Recent Federal Tax Developments

2008 Fourth Quarter Federal Tax Developments

During the past three months, there has been a rush of tax legislation and IRS activity. With so many federal tax developments, it's likely you have not been able to keep up with them, especially during what is one of the busiest times of the year. In this letter, we highlight some of the more important tax developments in the fourth quarter of 2008. As always, if you have any questions about these developments, or any others, please give our office a call or drop us an e-mail.

The Emergency Economic Stabilization Act of 2008 (EESA) was passed by Congress and signed into law by President Bush in October. The EESA, which created the Troubled Assets Relief Program (TARP) to help Wall Street, also includes $150 billion in individual and business tax incentives. Among the highlights are:

AMT Patch

The 2008 alternative minimum tax (AMT) patch raises the exemption amounts and allows taxpayers to take nonrefundable personal credits to reduce AMT liability. For the first time, the patch abates AMT liability stemming from the exercise of incentive stock options (ISOs). Additionally, all individuals, including those who paid their ISO AMT liabilities, may accelerate the refund of the minimum tax credit that has not been used.

Mortgage Help

The EESA also extends the exclusion for indebtedness in the Mortgage Forgiveness Debt Relief Act of 2007. This exclusion, which was effective for 2007 through 2009, is now available through 2012.

Extenders

Additionally, the EESA extends many popular but temporary tax breaks retroactive to the start of 2008 and through 2009. They include the state and local sales tax deduction, teachers' classroom expense deduction, research tax credit, energy tax incentives for individuals and businesses, the higher education tuition deduction, and tax-free distributions from IRAs for charitable purposes.

Disaster relief

For the first time, Congress has authorized national disaster relief as part of the EESA. Congress also gave taxpayers in 10 midwestern states and Texas targeted disaster relief.

Basis Reporting

To pay for the tax incentives in the EESA, Congress is requiring that brokers report the adjusted basis of publicly-traded securities to the IRS. Basis reporting applies to stock acquired in 2011, mutual funds acquired in 2012 and other securities acquired in 2013. We'll provide you with details of this important change as they become available from the IRS.

In December, Congress passed the Worker, Retiree, and Employer Recovery Act of 2008. The law suspends required minimum distributions (RMDs) from qualified retirement arrangements for 2009 (but not for 2008), requires plans to offer non-spouse rollovers, gives plans funding relief and includes a host of pension-related provisions and technical corrections to the Pension Protection Act of 2006 (PPA).

Tax Brackets

The IRS issued new income tax brackets, standard deduction, personal exemption amount, and a host of other inflation-adjustments for the 2009 tax year in October. The personal and dependency exemptions have increased to $3,650 for 2009. The standard deduction for 2009 is $11,400 for married couples filing jointly, $5,700 for singles and married individuals filing separately, and $8,350 for heads of household. The annual gift tax exclusion will rise from $12,000 in 2008 to $13,000 in 2009.

Pension COLAs

The IRS released cost-of-living adjustments (COLAs) for qualified retirement plans for 2009 in October. Some amounts have jumped considerably compared to 2008. For defined contribution plans, the limits on elective deferrals to 401(k)s, 403(b)s, certain 457 plans, and the federal government's Thrift Savings Plan rise to $16,500 in 2009, up from the $15,500 that applied to both 2007 and 2008. The limit on annual additions to defined contribution plans will also jump from $46,000 for 2008 to $49,000 in 2009. The annual benefit limitation under a defined benefit plan, the maximum amount a plan may pay a participant each year, increases from $185,000 in 2008 to $195,000 in 2009. Additionally, the catch-up amount for 401(k)s, 457s, 403(b)s, and SEPs is $5,500 in 2009.

Mileage Rates

The IRS announced the 2009 business standard mileage rate in November: 55 cents for all business miles driven. The 2009 rate is down from the 58.5 cents per mile rate effective for the second half of 2008 but higher than the 50.5 cents per mile rate for the first half of 2008. The rate changed in mid-2008 because of skyrocketing gasoline prices. The IRS also announced that the rate for all miles driven for medical and moving purposes will be 24 cents in 2009. The rate for miles driven for charitable purposes will remain unchanged for 2009 at 14 cents per mile.

Section 409A

The IRS issued proposed regulations explaining how employers, employees and independent contractors should determine the amount of deferred and taxable compensation under Code Sec. 409A in December. Congress created Code Sec. 409A in 2004, but has allowed the IRS to create transition rules. If certain requirements are not met at any time during a taxable year, amounts deferred under a nonqualified deferred compensation plan for that year and all previous taxable years are currently includible in gross income to the extent not subject to a substantial risk of forfeiture and not previously included in gross income. The IRS also expanded its voluntary correction program for deferred compensation plans.

Per Diem Rates

The IRS issued its annual update of the simplified per diem rates that taxpayers can use to reimburse employees for lodging, meals and incidental expenses incurred during business travel in October. The simplified "high-low" per-diems have increased to $256 and $158, respectively, up from $237 and $152.

ROBS

As unemployment rises, some individuals may seek to access retirement savings to pay for new business start-up costs. The IRS announced in November that it is aware of an arrangement, known as Rollovers as Business Start-ups (ROBS), wherein taxpayers attempt to access tax-deferred retirement funds without paying distribution taxes. The IRS is exploring these transactions for abuses.

Click here for more details The Emergency Economic Stabilization Act of 2008 (EESA)