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William Perez

Tax Provisions in the Bailout Legislation

By October 2, 2008

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The Emergency Economic Stabilization Act, the bailout package for the financial services industry, adds an enormous variety of tax credits, tax deductions, extensions, and even a few tax hikes. I imagine there's at least one tax change that affects you in the final version of the bill that was passed by both the Senate and the House.


The final version of the has added in a wide array of tax breaks, and tax increases, for businesses and individuals of all types. "Taken as a whole, the Senate tax package would cost $150.5 billion over 10 years. Of that amount, about $43.5 billion would be offset" with tax increases according to the New York Times.


The Emergency Economic Stabilization Act ( href="http://thomas.loc.gov/cgi-bin/bdquery/z?d110:H.R.1424:" rel="tag">HR
1424) passed the Senate on October 1, 2008, by a vote of 74 in favor to 25 against. Here's the roll call of the Senate vote showing who voted for and against the bill.


The House of Representatives passed HR 1424 on October 3, 2008, by a vote of 263 in favor to 171 against. Here's the roll call of the House vote. "The bill now heads to President Bush who is eager to sign it," reports the New York Times. President Bush signed HR 1424 into law later the same day.


The legislation would provide the Treasury Department with the ability to "purchase, insure, hold, and sell a wide variety of financial instruments, particularly those that are based on or related to residential or commercial mortgages" and would increase the insurance for bank deposits under the FDIC and the NCUA. (Quote from Senate financial rescue legislation, Congressional Budget Office blog.)


The legislation also change a wide variety of tax laws relating to executive compensation in the financial industry, tax breaks for energy efficiency and transportation, tax relief for taxpayers affected by disasters, and a long list of tax provisions that would impact nearly every taxpayer. Here are highlights of tax provisions that impact individual and self-employed taxpayers.


Tax Provisions Directly Related to the Bailout


Limits on executive compensation for bailed out financial institutions


HR 1424 would limit compensation for banks and other financial institutions that participate in one of two Treasury bailout programs. For institutions where the Treasury purchases assets directly from the institution, the legislation would give the Treasury the ability to set standards for executive pay. In general, the legislation outlines that there would be limits imposed on performance bonuses, would allow financial institutions to recover bonuses paid to executives based on financial performance when earnings are re-stated, and would prohibit golden parachute payments.


For institutions who participate in Treasury auctions for selling their assets, the legislation would provide that executive compensation over $500,000 will not be tax deductible by the employer, including any compensation in the form of performance bonuses and stock options. There would be penalties associated with excess golden parachute payments to any employee, and employers would lose the ability to take a tax deduction for such payments. Additionally, golden parachute payments would be prohibited for the top five executives.


Extends mortgage debt forgiveness relief to 2012


Mortgage debt that is canceled in foreclosure or through a write-down is currently excluded from taxable income, but is scheduled to end in 2009. HR 1424 would extend this tax relief through the end of 2012.


Energy and Transportation Related Tax Provisions


Extends, modifies the energy tax credits.


HR 1424 would extend and modify the energy efficient property credit through 2016, and the credit can offset AMT liabilities. The bill removes the $2,000 maximum limit on solar electric property. Two new types of equipment are added that would qualify for the credit:

  • wind energy equipment will produce a tax credit worth 30% of the cost of the equipment, with a maximum credit of $4,000; and
  • geothermal heat pumps would qualify for a credit worth 30% of the cost, with a maximum credit of $2,000.

 


The nonbusiness energy property credit would be extended through 2009. This provides a credit of up to $500 for purchasing energy-saving products, such as windows, insulation, and HVAC systems. HR 1424 adds two new types of improvements that qualify for the credit:

  • biomass fuel stoves with a thermal efficiency rating of 75% or more, and
  • asphalt roofs with cooling granules.

The bill also clarifies that water heaters must have either an energy factor of at least 0.80 or a thermal efficiency rating of at least 90% to qualify for the credit. While the credit is worth up to $500 for various improvements, the credit is further limited to $200 for windows and to $300 for biomass fuel stoves.


A new tax credit for electric vehicles


HR 1424 provides a new tax credit worth $2,500 to $7,500 for plug-in electric vehicles. The credit will start to phase-out after 250,000 qualifying electric vehicles are sold. Individuals can use the credit to offset AMT. Vehicles that qualify will need to be certified under the Clean Air Act and meet the California low-emission standards. Higher tax credits are also available for electric vehicles with gross vehicle weight ratings of more than 10,000 pounds.


Tax-free fringe benefits for bicyclists


HR 1424 would add a new tax break for people who commute by bicycle. Employers can provide tax-free fringe benefit of up to $20 per month to cover "reasonable expenses incurred by the employee" for the purchase, improvement, repair, and storage of a bicycle that is regularly used to commute between the employee's home and office. This section of the tax code also provides tax-free benefits of up to $100 for transit passes and up to $175 in parking benefits per month, which remains unchanged. This bicycle fringe benefit will begin in 2009. Fringe benefits for commute and transit expenses are excluded from an employee's wages.


Revenue Raisers (aka Tax Hikes)


Section 199 limits for oil production


Limits the domestic production activities deduction for oil-related production to 3% (currently the deduction is 6% for various industries).


Cost basis reporting for brokerage accounts


Requires brokerage firms to report cost basis in securities, with reporting to be phased in from 2011 to 2013. Currently brokers report only the gross proceeds from the sale of securities. The law would require brokers to keep track of the cost basis in stocks, bonds, mutual funds and other securities using either the first-in, first-out method or the average cost method. In addition, the broker will need to specify whether the gains are long-term or short-term. Brokers will be required to furnish customers with the information statements by February 15th, instead of the usual January 31st deadline for sending out tax documents. For people who transfer their securities from one brokerage to another, the old broker will need to provide the new broker with the required cost basis information.


Unemployment insurance tax rates


Extends the 6.2% FUTA tax rate federal unemployment insurance through 2009 (was scheduled to be reduced to 6%). This payroll tax is paid for by the employer, not through employee deductions. The FUTA tax is assessed only on the first $7,000 of wages or salary paid to an employee for a year.


Certain deferred compensation must be included in current taxable income


Individuals with certain types of non-qualified deferred compensation packages from "tax indifferent companies" will be required to include the value of the deferred compensation as part of their current taxable income. The applies only employees who are employed by certain types of partnerships and foreign corporations that are not subject to income tax in their jurisdiction.


Extensions of Various Income Tax Provisions


AMT Patch


HR 1424 would temporarily increase the alternative minimum tax (AMT) exemption amounts for 2008. The proposed AMT exemption amounts are as follows:


  • Married filing jointly: $69,950

  • Single and Head of Household: $46,200

  • Married filing separately: $34,975

 

Also extended is the ability to use personal tax credits to offset the AMT.


Increases Refundable AMT credit carryovers for ISOs


The bill would provide relief to individuals who have AMT credits from incentive stocks options. Currently, the credit for prior year minimum tax is refundable at a rate of 20% over five years, up to a maximum credit of $5,000 per year. The credit is phased-out for people with AGI of $100,000 or more ($150,000 for joint filers). HR 1424 would eliminate the phase-out based on income and provide a refundable credit worth 50% over two years. The bill would also abate penalties and interest relating to underpaid tax and AMT relating to the incentive stock options.


Deduction for sales tax


HR 1424 would extend to 2009 the optional deduction for sales tax in lieu of state and local income taxes as an itemized deduction.


Deduction for educator expenses


Extends to 2009 the above-the-line deduction for classroom expenses incurred by teachers, counselors, and principals in K-12 schools. The deduction amount remains the same: up to $250 for materials and supplies.


Deduction for tuition and fees


Extends to 2009 the tuition and fees deduction. The deduction amounts and income limits remain unchanged. The deduction is worth up to $4,000 depending on adjusted gross income.


