Tax Changes Affecting Individuals and Businesses From the 2008 Financial Bailout
Several tax law changes, specifi cally, those resulting from passage of
the Emergency Economic Stabilization Act of 2008 (the “Bailout Bill”)
were signed into law last month. These changes, together with the
extension of several other popular tax benefi ts were included in the
Bailout Bill to win support from reluctant lawmakers. Although most
of these tax changes impact a relatively small group of taxpayers, we
want to bring to your attention the changes likely to impact you as you
prepare your 2008 return.
Alternative Minimum Tax Relief
Changes in the alternative minimum tax (“AMT”) rules will provide relief
for millions of individuals. The initial change increased the exemption
amounts that are subtracted from an individual’s “alternative
minimum taxable income” to determine the taxable amount (if any).
The exemption amounts for 2008 are $69,950 for joint fi lers, $46,200
for single fi lers, and $34,975 for married taxpayers fi ling separate returns.
These amounts, although only slightly higher than in 2007, are
substantially higher than the exemption amounts originally scheduled
to apply in 2008.
The second broadly applicable AMT change allows taxpayers to use
all their “nonrefundable personal credits” (e.g., the dependent care
credit) in full to offset both the regular tax and the AMT in 2008. Prior
to this change, which represents a one-year extension of a rule that
had expired in 2007, the majority of the nonrefundable personal credits
could not be utilized to offset the AMT.
Other changes in the new law are aimed at a narrower but nevertheless
substantial group of taxpayers. These involve the many employees
who paid AMT as a result of exercising incentive stock options
(“ISOs”), then later suffered losses on selling the stock after its value
had declined sharply. This scenario is often called the “phantom income”
problem because tax is paid on gains that never materialize.
The new law addresses this problem in two ways. First, it liberalizes a
rule, which originally took effect in 2007, designed to allow taxpayers
to recover some of the benefit of previously unused AMT credits over
a five-year period. The new law provides additional relief by eliminating
a phase-out provision in the original rule and reducing the recovery
period to two years.
Second, the new law forgives any tax, including interest and penalties,
outstanding on October 3, 2008 (date of enactment), if attributable to
the minimum tax adjustment for ISOs. Second, for taxpayers who have
already paid any interest and penalties that would have been abated under
this new rule, such interest and penalties can be used—half in 2008 and
half in 2009—to increase the “AMT refundable credit amount” and the minimum
Another AMT change may benefit energy-conscious taxpayers. Beginning in
2008, the credit for “energy efficient residential property” can be used
to offset the AMT. Retroactive Extensions of Other Individual Provisions
The new law extends several provisions through 2009 that had expired at
the end of 2007. These include:
• State and Local Sales Tax Deduction. Allows taxpayers to use state and
local sales taxes as itemized deductions in lieu of state income taxes.
• Deduction for Qualifi ed Tuition and Related Expenses. Allows an
“above-the-line” deduction (i.e., not part of itemized deductions) for
certain higher education expenses. The maximum deduction is $4,000 or
$2,000, depending on the taxpayer’s adjusted gross income (AGI). No
deduction is allowed for single filers having AGI above $80,000 or for
joint filers having AGI above $160,000.
• Tax-free IRA Distributions to Charity. Permits direct distributions
to charity of up to $100,000 from a traditional or Roth IRA maintained
for an individual who has reached age 70 ½. Ordinarily, such distributions
would be taxable to the individual, who would not be able to offset the
income fully because of the percentage limitations on charitable contribution
Principal Residence/Vacation Home Sale
The Code currently provides a $250,000 exclusion ($500,000 on joint returns)
of gain on the sale of a principal residence when the taxpayer has used
the home as a primary residence for two of the preceding five years. For
any period the home is not used as a primary residence after 12/31/08, such
nonqualified use period is ineligible for the gain exclusion. For example,
if you purchase a vacation home in January 2009, start using it as your
principal residence in 2012, and sell it two years later, only 40% of the
gain is eligible for exclusion. The recognized gain due to nonqualified use periods
is generally taxed at the capital gains rate.
