2008 – Keep Your Eyes and Ears Open  

Approximately two months later than promised in December, tax extender relief is now making its way through Congress. The Senate is considering a bill that would extend many of the popular provisions enacted over the past six years that have technically expired or will expire at the end of 2008 absent additional legislative action.

If the bill is enacted in its current form, individuals will be able to continue through 2009 to deduct state and local sales taxes, qualified tuition and related expenses, educator expenses, and qualified conservation contributions to the same extent as under the law applicable to 2007 returns. The exclusion given to the deemed distributions from an IRA in funding a charitable contribution will likewise extend through 2009. The basis reduction of an S shareholder in stock on a charitable contribution of appreciated property will also continue as in 2007.

Energy provisions that individuals have enjoyed will likewise remain available for two years if the bill is passed. At the top of the list is the credit for non-business energy-efficient property, followed by residential energy-efficient property. Investors, too, will continue to reap benefits from clean renewable energy bonds issued in 2009, with a requirement of level amortization of principal in bonds issued after enactment.

Energy provisions were popular with contractors and appliance producers because of the credit for energy-efficient home construction and manufacture of energy-efficient home appliances, and these will continue as before, but the producer will be able to restart the credit limitation to the end of 2007.

More generally, businesses can utilize the extension of the 15-year straight-line recovery for qualified leasehold improvements and qualified restaurant improvements through 2009; more specifically, the 7-year recovery for motor sports racing facilities will be reinstated as of the date of enactment. Expensing of environmental remediation costs will continue uninterrupted for two years.

The bill is entitled “Alternative Minimum Tax and Extenders Tax Relief Act of 2008” and true to its name, incremental tax relief is afforded individual taxpayers through an increased AMT exemption and a continuation of the effective offset of AMT by certain nonrefundable personal credits, in each case for just the one year 2008. The exemption would increase to $69,950 for married taxpayers filing jointly ($39,975 in the case of married filing separately) and surviving spouses, and $46,200 for single taxpayers (other than surviving spouses).

Again we see the Congress looking for a band-aid approach to the political problem its members envision when the full fury of the AMT hits. As noted in earlier newsletters, Congressman Rangel of New York, chairman of the House Ways and Means Committee, has proposed major tax reform legislation that would eliminate the AMT for individuals altogether in favor of increased tax brackets for high-income individuals. Such change, however, will not be enacted in an election year, where the bipartisan objective will be not to ruffle the feathers of taxpayers, but rather to show concern for the cash squeeze that many taxpayers now feel in an economic contraction.

The current climate has already produced an Economic Stimulus package aimed both at housing issues and spurring spending and investment, so the likelihood of passage is high. However, this is not entirely certain given that the AMT extension enacted in December of 2007 only came about because of the decision to forego PAY-GO, a waiver that was not universally welcomed by Blue Dog Democrats and fiscally conservative Republicans. An insistence on offsets may trigger a Congressional donnybrook that would jeopardize enactment or result in tax increases.

The bottom-line: there are other tax-laden legislative proposals that are also making their way through the Congress, and practitioners must keep abreast of their movements to provide tax planning advice for 2008 (and beyond).

These developments will be discussed in the following upcoming Surgent McCoy courses: