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TIP: Don’t Overlook Bailout’s Personal Tax Break Provisions
Tip of the Month
November 2008
TIP: Don’t Overlook Bailout’s Personal Tax Break Provisions
Regardless of who’ll be in the White House next year, our new president, facing spiraling federal deficits, will find it tough to meet personal tax-cut pledges. It’s even more important to take advantage of every eligible tax break in your 2008 filing. With that in mind, it makes sense to discuss with your professional tax consultant how best to leverage the tax breaks generated by the recent bail-out plan (Emergency Economic Stabilization Act of 2008). The bail-out does provide some provisions –chiefly prolonged life to existing tax breaks and added relief for tax-payers hit with Alternative Minimum Tax (AMT)--that may work to your advantage. Your tax professional can provide specifics, but here is an over-view of some key elements:
Tax-Free Break for Forgiven Mortgage Debt
Legislation passed in 2007 allowed for tax-free treatment for up to $2 million in forgiven principal residence mortgage debt. The new Act extends the provision for three more years—until 2012. Home owners do not have to be insolvent or bankrupt to be eligible for this provision.
Tax Breaks Extended for Residential Energy-Saving Equipment
The tax credit for 30 percent of expenditures made to install solar power, and water-heating, and fuel cell equipment in a residence (capped at $2,000) was due to expire at the end of 2008. The new legislation extends the credit through 2016 and expands the tax break to also cover expenditure for wind energy and geothermal heat equipment. For 2009-2026 the annual cap of $2000 is removed for solar energy equipment –the wind energy and geothermal equipment also are subject to annual caps. The tax credit can be used to offset regular and AMT tax bills beginning in 2008.
Real Property Tax Deduction for Non-Itemizers Extended
The 2008 provision that established a new maximum deduction for non-itemizers of $1,000 for married joint filers and $500 for single-filers has been extended through 2009. The deduction cannot be greater than the state and local property taxes actually paid during the year.
New Break for Prior-Year Alternative Minimum Tax (AMT)
The new law allows you to walk away from AMT bills unpaid as of October 3, 2008, if they related to exercising incentive stock options before 2008. Likewise you can walk away from related penalty or interest charges, too. If you’ve paid penalty costs, you may be able to recover them under the new refundable credit rules over a two-year period.
AMT Extension and Expansion
If the provisions put in place last year helped you side-step the AMT penalty last year, the new legislation which puts another one-year patch in place, probably means you won’t be subject to it this year either. The new provisions expand AMT exemption amounts for 2008:
Personal Tax Credits to Offset AMT Bill Continues
Just as for 2007 filings, certain tax credits may be used to offset your AMT bill in 2008 as well as your regular personal income tax bill. Your tax advisor can provide the details, but the more common categories include: child tax credit, child and dependent care tax credit, and adoption tax credit. These credits are subject to reduction or complete elimination –as they were for 2007 filings – if your income exceeds certain levels.
Tax-Free Break for Forgiven Mortgage Debt
Legislation passed in 2007 allowed for tax-free treatment for up to $2 million in forgiven principal residence mortgage debt. The new Act extends the provision for three more years—until 2012. Home owners do not have to be insolvent or bankrupt to be eligible for this provision.
Tax Breaks Extended for Residential Energy-Saving Equipment
The tax credit for 30 percent of expenditures made to install solar power, and water-heating, and fuel cell equipment in a residence (capped at $2,000) was due to expire at the end of 2008. The new legislation extends the credit through 2016 and expands the tax break to also cover expenditure for wind energy and geothermal heat equipment. For 2009-2026 the annual cap of $2000 is removed for solar energy equipment –the wind energy and geothermal equipment also are subject to annual caps. The tax credit can be used to offset regular and AMT tax bills beginning in 2008.
Real Property Tax Deduction for Non-Itemizers Extended
The 2008 provision that established a new maximum deduction for non-itemizers of $1,000 for married joint filers and $500 for single-filers has been extended through 2009. The deduction cannot be greater than the state and local property taxes actually paid during the year.
New Break for Prior-Year Alternative Minimum Tax (AMT)
The new law allows you to walk away from AMT bills unpaid as of October 3, 2008, if they related to exercising incentive stock options before 2008. Likewise you can walk away from related penalty or interest charges, too. If you’ve paid penalty costs, you may be able to recover them under the new refundable credit rules over a two-year period.
AMT Extension and Expansion
If the provisions put in place last year helped you side-step the AMT penalty last year, the new legislation which puts another one-year patch in place, probably means you won’t be subject to it this year either. The new provisions expand AMT exemption amounts for 2008:
- Married joint-filing couples and surviving spouses increased to $69,950 ($66,250 in 2007)
- Unmarried individuals increased to $46,200 (up from $44,350)
- Married but filing separately increased to $34,975 (from $33,125 in 2007)
Personal Tax Credits to Offset AMT Bill Continues
Just as for 2007 filings, certain tax credits may be used to offset your AMT bill in 2008 as well as your regular personal income tax bill. Your tax advisor can provide the details, but the more common categories include: child tax credit, child and dependent care tax credit, and adoption tax credit. These credits are subject to reduction or complete elimination –as they were for 2007 filings – if your income exceeds certain levels.
These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.
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