Economic rescue package contains incentives for individuals and businesses

On October 3, President Bush signed into law the Emergency Economic Stabilization Act of 2008, an $850 billion financial markets rescue package. The rescue plan is designed to restore liquidity to the financial markets and includes some valuable tax incentives for individuals and businesses. In this letter, we highlight some of the key incentives of the new law.

Incentives for individuals

AMT. The rescue package raises the alternative minimum tax (AMT) exemption amounts to $69,950 for married couples filing jointly and surviving spouses, $46,200 for single taxpayers and heads of household, and $34,975 for married couples filing separately. The rescue package also allows taxpayers to take nonrefundable personal credits to reduce their AMT liability.

Homeowners. When a lender forecloses on property, sells the home for less than the borrower’s outstanding mortgage and forgives all or part of the excess mortgage debt, the tax code treats the cancelled debt as taxable income to the homeowner. The Mortgage Forgiveness Debt Relief Act, enacted in late 2007, excludes from federal tax discharges involving up to $2 million of indebtedness ($1 million for a married taxpayer filing a separate return) secured by a principal residence and incurred in the acquisition, construction or substantial improvement of the residence. The new law extends this treatment from the end of 2009 through 2012.

The rescue package also extends the additional standard deduction for real property taxes. Individuals who do not itemize their deductions may take this deduction in 2008 and 2009 in addition to the standard deduction. This deduction can reduce your taxable income by as much as $500 ($1,000 for those filing joint returns).

Child tax credit. Before the new law, the child tax credit was refundable to the extent of 15 percent of the taxpayer’s earned income in excess of approximately $12,050 (reflecting inflation adjustments from the original floor of $10,000). Under the new law, the floor falls to $8,500. This treatment will result in an increase in the amount of the refundable credit for more taxpayers.

Charity. In 2008 and 2009, an individual age 70 1/2 or older can direct that up to $100,000 of his or her IRA balance be distributed by the IRA trustee directly to charitable organizations, including churches, without recognizing income and without taking a charitable deduction. This special tax break had expired at the end of 2007 but is renewed through 2009.

Energy. The new law extends a number of energy conservation tax incentives and creates a new tax credit for individuals who purchase a plug-in electrical vehicle. Significant tax breaks for "going solar" are also available in connection with home improvements.

State and local taxes. The rescue package gives individuals who itemize their deductions the option of deducting state and local income taxes or deducting state and local general sales taxes. This election was available in past years but expired at the end of 2007. The new law makes it retroactive to January 1, 2008, and extends it for 2009.

Education. The rescue package extends the higher education tuition deduction through December 31, 2009. As in previous years, however, the amount of the deduction depends on your adjusted gross income. For 2007, the deduction phased out between $65,000 - $80,000 for single filers and $130,000 - $160,000 for joint filers.

Incentives for businesses

Research Tax Credit. The rescue package extends the research tax credit to amounts paid or incurred in 2008 and 2009. It also increases the alternative simplified research credit, an incentive to encourage smaller firms to use the research credit to grow their businesses, to 14 percent starting next year.

Leasehold improvements. Under the new law, qualifying restaurant improvements and leasehold improvements will be eligible for 15-year cost recovery rather than a 39-year period for two more years, through December 31, 2009. Similarly, Congress authorized a 15-year recovery period for depreciation of certain improvements to retail space. This treatment is extended through December 31, 2009. It applies to owner-occupied businesses and restaurants as well as leased establishments.

Energy conservation. The new law extends a host of energy tax incentives. Most notable are the extension of the special deduction for energy-efficient commercial buildings, through December 31, 2013, and the substantial, long-term tax breaks given to businesses that develop or use solar energy. For businesses in urban areas, a $20/month transportation tax-free fringe benefit may be set up for employees who bicycle to work.

Charitable contributions. The tax code gives businesses enhanced deductions for contributions of food to charitable organizations and of books and computer equipment to qualifying schools. The new law extends these tax breaks through December 31, 2009. Additionally, Congress extended the temporary suspension of limitations on charitable contributions in the case of a qualified farmer or rancher who contributes food before January 1, 2009.

S-corporation shareholders are also eligible for special tax treatment when making charitable contributions of qualifying property. The new law extends, through December 31, 2009, the special rule allowing S-corp shareholders to take into account their pro-rata share of charitable deductions even if the deductions would exceed the shareholder’s adjusted basis in his or her S-corporation.

Contact us

Some of the tax breaks contained in the Emergency Economic Stabilization Act of 2008, require quick action before the 2008 tax year ends, others call for careful coordination with standard year-end tax strategies, and still others require planning now to maximize the benefits available in 2009 and beyond.

We encourage you to contact your WK tax advisor at (573) 442-6171 or (573) 635-6196 to discuss in more detail how the new Emergency Economic Stabilization Act of 2008 applies to you and your business.

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