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Alert: Tax Changes Within the Emergency Economic Stabilization Act

Most people are aware that Congress, in October, passed the Emergency Economic Stabilization Act of 2008. The Act was primarily intended to solve the credit crunch in the financial markets. However, the Act also is one of the largest tax bills in recent years, making nearly 300 changes to the Internal Revenue Code. The majority of these changes will impact taxpayers in 2008 and 2009, so taxpayers should be aware of these changes while doing their 2008 and 2009 tax planning.

Some of the key changes within the Act include the following:

• AMT Patch.  The Act’s AMT patch raises the AMT exemption amount to $69,950 for married couples filing jointly, $46,200 for single taxpayers and heads of household, and $34,975 for married couples filing separately. This is intended to insulate most middle class taxpayers from the AMT, but is effective for 2008 only.

• AMT Relief For Incentive Stock Options.  The Act abates AMT liability from the exercise of incentive stock options (ISO) before 2008. The Act also allows individuals, including those who paid their AMT taxes, to accelerate the refund of any unused minimum tax credit.

• Sales Tax Deduction.  The Act allows individuals an itemized deduction for state and local sales taxes, in lieu of state income taxes, for 2008 and 2009.

• Above-The-Line Tuition Deduction.  The Act extends the above-the-line tuition deduction through 2009. The maximum deduction is $4,000 for taxpayers with AGI of $65,000 or less ($130,000 for joint filers) and $2,000 for taxpayers with AGI of $80,000 or less ($160,000 for joint filers).

• Additional Standard Deduction For Real Property Taxes.  The Act extends the additional standard deduction for real property taxes (for those taxpayers who do not itemize) through 2009. Congress previously authorized an additional $500 deduction ($1,000 for joint filers), but made it available only for 2008.

• Teachers’ Classroom Expense Deduction.  For 2008 and 2009, teachers may deduct up to $250 in classroom expenses as an above-the-line deduction.

• Tax Free Distributions From IRAs for Charitable Purposes.  The Act permits taxpayers who are age 70½ or older to make tax-free distributions from IRAs for charitable purposes in 2008 and 2009. These distributions can be used to satisfy required minimum distributions. This provision had expired on January 1. The maximum contribution limit is $100,000.

• Child Tax Credit.  The Act enhances the child tax credit by allowing a credit of 15% of the taxpayer’s earned income in excess of $8,500 (from $12,050). The Act also changes the definition of a “qualifying child”, ties the child tax credit to the child dependency exemption, and clarifies the tiebreaker rules for children who are supported by multiple taxpayers.

• Business Research Tax Credit.  The Act extends the research tax credit to amounts incurred or paid in 2008 or 2009. The Act also increases the alternative simplified credit to 14% of qualified expenses which exceed 50% of the average research expenses for the three preceding tax years.

• Energy Efficiency Credits.  The Act extends the Sec. 179D deduction for commercial buildings through 2013 and the Sec. 25D residential credit through 2016.  Sec. 25D allows a credit of up to 30% on certain solar or fuel cell expenditures.  The Act extended the credit to small wind energy and geothermal heat pump property expenditures.  In addition, Congress reinstated the Sec. 25C residential credit for eligible improvements (including insulation materials, exterior windows, and exterior doors) placed in service in 2009. Under Sec. 25C, an individual is allowed a credit equal to 10 percent of the costs of “qualified energy efficiency improvements” installed during the taxable year and 100 percent of any “residential energy property expenditures” made during the year, which may not exceed over $500 in the taxpayer’s lifetime.

• Leasehold and Restaurant Improvements.  The Act makes qualifying restaurant and leasehold improvements through 2009 eligible for a 15 year depreciation period, rather than a 39 year period.  The Act also allows certain improvements to retail space, made in 2008 and 2009, to be depreciated over 15 years (rather than 39).

• Broker Basis Reporting.  One of the revenue raisers in the Act was to expand basis reporting requirements by brokers. Brokers must report the adjusted basis of publicly traded securities when reporting sales transactions and must indicate whether the gain was short or long term. Reporting will take effect for stock acquired in 2011, mutual funds acquired in 2012, and other securities acquired in 2013.