Additional standard deduction for property tax


A new deduction for 2008, individuals who don't itemize can take an additional standard deduction for property taxes that they paid during the year. This was scheduled to be a one-year-only deduction. The bill would extend the deduction for one additional year to 2009. The deduction provides an additional $500 (or $1,000 for joint filers) on top of the person's standard deduction.


Charitable IRA rollovers


Extends through 2009 the ability for individuals to donate all or part of their IRA to a charity without needing to report the distribution on their tax return. This provision eliminates some administrative hassles with reporting the IRA distribution on the return and then taking a corresponding charitable deduction. For planning purposes, this can benefit taxpayers who need to take requirement minimum distributions, but who don't need the funds personally, and can help where taxpayers would like to donate to charity but would not be able to benefit from the charitable deduction.


Designated interest-related dividends


Extends through the end of 2009 the ability of investment companies to designate some or all of its dividends as interest-related dividends, which would make those dividends exempt from US income tax for foreign investors.


Child tax credit


Lowers the income threshold for the additional child tax credit from $12,050 (the scheduled threshold amount for 2008) to $8,500. The lower threshold amount is effective for 2008 only.


Disaster Related Tax Relief Provisions


Work Opportunity Credit for Hurricane Katrina employees is extended through August 28, 2009.


Rehabilitation Credit for Gulf Opportunity Zone buildings is extended through the end of 2009.


Extensive tax relief is provided for taxpayers in the Midwest. The following provisions apply to victims of flooding, storms and tornadoes between May 20, 2008, and August 1, 2008, in what is being called the "Midwestern Disaster Area" covering Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, and Wisconsin.


IRA distribution rules


Waives the 10% penalty for early distributions from an IRA, 401(k), 403(b), or 457(b) retirement plan. The withdrawn amounts are still included in income for tax purposes. However, the financial institution would not be required to withhold tax on the distribution. Individuals can spread the tax liability over three years. Individuals can also re-contribute any or all of the funds withdrawn within three years and the re-contributed amounts would be have to be included in their income for tax purposes. The waiver is limited to $100,000 in distributions, and distributions would have to be made after the date that the area was declared a Presidential disaster area and before January 1, 2010.


Distributions for home purchases


Taxpayers who took a distribution from an IRA, 401(k) or other retirement plan to purchase their home can recontribute retirement funds within five months and avoid any tax consequences. This recontribution rule applies to distributions taken within six months prior to their area being declared a Presidential disaster area, and the home purchase was never finalized because of the natural disasters that occurred. As long as the funds are re-contributed back to the plan, the transaction will be treated as a rollover.


100% loans from retirement plans


The amount of loans against a 401(k), 403(b), or 457(b) retirement plan is doubled from 50% of the account value to 100% of the account value, up to $100,000. Loan payments can be deferred up to twelve months.


Casualty loss limits suspended


Eliminates the casual loss deduction limitations. Taxpayers in the Midwestern Disaster Area can deduct their casualty losses in full without being limited by the $100 per event and 10% of AGI thresholds.


Additional personal exemption for housing dislocated persons


HR 1424 would allow an additional personal exemption for providing rent-free temporary housing to family members who were dislocated from the Midwestern disasters. The additional amount is $500 per dislocated person, up to a maximum of four people. The taxpayer must provide rent-free housing for a minimum of 60 days, and the exemption can be taken in either 2008 or 2009 (but not both) for the same dislocated person.


Tax exclusion for canceled debts


Individuals in the Midwestern disaster area whose personal debts were canceled can exclude those debts from their taxable income. Ordinarily, debt forgiveness can result in taxable income.


Longer replacement period for non-recognition of gain


Taxpayers who replace their homes and business property within a five year period will avoid having to report gain from the destruction or damage of their property. Additionally, the replacement property must be located in the same county. Ordinarily, taxpayers have four years to replace personal residences and two years to replace business property following a loss.


