Highlights of the 2008 Tax Changes on the Bailout
Bill
The Emergency Economic Stabilization Act, better
known as the “Bailout Bill” for the financial services
industry, adds a multitude of various tax credits, tax
deductions, extensions of current credits scheduled to
expire, and you can count on a few tax hikes as well.
With all of the tax changes and/or extensions, there
will be at least one that will affect every American
taxpayer when the final version of this Bailout package
is hammered out.
The financial industry
Bailout package in the final version will add a number
of tax breaks to some, tax increases for others, and to
be sure, a lot of our hard earned money from each and
everyone of us. The New York Times has stated that
“Taken as a whole, the Senate tax package would cost
$150.5 billion over 10 years. Of that amount, about
$43.5 billion would be offset” with tax increases.
Having been a banker for 25 years, and now retired, it
is my opinion that $700 billion is not going to be
sufficient to clean up this mess caused by greed, and
inept self-serving politicians.
The legislation would provide the Treasury
Department with the ability to “purchase, insure, hold,
and sell a wide variety of financial instruments,
particularly those that are based on or related to
residential or commercial mortgages” and would increase
the insurance for bank deposits under the FDIC and the
NCUA from $100,000 to $250,000.
The Bailout bill will also change a wide variety
of tax laws geared to limiting executive compensation
(good luck on this one) in the financial industry, tax
breaks for energy efficiency and transportation, tax
relief for taxpayers affected by disasters, and a long
list of tax provisions that would impact nearly every
taxpayer. The following are some of the highlights of
tax provisions that generally affect individual and
self-employed taxpayers.
Tax Provisions
Directly Related to the Bailout
Limits on
executive compensation for bailed out financial
institutions
HR 1424 is supposed to limit executive
compensation for banks and other financial institutions
that participate in one of two Treasury bailout
programs. For financial institutions where the Treasury
purchases assets directly from the institution, the new
legislation would give the Treasury the ability to set
standards for executive pay. In general, the legislation
outlines that there would be limits imposed on
performance bonuses,and would also allow financial
institutions to recover bonuses paid to executives based
on financial performance when earnings are re-stated,
and would prohibit golden parachute payments. ( who will
police all of this?)
For those financial institutions who participate
in Treasury auctions for selling their assets, the
legislation would provide that executive compensation
over $500,000 will not be tax deductible by the
employer, including any compensation in the form of
performance bonuses and stock options. There would be
penalties associated with excess golden parachute
payments to any employee, and employers would lose the
ability to take a tax deduction for such payments.
Additionally, golden parachute payments would be
prohibited for the top five executives. ( why only
5?)
Extends mortgage debt forgiveness
relief to 2012
Mortgage debt that is canceled in foreclosure or
through a write-down is currently excluded from taxable
income, but is scheduled to end in 2009. The new House
bill would extend this tax relief through the end of
2012.
Energy and Transportation Related
Tax Provisions
Extends, modifies the energy tax
credits
HR 1424 would extend and modify the energy
efficient property credit through 2016, and the credit
can offset AMT liabilities. The bill removes the $2,000
maximum limit on solar electric property. Two new types
of equipment are added that would qualify for the
credit:
* wind energy equipment will produce a tax credit
worth 30% of the cost of the equipment, with a maximum
credit of $4,000; and * geothermal heat pumps would
qualify for a credit worth 30% of the cost, with a
maximum credit of $2,000.
The nonbusiness energy property credit would be
extended through 2009. This provides a credit of up to
$500 for purchasing energy-saving products, such as
windows, insulation, and HVAC systems. HR 1424 adds two
new types of improvements that qualify for the
credit:
* biomass fuel stoves with a thermal efficiency
rating of 75% or more, and * asphalt roofs with
cooling granules.
The bill also clarifies that water heaters must
have either an energy factor of at least 0.80 or a
thermal efficiency rating of at least 90% to qualify for
the credit. While the credit is worth up to $500 for
various improvements, the credit is further limited to
$200 for windows and to $300 for biomass fuel
stoves.
