By Kenneth H. Bridges, CPA, PFS February 2008
On February 13, 2008, President Bush signed into law the The Economic Stimulus Act of 2008 (the “Act”). Highlights of the Act include:
Rebate checks – Eligible individuals will receive tax rebate checks of up to $600 ($1,200 for a married couple filing jointly), plus an additional $300 per child. The amount of the rebate (excluding the $300 per child amount) is computed as the greater of: (a) the amount of income tax paid in 2007 (not to exceed $600 for an individual or $1,200 for a married couple filing jointly); or (b) $300 for an individual or $600 for a couple if their 2007 tax liability was less than these amounts but they had income of at least $3,000 from self-employment, veterans’ disability payments, and social security benefits or they had a tax liability of at least $1 and gross income in excess of their basic standard deduction amount plus exemption (which likely means at least $8,950 of income for singles and $17,900 for married couples). Unfortunately, the amount of the rebate is phased out at a rate of 5 cents for each dollar of 2007 income above $75,000 for a single filer or $150,000 for a couple filing jointly. It will likely be May before the IRS can begin to process the rebate checks.
Increased section 179 expense amount – Under current law, most small businesses can elect to immediately expense up to $128,000 each year of the cost of furniture and equipment purchased for use in the business. This amount is phased out if the amount of furniture and equipment purchased during the year exceeds $510,000. The Economic Stimulus Act increases the amount that can be expensed in 2008 to $250,000, and increases the phase-out threshold to $800,000 of purchases.
Bonus first-year depreciation – For most new depreciable assets (other than buildings) placed in service during 2008 The Economic Stimulus Act will permit 50% of the cost to be expensed immediately, with the balance recovered under the regular depreciation rules. This special first-year deduction applies both for regular tax and alternative minimum tax. For autos and light trucks, for which first-year depreciation would otherwise be limited under the so-called “luxury automobile rules”, bonus depreciation of $8,000 may be taken (bringing the total deduction to approximately $11,000). Property acquired under a binding contract entered into prior to 2008 will not qualify. On the other hand, property acquired during 2009 under a binding contract entered into during 2008 will qualify.
The Heroes Earnings Assistance and Relief Tax Act of 2008
On June 17, 2008, President Bush signed into law the The Heroes Earnings Assistance and Relief Tax Act of 2008 (the “Heroes Act”). Highlights of the Heroes Act include:
Targeted tax relief for members of the military – As the name of the Heroes Act implies, its primary purpose is to provide targeted tax relief for members of the military, including: provision that those in the active military filing joint returns are eligible for the 2008 Economic Stimulus rebate check even if their spouse does not have a social security number; making permanent the ability to include combat pay as earned income for purposes of the earned income tax credit; liberalizing certain retirement plan rules for reservists called to active duty; and providing small employers with a 20% tax credit for differential wage payments made to employees who are on active military duty. Provisions designed to offset the revenue lost from these tax breaks are summarized below.
Tightening of expatriation rules – The U.S. taxes its citizens and residents on their worldwide income, from whatever source derived. In the past, if you were willing to renounce your U.S. citizenship (or in the case of a non-citizen surrender your permanent lawful residence status), stay out of the country for 10 years, and wait 10 years to sell substantially appreciated assets, you could potentially avoid the U.S. tax on such gains. Some wealthy individuals were willing to take these steps in order to avoid U.S. tax. Under the new rules, wealthy individuals (generally defined for these purposes as those with net worth over $2 million or annual income tax liability in excess of $139,000) who expatriate will be deemed to have sold all of their assets the day before expatriation for their fair market value and owe tax on the deemed gain in excess of $600,000. These rules apply not only to U.S. citizens who renounce their citizenship, but also to non-citizen long-term (generally 8 years) residents who cease to be permanent lawful residents. In addition to these changes to the income tax rules, new estate and gift tax rules provide that a U.S. citizen or resident who receives a gift or bequest from an expatriate may be subject to gift or estate tax upon the receipt of such.
Treatment of foreign subsidiaries as U.S. employers – In the past, U.S. companies with U.S. citizen employees working abroad have often been able to avoid paying FICA tax by having these individuals employed by their foreign subsidiaries. Under the new rules, foreign subsidiaries of U.S. companies performing services under a U.S. government contract will be treated as U.S. employers for employment tax purposes.
Housing Assistance Tax Act of 2008
On July 30, 2008, President Bush signed into law The Housing Assistance Tax Act of 2008 (included as part of the American Housing Rescue and Foreclosure Prevention Act of 2008). Highlights of the legislation include:
New tax credit for first-time homebuyers – Taxpayers who have not owned a principal residence within the past 3 years and purchase a home after April 8, 2008 and before July 9, 2009 may be eligible for a tax credit of up to $7,500. The credit will be phased out for single taxpayers with income between $75,000 and $95,000 and joint filers with income between $150,000 and $170,000. The credit will be recaptured (i.e. repaid) over a 15-year period, so it is essentially the equivalent of a long-term interest-free loan from the government. Repayment of the credit will be accelerated if the taxpayer sells the home during the 15-year period for a gain.
New property tax deduction for non-itemizers – For tax years beginning in 2008, taxpayers who claim the standard deduction will also be able to claim a deduction of up to $1,000 on a joint return or $500 on a single filer return for property taxes.
Reduced homesale exclusion for periods of nonqualified use – Married taxpayers can generally exclude from taxable income up to $500,000 of gain from the sale of their principal residence and single filers up to $250,000 of gain, provided the home was owned and used as their principal residence for at least 2 of the previous 5 years. Under the new rules, for sales after 12/31/08, the homesale exclusion will not apply to gain allocated to periods of nonqualified use. For example, if you own a home as a rental property for 2 years, convert it to your principal residence for 3 years, and then sell the home at a gain, only 60% (i.e. 3 years divided by 5 years) of the gain will be eligible for exclusion. Also, any depreciation expense claimed while the home was a rental property would be subject to recapture.
Election by corporations to accelerate AMT & research credits instead of bonus depreciation – For tax years beginning after 3/31/08, corporations otherwise eligible for bonus depreciation may instead elect to claim additional alternative minimum tax (AMT) credits or research tax credits.
Low-income housing tax credit may offset AMT – Under present law, the Federal low-income housing tax credit (LIHTC) cannot offset alternative minimum tax (AMT). As a consequence of this rule (as well as the passive loss rules and CRA credits that banks get), the Federal LIHTC investor is almost always a publicly-traded corporation, typically a bank, and almost never an individual. Under the new law, LIHTCs attributable to buildings placed in service after 12/31/07 will be able to offset AMT. This change may expand the pool of potential of investors for LIHTC projects.
Increase in the state-by-state limit on the annual amount of Federal LIHTCs – The state-by-state limit on the annual amount of Federal low-income housing tax credits that may be allocated by each state is increased from $2 per person to $2.20 per person in the state’s population.
Increase in limit on amount of tax-exempt housing bonds that each state may issue – The national limit for 2008 is increased to allow for the issuance of an additional $11 billion of tax-exempt bonds to provide loans to first-time home buyers and to finance the construction of low-income rental housing.
Kenneth H. Bridges, CPA, PFS is a partner with Bridges & Dunn-Rankin, LLP an Atlanta-based CPA firm.
This article is presented for educational and informational purposes only, and is not intended to constitute legal, tax or accounting advice. The article provides only a very general summary of complex rules. For advice on how these rules may apply to your specific situation, contact a professional tax advisor.