• 2008 Financial Rescue Package and Other Changes Affecting Individual Taxpayers
  • October 25, 2008 | Author: Michael L. Kaufman
  • Law Firm: Jackson Walker L.L.P. - Dallas Office
  • After a tumultuous few weeks, on October 3, Congress took action to address the market turmoil created by subprime lending and related credit problems. Since the Senate, who ended up originating the bill that passed, cannot originate a "spending" bill, the financial rescue provisions were added to a "revenue" bill that contained a number of tax provisions. Those that directly affect individuals are summarized briefly below.

    Direct, tax-free contributions from IRA accounts may be made to charities through December 31, 2009

    Under this law, taxpayers aged 70 ½ or older may direct tax-free distributions from their IRA account, generally only to qualified public charities, and only through December 31, 2009. The maximum annual amount any taxpayer may contribute in this way is $100,000. This is an extension of the 2006 law that expired under its own term at the end of 2007.

    Previously, if you wanted to use proceeds from your IRA to benefit a charity, you would have to take a distribution from the IRA and then make a gift to the charity. The IRA distribution would have raised your taxable income, possibly causing you to shift into a higher marginal tax bracket or making otherwise untaxed Social Security benefits subject to tax. You also then may or may not have been able to use an offsetting charitable income tax deduction for your contribution, depending on your personal tax situation.

    Under this new law, you may direct your IRA trustee to distribute funds directly from the account to a qualified charity and pay no income tax on that distribution. However, since you will not owe any income tax on this charitable gift, you will not be able to claim the distribution as a charitable contribution on your tax return. These distributions to charity do satisfy your minimum distribution requirements from the IRA, however, potentially saving the income taxes otherwise due on that amount.

    Other Extensions Generally Applicable to Individuals

    The ability to elect to take an itemized deduction for state and local sales taxes (if they are greater than state and local income taxes paid) has been extended through tax years beginning before 2010.

    The ability to take an "above-the-line" deduction (that is, one allowable even if you do not itemize deductions) for qualified tuition and related expenses within the otherwise applicable limitations has been extended through 2009.

    Under the Housing Assistance Act passed just this past summer, non-itemizers were given the ability for 2008 only to increase the standard deduction for property taxes paid by up to $500 (for an individual) or $1,000 (for a married couple filing jointly). This new law extends this deduction through 2009.

    The ability of elementary and secondary school teachers to take an "above-the-line" deduction of up to $250 for classroom supplies has been extended through 2009.

    Alternative Minimum Tax Temporary Patches

    In the past few years, there has been much discussion of the fact that the Alternative Minimum Tax (AMT), designed to ensure that high-income taxpayers do not avoid paying taxes completely by taking advantage of tax credits and preferences, was becoming a burden on the middle class. The new law contains a one year fix, raising slightly the amount of the exemption that can be used against the income taxable for AMT purposes, to help lower income households avoid imposition of the tax. For tax years beginning in 2008, the AMT exemption amounts are increased to $69,950 (for married persons filing jointly and surviving spouses), $46,200 (for unmarried persons other than surviving spouses), and $34,975 (for married persons filing separately). The new law also contains a one year extension allowing certain non-refundable personal tax credits (for example, the dependent care credit) to be applied against AMT liability as well as regular tax liability.

    2009 Inflation Adjustments

    The IRS also announced certain 2009 inflation adjustments this week.

    • Gift tax annual exclusion. The general gift tax annual exclusion for 2009 gifts will be $13,000 (up from $12,000 in 2008).
    • Annual exclusion for gifts to noncitizen spouses. For 2009, gifts made to a non-citizen spouse, the annual exclusion will be $133,000 (up from $128,000 in 2008).
    • Kiddie tax. The exemption from the kiddie tax for 2009 will be $1,900 (up from $1,800 in 2008). A parent will be able to elect to include a child's income on the parent's 2009 return if the child's income is more than $950 and less than $9,500 (up from $900 and $9,000 in 2008).
    • AMT exemption for child subject to kiddie tax. The 2009 AMT exemption for a child subject to the kiddie tax will be the lower of $6,700 (up from $6,400 in 2008) plus the child's earned income or $33,750 (same as in 2008).