A new tax credit for electric
vehicles
HR 1424 provides a new tax credit worth $2,500 to
$7,500 for plug-in electric vehicles. The credit will
start to phase-out after 250,000 qualifying electric
vehicles are sold. Individuals can use the credit to
offset AMT. Vehicles that qualify will need to be
certified under the Clean Air Act and meet the
California low-emission standards. Higher tax credits
are also available for electric vehicles with gross
vehicle weight ratings of more than 10,000
pounds.
Tax-free fringe benefits for
bicyclists
HR 1424 would add a new tax break for people who
commute by bicycle. Employers can provide tax-free
fringe benefit of up to $20 per month to cover
“reasonable expenses incurred by the employee” for the
purchase, improvement, repair, and storage of a bicycle
that is regularly used to commute between the employee’s
home and office. This section of the tax code also
provides tax-free benefits of up to $100 for transit
passes and up to $175 in parking benefits per month,
which remains unchanged. This bicycle fringe benefit
will begin in 2009. Fringe benefits for commute and
transit expenses are excluded from an employee’s
wages.
Revenue Raisers
(aka Tax Hikes)
Section 199 limits
for oil production
Limits the domestic production activities
deduction for oil-related production to 3% (currently
the deduction is 6% for various industries).
Cost basis reporting for brokerage
accounts
Requires brokerage firms to report cost basis in
securities, with reporting to be phased in from 2011 to
2013. Currently brokers report only the gross proceeds
from the sale of securities. The law would require
brokers to keep track of the cost basis in stocks,
bonds, mutual funds and other securities using either
the first-in, first-out method or the average cost
method. In addition, the broker will need to specify
whether the gains are long-term or short-term. Brokers
will be required to furnish customers with the
information statements by February 15th, instead of the
usual January 31st deadline for sending out tax
documents. For people who transfer their securities from
one brokerage to another, the old broker will need to
provide the new broker with the required cost basis
information.
Unemployment insurance tax
rates
Extends the 6.2% FUTA tax rate federal
unemployment insurance through 2009 (was scheduled to be
reduced to 6%). This payroll tax is paid for by the
employer, not through employee deductions. The FUTA tax
is assessed only on the first $7,000 of wages or salary
paid to an employee for a year.
Certain deferred compensation must
be included in current taxable
income
Individuals with certain types of non-qualified
deferred compensation packages from “tax indifferent
companies” will be required to include the value of the
deferred compensation as part of their current taxable
income. The applies only employees who are employed by
certain types of partnerships and foreign corporations
that are not subject to income tax in their
jurisdiction.
Extensions of Various Income Tax
Provisions
AMT Patch
HR 1424 would temporarily increase the
alternative minimum tax (AMT) exemption amounts for
2008. The proposed AMT exemption amounts are as
follows:
* Married filing jointly: $69,950 * Single and
Head of Household: $46,200 * Married filing
separately: $34,975
Also extended is the ability to use personal tax
credits to offset the AMT.
Increases Refundable AMT credit carryovers for
ISOs
The bill would provide relief to individuals who
have AMT credits from incentive stocks options.
Currently, the credit for prior year minimum tax is
refundable at a rate of 20% over five years, up to a
maximum credit of $5,000 per year. The credit is
phased-out for people with AGI of $100,000 or more
($150,000 for joint filers). HR 1424 would eliminate the
phase-out based on income and provide a refundable
credit worth 50% over two years. The bill would also
abate penalties and interest relating to underpaid tax
and AMT relating to the incentive stock
options.
Deduction for sales
tax
HR 1424 would extend to 2009 the optional
deduction for sales tax in lieu of state and local
income taxes as an itemized deduction.
Deduction for educator
expenses
Extends to 2009 the above-the-line deduction for
classroom expenses incurred by teachers, counselors, and
principals in K-12 schools. The deduction amount remains
the same: up to $250 for materials and
supplies. Deduction for tuition and
fees
Extends to 2009 the tuition and fees deduction.
