November, 2008 Tax Newsletter

Tax Provisions of the Emergency Economic Stabilization Act of 2008 (EESA)

On October 3, 2008 The President signed EESA into law.  The law is a bailout of the U.S. financial system.  There are over 100 tax provisions in the law.  This newsletter discusses what I believe to be the more important of these provisions from the standpoint of my readers.

Alternative Minimum Tax (AMT)

Yet another AMT “patch” was included in the legislation.   Congress has yet to face up to the need to find a permanent reform to the highly controversial AMT.  The patch insulates millions of middle income taxpayers from the AMT, but only for 2008.  This was accomplished by increasing the amounts exempt from the AMT.  The patch also provides that nonrefundable credits such as the dependent care credit and education tax credits are allowed in full against both the AMT and the regular tax.  Further, the patch grants relief to those who were left holding worthless stock options but a large tax bill caused by including the benefit portion of the option in their AMT calculations.  The law abates AMT liability resulting from the exercise of incentive stock options before 2008 effective for any unpaid tax liability as of October 3, 2008.

Extenders

Expiring or expired provisions 

1)  The law extends several of the popular provisions that were set to expire after 2007.  These include the state and local tax deduction, higher education tuition deduction, the $250 teachers’ classroom expense deduction, and tax-free distributions from IRA’s for charitable purposes.

2)  The law reinstates the residential energy property credit for property placed in service in 2009.  The credit of up to $500 is available for nonbusiness residential energy property that meets the requirements for qualified energy efficiency improvements or qualified residential property expenditures.  Eligible improvements include insulation materials, exterior windows, including skylights, and exterior doors.

Extension of existing provisions  

1)  When a lender forecloses on a home and sells it for less than the borrower owed, tax law treats the cancelled debt as income to the borrower.  The Mortgage Forgiveness Debt Relief Act of 2007  www.rontaxcpa.com/shownews.php?newsid=129  excludes from federal tax discharges of up to $2 million of indebtedness ($1 million for married filing separate) secured by a principal residence and incurred in the acquisition, construction, or substantial improvement.   The new law extends this treatment through 2012.  Short sales are also covered by the extension

2)  The Housing Assistance Tax Act of 2008 enacted last July provided for an addition to the standard deduction for non-itemizers.  Under this law, if you do not itemize, you can increase your standard deduction by the amount of real property tax you could have claimed if you did itemize, up to $500 ($1,000 for a joint return).   This provision, which was to apply only to 2008, was extended by EESA through 2009.

Broker Reporting

To date, brokers have only been required to report the gross proceeds from the sale of securities to the IRS on Form 1099-B.  Cost basis information has not been required.  Congress has long suspected that there may be abuse in properly reporting gains or losses from security transactions.  Beginning in 2011 for stocks and 2012 for mutual funds, brokers will be required to report the basis of publicly traded securities when reporting sales transactions and indicate whether the gains or losses are long-term or short-term.  Brokers will be required to use either the first-in, first-out (FIFO) or average cost method to determine basis unless the taxpayer can provide specific identification of the security sold.   NOTE:  When a client changes brokers, the new broker normally inherits the client’s portfolio from the former broker.  It is presently unclear what the responsibility will be for the new broker as to obtaining the basis information on the inherited securities.  I always advise my clients to keep detailed records on the purchase of all securities in their portfolio.  This information is invaluable when a security is sold.

Tax Return Preparers  

I saved for last my reason for being so firm and demanding with my clients during the past filing season regarding substantiation of deductions and other items.    The 2007 Small Business Tax Act replaced the “realistic possibility of success” standard with a much stronger “more likely than not” standard for undisclosed, nonabusive positions on tax returns.  Tax return preparers faced severe penalties for taking positions on tax returns that, upon audit, were determined not to satisfy the standard.  After considerable protest and commentary from governing bodies representing tax preparers, Congress was persuaded to replace the more likely than not standard with a “substantial authority” standard.  However, the more likely than not standard was retained for tax shelters and reportable transactions.