During 2008 the President signed into law at least six different Congressional Acts amending the Internal Revenue Code.  Many of the changes simply extend expiring provisions, while one Act, signed by the President on December 23^rd, softens the tax effect of adverse market declines during the fourth quarter of 2008. 

Alert: The following provisions are actual law as of December 31, 2008.  In January 2009, Congress is considering and expected to pass amendments which could further modify the following.

We look forward to discussing with you in more detail any of the following that affect your particular situation. 

1.       Alternative Minimum Tax:  To prevent millions of taxpayers falling prey to the AMT, Congress passed a one year stop gap extension of the AMT exemption.  For tax years 2008, and 2008 only, the AMT exemption amounts are increased from their 2007 level as follows:

·     From $66,250 to $69,950 in the case of married individuals filing a joint return and surviving spouses;

·     From $44,350 to $46,200 in the case of unmarried individuals other than surviving spouses; and

·     From $33,125 to $34,975 in the case of married individuals filing a separate return.

·     The significance is that without this one year extension and without a similar extension for 2009, substantially more taxpayers would be subject to Alternative Minimum Tax because the exemption would be:

·     $45,000 instead of $69,950 in the case of married individuals filing a joint return and surviving spouses;

·     $33,750 instead of $46,200 in the case of unmarried individuals other than surviving spouses; and

·     $22,500 instead of $34,975 in the case of married individuals filing a separate return.

2.   Deductions – Charitable:  Extends for 2008 and 2009 the up-to-$100,000 annual exclusion from gross income for taxpayers age 70 1/2; who make otherwise taxable individual retirement account (IRA) distributions that are qualified charitable distributions.

3.   Deduction – Section 179:  For tax years beginning in 2008, the maximum regular section 179 property expense deduction is $250,000.  The $250,000 limitation is reduced by the amount by which the cost of section 179 property placed in service during the tax year beginning in 2008 exceeds $800,000. 

4.   Depreciation – Passenger Automobiles:  For passenger automobiles placed in service in 2008, first year depreciation is increased by $8,000.  The maximum first year depreciation is $10,960.  The usual rules regarding deducting auto expense continue to apply.

5.   Depreciation – Recycling:  For property placed in service after Aug. 31, 2008, 50% first year bonus depreciation is allowed for any machinery and equipment (not including buildings or real estate), which is used exclusively to collect, distribute, or recycle scrap plastic, scrap glass, scrap textiles, scrap rubber, scrap packaging, recovered fiber, scrap ferrous and nonferrous metals or electronic scrap.

6.   Education Expenses:  Extends for 2008 and 2009 the above-the-line deduction for up to $250 annually of expenses paid or incurred for books, supplies (other than non-athletic supplies for courses of instruction in health or physical education), computer equipment (including related software and services) and other equipment, and supplementary materials used by an eligible educator in the classroom. To be eligible for this deduction, the expenses must be otherwise deductible as a trade or business expense.

7.   Excise Tax – Children’s Wooden Arrows:  There was a great deal of media scrutiny of this one.  An exemption is provided from the manufacturer's excise tax on arrows sold after October 3, 2008 for wooden practice arrows that are commonly designed for use by children. 

8.   Film and TV Production:  Under certain circumstances, for film or television production commenced in 2008 and 2009 up to $15 million of expenses ($20 million for low income or distressed locations) can be deducted in the year incurred.  This liberalizes the previous deduction rules. 

9.   Foreign – Controlled Foreign Corporations:  Extends the temporary exclusion for active conduct of a banking, financing or similar business, or from the conduct of an insurance business for 2009.

10.  Foreign – Controlled Foreign Corporations:  Extends for 2009 look through treatment for Controlled Foreign Corporations for dividends, interest, rents, and royalties received by one controlled foreign corporation (CFC) from a related controlled foreign corporation. 

11.  Fringe Benefits – Bicycles:  Beginning in 2009, a qualified (read as “pre-tax”) bicycle commuting reimbursement fringe benefit is added for the purchase of a bicycle and bicycle improvements, repair, and storage.  The benefit is limited to $20 (not adjusted for inflation) multiplied by the number of months during the year that an employee regularly uses a bicycle for a substantial portion of the travel between the residence and place of employment. Unlike other transportation fringe benefits, this cannot be used in conjunction with commuter highway vehicle transportation, transit passes, or parking benefits.

12.  Health Insurance – Mental Health Parity:  Generally effective for plan years beginning after Oct. 3, private insurance plans covering 51 or more employees that offer mental health benefits are required as part of the coverage to offer mental health benefits on par with the medical surgical benefits. Thus, the existing mental health parity requirements (applying from June 17, 2008 through Dec. 31, 2008) are made permanent.

13.  Higher Education:  Extends the above-the-line tuition deduction for qualified tuition and related expenses for higher education paid by the individual during the tax year so that it applies for 2008 and 2009.   The income phaseouts for high-income taxpayers continue.