The deduction amounts and income limits remain
unchanged. The deduction is worth up to $4,000 depending
on adjusted gross income.
Additional standard deduction for
property tax
A new deduction for 2008, individuals who don’t
itemize can take an additional standard deduction for
property taxes that they paid during the year. This was
scheduled to be a one-year-only deduction. The bill
would extend the deduction for one additional year to
2009. The deduction provides an additional $500 (or
$1,000 for joint filers) on top of the person’s standard
deduction.
Charitable IRA
rollovers
Extends through 2009 the ability for individuals
to donate all or part of their IRA to a charity without
needing to report the distribution on their tax return.
This provision eliminates some administrative hassles
with reporting the IRA distribution on the return and
then taking a corresponding charitable deduction. For
planning purposes, this can benefit taxpayers who need
to take requirement minimum distributions, but who don’t
need the funds personally, and can help where taxpayers
would like to donate to charity but would not be able to
benefit from the charitable deduction.
Designated interest-related
dividends
Extends through the end of 2009 the ability of
investment companies to designate some or all of its
dividends as interest-related dividends, which would
make those dividends exempt from US income tax for
foreign investors.
Child tax
credit
Lowers the income threshold for the additional
child tax credit from $12,050 (the scheduled threshold
amount for 2008) to $8,500. The lower threshold amount
is effective for 2008 only.
Disaster Related Tax Relief
Provisions
Work Opportunity Credit for Hurricane Katrina
employees is extended through August 28,
2009.
Rehabilitation Credit for Gulf Opportunity Zone
buildings is extended through the end of
2009.
Extensive tax relief is provided for taxpayers in
the Midwest. The following provisions apply to victims
of flooding, storms and tornadoes between May 20, 2008,
and August 1, 2008, in what is being called the
“Midwestern Disaster Area” covering Arkansas, Illinois,
Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri,
Nebraska, and Wisconsin.
IRA distribution
rules
Waives the 10% penalty for early distributions
from an IRA, 401(k), 403(b), or 457(b) retirement plan.
The withdrawn amounts are still included in income for
tax purposes. However, the financial institution would
not be required to withhold tax on the distribution.
Individuals can spread the tax liability over three
years. Individuals can also re-contribute any or all of
the funds withdrawn within three years and the
re-contributed amounts would be have to be included in
their income for tax purposes. The waiver is limited to
$100,000 in distributions, and distributions would have
to be made after the date that the area was declared a
Presidential disaster area and before January 1,
2010. Distributions for home
purchases
Taxpayers who took a distribution from an IRA,
401(k) or other retirement plan to purchase their home
can recontribute retirement funds within five months and
avoid any tax consequences. This recontribution rule
applies to distributions taken within six months prior
to their area being declared a Presidential disaster
area, and the home purchase was never finalized because
of the natural disasters that occurred. As long as the
funds are re-contributed back to the plan, the
transaction will be treated as a rollover.
100% loans from retirement
plans
The amount of loans against a 401(k), 403(b), or
457(b) retirement plan is doubled from 50% of the
account value to 100% of the account value, up to
$100,000. Loan payments can be deferred up to twelve
months.
Casualty loss limits
suspended
Eliminates the casual loss deduction limitations.
Taxpayers in the Midwestern Disaster Area can deduct
their casualty losses in full without being limited by
the $100 per event and 10% of AGI
thresholds. Additional personal exemption for housing
dislocated persons
HR 1424 would allow an additional personal
exemption for providing rent-free temporary housing to
family members who were dislocated from the Midwestern
disasters. The additional amount is $500 per dislocated
person, up to a maximum of four people. The taxpayer
must provide rent-free housing for a minimum of 60 days,
and the exemption can be taken in either 2008 or 2009
(but not both) for the same dislocated
person.
