On October 3, 2008, President Bush signed into law a $700 billion financial rescue package that also featured $150 billion in tax breaks aimed at individuals and businesses, including an alternative minimum tax (AMT) patch, energy incentives, and an enhancement and extension of the research and development credit for businesses.

The Emergency Economic Stabilization Act of 2008 is primarily intended to ease the credit crunch threatening to bankrupt U.S. banks and other financial institutions, by allowing the government to make direct purchases of troubled assets or to acquire them through auctions. The legislation also limits the executive compensation packages of those companies assisted by the government and eases the losses of banks that hold preferred stock in Fannie Mae and Freddie Mac. Tax incentives were added to make the bill more appealing to lawmakers who were reluctant to vote in favor of a measure that bails out Wall Street bankers, without helping ordinary Americans facing recession on Main Street. In addition, the legislation contains a number of provisions intended to provide temporary relief to victims of severe storms in the Midwest in 2008.

The following tax-related provisions are included in the Emergency Economic Stabilization Act of 2008:

AMT Patch. A parallel tax system that can substantially increase the tax burden of Americans who claim a large number of exemptions and deductions, or who exercise incentive stock options (ISOs), the AMT has come under fire from consumer groups and legislators who would like to see it abolished. To reduce the impact of the AMT on middle-income families, Congress has been passing a “patch” each year that raises the AMT exemption amounts. The new legislation contains the 2008 patch, which increases the exemption amounts to $69,950 for married couples filing jointly, $46,200 for singles and heads of household, and $34,975 for married couples filing separately.

The new law also permits taxpayers to use nonrefundable personal credits—such as dependent care credits and education tax credits—to lower their AMT liability and removes limits in the AMT on claiming personal credits against regular tax liability. In addition, the legislation forgives the debts of taxpayers who have outstanding AMT liabilities for exercising ISOs prior to 2008.

Extension of Mortgage Debt Tax Relief. While cancelled debt normally counts as taxable income, taxpayers whose mortgage debt on a principal residence was partly or entirely discharged, usually due to foreclosure, are permitted to claim special federal income tax relief under the Mortgage Forgiveness Debt Relief Act of 2007, provided the balance of the loan was less than $2 million, or $1 million for a married person filing separately. The Emergency Economic Stabilization Act of 2008 extends this tax relief through 2012.

As another break for homeowners, the new legislation extends through 2009 the additional standard deduction for real property taxes for non-itemizing taxpayers. The standard deduction will increase by an additional $500 for single filers or $1,000 for married filing jointly taxpayers.

Enhancement of the Child Tax Credit. Under the Emergency Economic Stabilization Act of 2008, the child tax credit becomes refundable up to 15% of the taxpayer’s earned income in excess of $8,500. The previous threshold was about $12,050.

Extension of Tax-Free Charitable IRA Rollovers. The new legislation extends through the end of 2009 the ability of taxpayers to make tax-free distributions up to $100,000 from individual retirement accounts (IRAs) for charitable purposes.

Extension of Education Tax Breaks. The above-the-line deduction of qualifying higher education tuition expenses is extended through December 31, 2009 under the new law. Taxpayers with adjusted gross incomes (AGIs) up to $65,000 for individuals or $130,000 for married couples filing jointly may deduct up to $4,000 per year, and taxpayers with AGIs up to $80,000 for individuals or $160,000 for joint filers can deduct up to $2,000.

The new legislation also extends through 2009 the teachers’ classroom expense deduction.

Extension of the State and Local Sales Tax Deduction. The Emergency Economic Stabilization Act of 2008 extends a provision that gives individual taxpayers the option of deducting state and local general sales taxes, instead of state and local income taxes, for an additional two years, to the end of 2009.

Enhancement and Extension of Tax Breaks for Businesses. By taking advantage of the research and development credit, businesses can lower the cost of developing and improving their products or processes. Previously, businesses claiming the alternative simplified research credit were permitted to claim 12% of qualified research expenses that exceed 50% of the average qualified research expenses for the three preceding tax years. The Emergency Economic Stabilization Act of 2008 increases the amount that may be claimed to 14% of research expenses and extends the tax break through December 31, 2009.

The new law also extends through December 31, 2009 three other provisions applicable to businesses: the New Markets Tax Credit, deductions for certain charitable contributions by businesses, and deductions for qualifying restaurant and leasehold improvements.

Renewable Energy Incentives. The new law extends the production tax credit for wind energy developments through the end of 2009, and credits for producing electricity using biomass and other qualifying sources through September 30, 2011. The 30% credit toward installation of both residential and commercial installations of solar panels, fuel cells, and microturbines is extended through December 31, 2016. In addition, purchasers of plug-in electric cars and trucks will receive tax breaks between $2,500 and $7,500.

The legislation also extends the biodiesel tax credit through the end of 2009, but closes the so-called “splash and dash” loophole that had allowed biodiesel producers based outside the U.S. to ship their fuel to the U.S., add a small amount of domestically produced biodiesel to qualify for the tax break, and export the fuel to other markets.

Extension of Energy Efficiency Incentives. Under the Emergency Economic Stabilization Act of 2008, the deduction for energy efficient commercial buildings is extended through the end of 2013, and the credit for residential energy efficiency investments is extended through the end of 2016. The residential credit is worth up to $500 for the purchase of qualifying energy efficiency improvements or property, such as insulation or multi-paned windows. 

The number of extensions and enhancements offered by the Emergency Economic Stabilization Act of 2008 highlights the importance of tax planning to make the most of these temporary changes. Give us a call for more information on how the provisions may affect you.