AMT Relief, Other Tax Breaks Get New Life

Wonder what happened to some popular tax write-offs that expired in 2007? They're back.

By Joan Pryde, Senior Tax Editor, the Kiplinger letters

October 10, 2008

The $700-billion financial rescue law has lots of tax goodies, too, for individuals and businesses. It renews a slew of lapsed tax breaks, including relief for middle-class taxpayers from the alternative minimum tax (AMT).

Some year-end tax decisions are no longer in doubt with passage of the bill. Chief among them is the option for donating IRA payouts to charity -- one of the most popular lapsed tax provisions because it allows folks who are age 70½ to exclude their minimum distributions from income as long as the payout goes directly to a charitable organization. The break, which is limited to $100,000 per year, is now scheduled to expire at the end of 2009.

The new law's AMT relief provision sets the exemption amounts for 2008 at $69,950 for married couples filing jointly and $46,200 for single filers. That's enough to keep the minimum tax rolls from swelling. The credits for tuition and dependent care will continue to offset the minimum tax. Back AMT taxes that were owed on exercises of incentive stock options before 2008 will be waived. And folks who paid the minimum tax on those options will be able to use up their AMT credits faster, no matter how high their income is.

Other popular write-offs for individuals get two-year extensions, through 2009, including the option to take an itemized deduction for state and local sales tax, the deduction of up to $4000 for college tuition and fees, and the write-off for teachers of up to $250 in personal expenses for books and school supplies. Plus, the new standard deduction for property taxes, which was supposed to lapse at the end of 2008, is extended through 2009. Also extended: A tax law provision allowing people to exclude from income up to $2 million of mortgage debt forgiven on a primary home. That relief, which was supposed to expire at the end of 2009, has been extended through 2012.

Taxpayers also get a brand-new write-off: Those who commute to work by bicycle can get up to $20 a month tax free from their employers to defray the cost of buying, storing and repairing a bike.

Congress also added tax breaks for victims in presidentially declared disaster areas in the Midwest, including regions in Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska and Wisconsin. For example, folks in those areas can make penalty-free withdrawals from IRAs, 401(k)s, 403(b)s and other plans, and are permitted to spread the tax on those payouts over three years.

Businesses also share in the tax largesse, gaining extensions through 2009 of several key breaks, including:

• The research and development tax credit.

• A waiver of the net income cap on percentage depletion from marginal oil wells.

• 15-year write-offs for restaurant renovations and tenant improvements. For 2009, this break is expanded to cover new restaurants and retail stores.

• Easier reporting standards on preparers. The new law requires them to disclose positions taken on returns only when there is a less than 40% chance that the position taken will be upheld with the Service. That's down from 50%.

The energy sector was a big winner, too. Congress renewed a number of lapsed breaks through 2009, such as the coal and wind energy credits and the credit for biodiesel fuels. Energy credits for biomass and landfills are continued through 2010. The 30% solar energy and fuel cell credits and the residential solar energy credit get a long-term extension, through 2016. And a provision permitting expensing of energy saving improvements to commercial property will run through 2013, while the tax credit for energy efficient home improvements won't lapse until 2017.

The news isn't all good: Lawmakers did add some revenue raisers to offset the cost of the tax relief. Chief among these is a provision that requires securities brokers to report the tax basis of securities sold by their customers, including stocks, bonds, options and mutual funds. To give brokers time to gear up, this will affect only securities purchased after 2010. Other revenue raisers include:

• Retaining the 0.2% FUTA surtax for another year, through the end of 2009. The surtax is on top of the regular FUTA tax that employers pay to help fund state workforce agencies.

• Freezing the tax deduction for domestic production at 6% for oil and gas companies. For other companies, the deduction is scheduled to rise to 9% in 2010.

• Limiting executive pay write-offs for financially troubled companies that are being rescued by the federal government.

• Taxing more deferred compensation of investment fund managers by closing a loophole that lets them defer tax on pay stashed in offshore bank accounts.

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