Tax exclusion for canceled
debts
Individuals in the Midwestern disaster area whose
personal debts were canceled can exclude those debts
from their taxable income. Ordinarily, debt forgiveness
can result in taxable
income. Longer replacement period for non-recognition of
gain
Taxpayers who replace their homes and business
property within a five year period will avoid having to
report gain from the destruction or damage of their
property. Additionally, the replacement property must be
located in the same county. Ordinarily, taxpayers have
four years to replace personal residences and two years
to replace business property following a
loss.
Employee retention
credit
An employee retention tax credit is available for
employers who continued to pay their employees while
their business was inoperable. The credit is worth 40%
on wages of up to $6,000 per employee. Only businesses
with 200 or fewer employees are eligible.
Doubled Hope and Lifetime Learning
credits
Expands the education tax credits available for
college students in the Midwestern disaster area by
increasing the HOPE and Lifetime Learning tax credits,
and by expanding the definition of qualified educational
expenses. In particular:
* Expenses that qualify for the credit (normally
only tuition and required fees) shall include tuition,
fees, books, supplies, equipment, fees for special
services, room and board. * The dollar amount for
qualified expenses for the HOPE credit is doubled from
the first $2,400 of expenses to the first $4,800 in
expenses. Hope credit is worth 100% of the first $2,400,
and 50% of the next $2,400, for a maximum Hope credit of
$3,600. (Note: my calculations differ from the $3,000
maximum stated in the summary from the Senate Finance
Committee.) * The percentage amount for the Lifetime
Learning Credit is doubled from 20% to 40% of qualifying
expenses. The $10,000 dollar limit for qualifying
expenses remains unchanged. The maximum lifetime
learning credit would thus be $4,000.
Charity deduction limits
suspended
The normal 50% of AGI limit on charitable
deductions is waived for donations dedicated for relief
efforts in the Midwestern area.
Standard mileage rate for charity
The normal 14 cents per mile mileage rate for
charitable purposes is raised to 70% of the business
mileage rate. This higher rate applies only to taxpayers
driving in the Midwestern area to assist in disaster
relief efforts. The standard mileage rates for 2008 for
charitable driving would be:
1. January to June 2008: 50.5 cents per mile for
business x 70% = 35.35 cents per mile 2. July to
December 2008: 58.5 cents per mile for business x 70% =
40.95 cents per mile
Mileage reimbursement from charity is
tax-exempt
Disaster volunteers who received mileage
reimbursements from a charitable organization for
driving will not have to include that reimbursement in
their taxable income as long as the reimbursement was
the same or less than the standard mileage rate for
business use.
National Disaster Tax Relief
Several provisions in the Emergency Economic
Stabilization Act would change disaster related tax
relief available to all taxpayers in federally declared
disaster areas.
Casualty loss deduction changes
Removes the 10% of AGI threshold and raises the
loss threshold from $100 to $500 per disaster loss
event. Allows non-itemizers to claim casualty losses as
an additional amount to the standard deduction.
Effective for 2008 and 2009 only.
Carrybacks for Net Operating Losses due to
Disaster-Related Casualty losses
Casualty loss deductions can produce a net
operating loss (in which losses exceed income for a
year). Net operating losses normally are carried back
two years. HR 1424 would allow net operating losses due
a disaster casualty deduction to be carried back five
years. Carried-back disaster-related net operating
losses will be allowed to recompute the alternative
minimum tax in the five year carryback period. Effective
for 2008 and 2009 only.
50% bonus
depreciation
Equipment and property placed in service in a
federal disaster area qualifies for additional
depreciation of 50%. This bonus depreciation applies to
a wide range of depreciable assets including
nonresidential and residental rental properties,
leasehold improvements, software, and asset classes with
recovery periods of 20 years or less, and costs to
rehabilitate or replaces destroyed or condemned property
in a disaster area. All depreciation including bonus
depreciation for disaster area property would be exempt
from AMT. Effective through the end of 2011; through the
end of 2012 for real property.
Expanded section 179
deductions
Increases by $100,000 the Section 179 deduction
for placing new equipment into service in a disaster
area, and increases the phase-out threshold by $600,000.
Effective for 2008 and 2009 only.