (as
well as bonds and several other financial instruments) bought after
2010 (a later date applies to some specialized securities), brokers
will have to report the customer's adjusted basis (essentially cost
for tax purposes) and whether a gain or loss on the transaction was
short- or long-term. This new information reporting requirement is
designed to boost IRS's compliance efforts (e.g., help assure
taxpayers properly report their gains and losses).
Please keep in mind that I've described only the highlights of how
the new law affects you. If you would like more details, please call
me at your convenience.