Three bills which make important changes to the federal tax code have been enacted since June 17: 1) the Housing Assistance Tax Act of 2008 on July 30, 2008 (the “2008 Housing Act”); 2) the Heartland, Habitat, Harvest and Horticulture Act of 2008 (the “2008 Farm Act”) on June 18, 2008 (over President Bush’s veto); and 3) the Heroes Earnings Assistance and Relief Act of 2008 (the “2008 Heroes Act”) on June 17, 2008. This special alert will highlight some of the key tax provisions of these bills.
2008 Housing Act
• New Property Tax Deduction For Non-Itemizers. The Act allows individuals, who do not itemize on their income tax returns, to deduct a portion of their state and local real property taxes. The amount of the new deduction is as much as $500 for single filers and $1,000 for joint filers. Since this is a deduction and not a credit (i.e. a dollar-for-dollar reduction in tax liability), the actual tax benefit will not be substantial. For example, the maximum benefit for a couple in the 15% tax bracket is $150 (and only $75 to a single in this bracket). The maximum benefit for a couple in the 10% tax bracket is $100 (and only $50 to a single in this bracket). The deduction is only allowed in 2008.
• Refundable Credit For Home Purchase. The Act allows new homebuyers to claim a refundable credit of up to $7,500 of the home’s purchase price. The home must be located in the U.S. and must be the taxpayer’s principal residence. The taxpayer (and spouse if married) must not have owned another principal residence for a previous three-year period.
The home must have been purchased (or if new construction, moved into) between April 9, 2008 and June 30, 2009, inclusive. A special rule allows taxpayers to claim the credit during 2008, even if they bought the home in 2009.
The credit is equal to 10% of the price paid for the home, up to a maximum of $7,500 for single and joint fliers ($3,750 for married individuals filing separately). The credit is phased out for individual taxpayers with modified adjusted gross incomes (AGI) between $75,000 and $95,000 ($150,000 and $170,000 for joint filers). Taxpayers with modified AGI over $95,000 ($170,000 for joint filers) cannot claim the credit.
In the second year after purchase, taxpayers who took the credit must start paying it back in equal installments over 15 years, without interest. For example, if a first-time homebuyer purchases a home for $100,000 in 2008, and claims the maximum credit of $7,500 on his or her 2008 tax return, the homebuyer must pay back $500 (one-fifteenth of the credit) on his or her tax return from 2010 through 2024.
• Capital Gains On Former Rental Homes. The Act requires homeowners to pay tax on gains from the sale of a home that has been converted to a qualifying principal residence to reflect the portion of the time the home was not used as principal residence (e.g., vacation or rental property). The amount taxed will be based on the portion of the time during which the taxpayer owned the home that the property was used as a vacation home or rented out. This change is effective for sales after 2008.
• Foreign Interest Election. The Act delays implementation of the worldwide allocation of interest expense election. As originally enacted, the election to take advantage of a liberalized rule for allocating interest expense between U.S. sources and foreign sources for purposes of determining a taxpayer’s foreign tax credit was scheduled to be effective after 2008. This election is delayed to tax years beginning after 2010.
2008 Farm Act
• Limitation On Farming Losses. For tax years beginning after 2009, the farming loss of a taxpayer (other than a C corporation) is limited for any tax year in which any applicable subsidies are received to the greater of: (a) $300,000 ($150,000 for a married person filing separately); or (b) the taxpayer’s total net farm income for the prior five tax years.
• Increase In Corporate Tax Estimates. The estimated tax payments due in July, August, and September, 2012 for large corporations were increased by 7.75% (from 116.50% to 124.25%) (which were again reworked by the 2008 Housing Act).
• Favorable Treatment Of Property Donated For Conservation. The Act extends favorable tax treatment of capital gain property donated for qualified conservation purposes to donations made in 2008 and 2009.
• Reporting Of Gain On CCC Loans. The Act codifies IRS requirements that a taxpayer must report market gain associated with the repayment of a Commodity Credit Corporation (CCC) loan after December 31, 2006 — regardless of whether the taxpayer repays the loan with cash or uses CCC certificates.
• Expanded § 1031 Exchange Of Stock. The Act makes stock exchanges completed after May 22, 2008 in certain farm-related entities (i.e., mutual ditch, reservoir, or irrigation companies) eligible for like-kind nonrecognition treatment under Code Sec. 1031.
• Credit For Cellulosic Biofuel. The Act adds a new component to the alcohol fuel credit under Code Sec. 40 for the production of cellulosic biofuel after December 31, 2008.
• Reduction In Ethanol Credit. The Act reduces the 50-cent-per-gallon alcohol credit incentive for ethanol to 45 cents per gallon for 2009 and 2010.
• Extension Of Ethanol Tariff. The Act extends the ethanol tariff for two years to imports of ethyl alcohol before January 2011.
• New Credit For Ag Chemical Security Costs. The Act creates a Code Sec. 450 30% credit for qualified agricultural chemicals security expenditures paid or incurred after May 22, 2008 and before January 1, 2013 by certain taxpayers doing business with farmers and ranchers.
2008 Heroes Act
• Stimulus Rebate Rules. The Act clarifies that those in the active military who file a joint tax return are eligible for the 2008 stimulus rebate payment – even if one spouse does not have a Social Security number.
• Expanded Retirement Plan Benefits. The Act requires tax-qualified retirement plans to provide that if a participant dies while performing qualified military service, his or her survivors would be entitled to any additional benefits (other than benefit accruals relating to the period of qualified military service) that could have been provided had the participant resumed employment and then terminated employment on account of death. Additionally, the new law provides that retirement plans can permit individuals who leave for qualified military service and cannot be reemployed on account of death or disability to be treated as if they had been rehired as of the day before death or disability and then had terminated employment on the date of death or disability.
• Differential Wages Rules. For years after 2008, the Act includes differential wages paid by an employer to an employee who becomes active duty military in the calculation of wages for retirement plan and IRA purposes. In addition, differential pay was made subject to federal income tax withholding, effective for amounts paid after 2008.
• Tax Credit For Differential Wages. The Act provides small employers with a 20% tax credit for differential wage payments made to employees who are on active military duty.
• Penalty Free Withdrawals From Retirement. The Act makes permanent the expiring law that permits active duty reservists to make penalty-free withdrawals from retirement plans.
• Tightens Expatriation Rules. U.S. citizens and long-term U.S. residents are subject to tax on their worldwide income, but can avoid taxes by renouncing their US. citizenship or terminating their residence. The Act tightens the expatriation rules to ensure that certain high net-worth taxpayers can’t renounce their U.S. citizenship or terminate their U.S. residency in order to avoid U.S. taxes. Under this provision, high net-worth individuals are treated as if they sold all of their property for its fair market value on the day before they expatriate or terminate their residency. Gain is recognized to the extent that the aggregate gain recognized exceeds $600,000 (which will be adjusted for cost-of-living in the future). The provision applies for those who relinquish U.S. citizenship or terminate their U.S. residence on or after June 17, 2008.
• Increases Failure To File Penalty. The Act increases the minimum penalty for a failure to file an individual tax return within 60 days of the due date to the lesser of $135 (up from $100) or 100% of the amount of tax required to be shown on the return. This change is effective for tax returns required to be filed after 2008.
McGrath North’s Tax Practice Group hopes these highlights of this recent tax legislation are valuable and helpful. A member of the Group would be happy to answer questions about the new laws’ effects on you, your business or your clients and their businesses.