2008: More Change You Can Believe In

Although it began as a three-page basic plan of providing the Treasury with sufficient authorities and discretion to do what was necessary to resuscitate the credit markets, the Emergency Economic Stabilization Act of 2008 (EESA) quickly morphed into a 451-page monster, including over 210 pages of tax provisions. There is insufficient space here to provide even a brief description of all of the tax provisions, so this column will only cover selected areas.

First, the AMT patch was enacted for 2008 only, raising the exemption to $69,950 (married), $46,200 (head of household or unmarried), and $34,975 (married filing separately). This will take up to 26 million taxpayers, who would have paid AMT under the exemption levels (to which the AMT was to return this year), out of the AMT in 2008. However, as is the Congress’ wont, no permanent solution has yet emerged. That awaits a new administration and legislature. Similarly, the use of personal nonrefundable credits against AMT liability has been extended to 2008, but only for that one year.

Major tax relief has been provided by two provisions in EESA. The first alters the minimum tax refundable credit significantly. Such long-term AMT tax credits were recoverable to the extent of the greater of $5,000, the prior year’s AMT refundable credit, or 20 percent of the unused long-term minimum tax credit. This was subject to a phaseout when the taxpayer’s AGI exceeded certain thresholds. Under EESA, the phaseout is eliminated and the percentage level is increased to 50 percent. The practical implication appears to be that taxpayers can generally apply their long-term credits over two years, and higher income taxpayers will not be stymied by the phaseout.

Another AMT change that many preparers will find significant is the abatement/refund of AMT attributable to ISOs. The EESA abates any underpayment of tax and associated interest and penalties outstanding on October 3, 2008. The abatement applies to all taxable years ending before January 1, 2008. Of course, many taxpayers have already paid the underpayment, interest, and penalties, and as to those, the taxpayer is entitled to increase the AMT refundable amount by 50 percent of the interest and penalties that were paid, but that would have been abated under the provision. Curiously, the abatement does not apply to AMT, interest, and penalties attributable to an ISO after December 31, 2007. The offending Code section, §56(b)(3), has not been repealed.

A number of taxpayer deductions have been retroactively resuscitated for 2007 and extended through 2009. These include the deduction for state and local sales tax, the deduction for tuition and related expenses, the deduction for elementary and secondary school teacher expenses, and the tax-free distribution of amounts from an IRA to a charity. Similarly, business tax breaks that may live again in 2008 and 2009 include the research credit, the 15-year straight-line recovery of qualified leasehold improvements and qualified restaurant improvements, the favorable basis adjustment to the stock of an S corporation making charitable contributions of appreciated property, the seven-year recovery period for motorsports racing property, the deduction for environmental remediation costs, and the computer and food charitable contribution calculation. The Act also provides a 15-year straight-line recovery for certain retail property improvements.

Of high importance to preparers is the easing of the standard applicable for return preparer penalties. While before the preparer had to have a reasonable belief that a tax position would more likely than not be sustained on the merits to avoid the penalty if the position was not disclosed, retroactively the standard has been reset to substantial authority, the same level as a taxpayer would have to satisfy to avoid taxpayer penalties for an undisclosed position. This will remove much of the tension between clients and preparers.

There are many more provisions that aim at energy policy, some merely extending provisions that either had expired or were about to expire, and others that expand the scope of existing law to new technologies. These await another day, another column.

For full coverage of EESA, see The Best Federal Tax Update Course by Surgent McCoy (BFTU) or The Best Individual Income Tax Update Course by Surgent McCoy (BITU).