14.  Information Reporting Returns:  For sales of certain securities acquired after Dec. 31, 2010, every broker that is required to file an information return reporting the gross proceeds of a covered security must include in the return the customer's adjusted basis in the security and whether any gain or loss with respect to the security is short term or long term.  Securities options are subject to a new set of rules, but not for any option that is granted or acquired before Jan. 1, 2013. 

15.  Information Reporting Returns:  Each payment settlement entity (generally banks) will have to issue an information return to each payee to whom payments of reportable payment transactions are made.  Thus, a bank that enrolls a business to accept credit cards and contracts with the business to make payment on credit card transactions will be required to report to IRS the business's gross credit card transactions for each calendar year. The bank will also be required to provide a copy of the information report to the business.  Certain transactions where the aggregate is less than $20,000 and less than 200 transactions will be excluded. This provision has been speculated to be in response to the growing amount of business transactions over the Internet. 

16.  Itemized Deductions:  Extends for 2008 and 2009 the election to claim an itemized deduction for state and local general sales taxes instead of the itemized deduction for state and local income taxes.

17.  Leasehold Improvement:  Extends for 2008 and 2009 the accelerated 15-year write-off period (compared with 39 years) for qualified leasehold improvements and qualified restaurant improvements.
 

18.  Mortgages – Debt Forgiveness:  There is a three year extension (through 12/31/2012) to the provision that taxpayers may exclude up to $2 million of mortgage debt forgiveness on their principal residence.
 

19.  Real Estate – Property Tax Deduction:  Extends for 2008 and 2009 the additional standard deduction for state and local property tax.   Taxpayers who claim the standard deduction instead of itemizing deductions may claim an 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).

20.  Real Estate – Sale of Principal Residence:  For sales and exchanges after Dec. 31, 2008 the exclusion of up to $250,000 ($500,000 for certain married couples) that applies to gain from the sale or exchange of a principal residence under will not apply to so much of the gain from the sale or exchange of property as is allocated to periods of nonqualified use.  A taxpayer who fails to meet the ownership and use requirements for the exclusion by reason of a change of place of employment, health, or unforeseen circumstances may qualify for a reduced exclusion.

21.  Retirement Income – Minimum Distributions:  The 2008 Recovery Act provides a one-year suspension of the required retirement plan minimum distribution (age 70-1/2 and above) rules for 2009. 

22.  Retirement Income – Rollovers:  Since the retirement plan rollover rules were liberalized in 2006 several seemingly technical issues have caused large scale confusion which resulted in real life planning decisions not necessarily required by the 2006 rules.  To clarify these issues, beginning in 2010, qualified retirement plans will be required to permit rollovers to “non-spouses”.  In similar fashion, a technical correction to the definition of a trust, will allow retirement planning to continue without some of the lingering doubts since 2006.  

23.  Tax Credit – Carbon Dioxide:  For qualified carbon dioxide captured after Oct. 3, 2008, a carbon dioxide sequestration credit is created. Qualified carbon dioxide is carbon dioxide captured from an industrial source that would otherwise be released into the atmosphere as industrial emission of greenhouse gas, and is measured at the source of capture and verified at the point of disposal or injection.

24.  Tax Credits – Electric Vehicles:  A new tax credit for plug-in electric drive motor vehicles purchased between 2009 and 12/31/2014 limited to $7,500 for no more than 10,000 pounds; $10,000 for more than 10,000 pounds but no more than 14,000 pounds; $12,500 for more than 14,000 pounds but no more than 26,000 pounds; and $15,000 for more than 26,000 pounds.   Taxpayers may claim the full amount of the allowable credit up to the end of the first calendar quarter after the quarter in which the total number of qualified plug-in electric drive vehicles sold in the U.S. is at least 250,000. The new provision further encourages early buyers by stipulating that the credit will be phased out after the 250,000^th plug-in electric vehicle has been sold.
 

25. Tax Credits – Energy:  Extends for 8 years (until 12/31/2016) the energy efficient residential tax credit including wind turbine and geothermal. 

26. Tax Credits – Existing Homes:  Extends to 2008 and 2009 the energy efficient tax credits for existing homes. 

27. Tax Credits – First Time Home Buyers:  The 2008 Housing Act adds a new refundable tax credit for “first-time homebuyers”, equal to the lesser of $7,500 or 10% of the home's purchase price. The credit is phased out for taxpayers with modified AGI between $75,000 and $95,000 ($150,000 and $170,000 for joint filers). The credit is recaptured ratably over 15 years with no interest charge, beginning in the second tax year after the tax year in which the home is purchased. If the home is sold before the 15-year period ends, the remaining credit must be recaptured in the year of sale. If the sale was to an unrelated person, recapture is limited to the gain from the sale, determined by reducing the home's basis by the credit not previously recaptured.  The credit is equivalent to an interest-free loan of 10% of the home's purchase price, up to $7,500.  Taxpayers who purchase a residence after Dec. 31, 2008, and before July 1, 2009, may elect to treat the purchase as made on Dec. 31, 2008.  The credit phases out for individual taxpayers with modified AGI between $75,000 and $95,000 ($150,000 and $170,000 for joint filers) for the year of purchase.

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