Employee retention credit


An employee retention tax credit is available for employers who continued to pay their employees while their business was inoperable. The credit is worth 40% on wages of up to $6,000 per employee. Only businesses with 200 or fewer employees are eligible.


Doubled Hope and Lifetime Learning credits


Expands the education tax credits available for college students in the Midwestern disaster area by increasing the HOPE and Lifetime Learning tax credits, and by expanding the definition of qualified educational expenses. In particular:

 


  • Expenses that qualify for the credit (normally only tuition and required fees) shall include tuition, fees, books, supplies, equipment, fees for special services, room and board.
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  • The dollar amount for qualified expenses for the HOPE credit is doubled from the first $2,400 of expenses to the first $4,800 in expenses. Hope credit is worth 100% of the first $2,400, and 50% of the next $2,400, for a maximum Hope credit of $3,600. (Note: my calculations differ from the $3,000 maximum stated in the summary from the Senate Finance Committee.)
  •  

     

  • The percentage amount for the Lifetime Learning Credit is doubled from 20% to 40% of qualifying expenses. The $10,000 dollar limit for qualifying expenses remains unchanged. The maximum lifetime learning credit would thus be $4,000.

 

Charity deduction limits suspended


The normal 50% of AGI limit on charitable deductions is waived for donations dedicated for relief efforts in the Midwestern area.


Standard mileage rate for charity


The normal 14 cents per mile mileage rate for charitable purposes is raised to 70% of the business mileage rate. This higher rate applies only to taxpayers driving in the Midwestern area to assist in disaster relief efforts. The standard mileage rates for 2008 for charitable driving would be:


  1. January to June 2008: 50.5 cents per mile for business x 70% = 35.35 cents per mile

  2. July to December 2008: 58.5 cents per mile for business x 70% = 40.95 cents per mile

 

Mileage reimbursement from charity is tax-exempt


Disaster volunteers who received mileage reimbursements from a charitable organization for driving will not have to include that reimbursement in their taxable income as long as the reimbursement was the same or less than the standard mileage rate for business use.


National Disaster Tax Relief


Several provisions in the Emergency Economic Stabilization Act would change disaster related tax relief available to all taxpayers in federally declared disaster areas.


Casualty loss deduction changes


Removes the 10% of AGI threshold and raises the loss threshold from $100 to $500 per disaster loss event. Allows non-itemizers to claim casualty losses as an additional amount to the standard deduction. Effective for 2008 and 2009 only.


Carrybacks for Net Operating Losses due to Disaster-Related Casualty losses


Casualty loss deductions can produce a net operating loss (in which losses exceed income for a year). Net operating losses normally are carried back two years. HR 1424 would allow net operating losses due a disaster casualty deduction to be carried back five years. Carried-back disaster-related net operating losses will be allowed to recompute the alternative minimum tax in the five year carryback period. Effective for 2008 and 2009 only.


50% bonus depreciation


Equipment and property placed in service in a federal disaster area qualifies for additional depreciation of 50%. This bonus depreciation applies to a wide range of depreciable assets including nonresidential and residental rental properties, leasehold improvements, software, and asset classes with recovery periods of 20 years or less, and costs to rehabilitate or replaces destroyed or condemned property in a disaster area. All depreciation including bonus depreciation for disaster area property would be exempt from AMT. Effective through the end of 2011; through the end of 2012 for real property.


Expanded section 179 deductions


Increases by $100,000 the Section 179 deduction for placing new equipment into service in a disaster area, and increases the phase-out threshold by $600,000. Effective for 2008 and 2009 only.


More information:

 

And if, like me, you have troubling conceptualizing what $700 billion looks like, Jess Bachman over at WallStats.com has this breakdown of what it might take to raise $700 billion from American taxpayers.


Updated 10/03/08 with fuller summaries of the tax provisions in HR 1424, and links to additional reference materials.

Updated 10/03/08 with information about the House vote and additional reference materials.

Comments
October 7, 2008 at 2:15 pm
(1) Eric says:

Thanks for the summary!

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