Purchase Business Equipment and Obtain Additional Depreciation/
As part of the economic stimulus, investment in new equipment has been
encouraged by expanding the amount of new equipment that may be expensed in
the year acquired and placed in service rather than merely taking a
depreciation expense over the expected life of the asset. For 2008, businesses
are now permitted to expense $250,000 of depreciable personal property,
such as machinery, equipment, and furniture acquired by purchase for use
in the active conduct of a trade or business. This $250,000 expense limit is
phased out if the purchases exceed $800,000 in 2008. The expense limit is
reduced to $125,000 in 2009, inflation indexed for 2010, and reduced to
$25,000 in 2011. Within these accelerated expense rules, there is a
separate limitation for certain listed vehicles. The vehicle limits have
also been increased for 2008 to allow a taxpayer to claim this first year
expense up to $10,960 on a new auto mobile used in business and $11,960 on
a light truck or van.
Credit for Residential Energy Efficient Property Extended and Expanded
The new law extends through 2016 the credit for “residential energy
effi cient property,” which was scheduled to expire at the end of 2008.
Also, as noted above, beginning in 2008, taxpayers can use the credit
against the alternative minimum tax (“AMT”). Moreover, the new law
retroactively adds two new types of qualifying property, and, beginning
after 2008, removes the credit limit for “qualified solar electric property.”
Previously, the credit was based on expenditures for three defined
types of qualifying property: qualifi ed solar electric property, qualifi ed
solar water heating property, and qualifi ed fuel cell property. The new
law adds two more categories: qualifi ed small wind energy property
and qualifi ed geothermal heat pump property. The credit for each type
of property is 30% of qualifying expenditures, subject to a dollar limit
for each. These limits are as follows:
• $2,000 for qualifi ed solar electric property expenditures in 2008; the
limit is removed after 2008.
• $2,000 for qualified solar water heating property expenditures.
• $2,000 for qualified geothermal heat pump property expenditures.
• $500 for each half kilowatt of capacity (not to exceed $4,000) for
qualified small wind energy property expenditures.
• $500 for each half kilowatt of capacity for qualified fuel cell property
Earned Income Threshold for Child Tax Credit Refundability
The new law reduces the earned income threshold for determining the
refundability of the child tax credit for 2008 to $8,500 (from $12,050).
Real Property Tax Deduction for Nonitemizers
In 2008, individuals who do not itemize their deductions may include,
as part of the standard deduction, real property taxes of up to $500
($1,000 for joint filers). The new law extends this rule through 2009.
If you have questions concerning whether any of these or other benefi ts
passed in recent legislation impacts you or your business, please contact
our closely held business members Randall L. Duncan or Jonathan
D. Mishkin, LL.M. at (503) 242-0000, and we will be glad to assist you.
Randall L. Duncan
Direct Line: 541-417-6010
Jonathan D. Mishkin, LL.M.
Direct Line: 541-417-6007
1001 SW Fifth Avenue
Portland, OR 97204-1116
Phone: (503) 242-0000
Fax: (503) 241-1458
360 E. 10th Avenue, Suite 300
Eugene, OR 97401-3273
Phone: (541) 485-0220
Fax: (541) 686-6564
333 High Street, N.E.
Salem, OR 97301-3632
Phone: (503) 371-3330
Fax: (503) 371-5336
Nothing in this communication creates or is intended to create an attorney-client
relationship with you, constitutes the provision of legal advice, or creates any legal
duty to you. If you are seeking legal advice, you should first contact a member of
the Closely Held Business Team with the understanding that any attorney-client
relationship would be subsequently established by a specific written agreement
with Harrang Long Gary Rudnick P.C. To maintain confidentiality, you should not
forward any unsolicited information you deem to be confidential until after an attorney-
client relationship has been established.