RIA Federal Tax Handbook

Federal Tax Handbook Tax Calendar

Housing Assistance Tax Act of 2008 (Housing Act)

H.R. 3221, the “American Housing Rescue and Foreclosure Prevention Act of 2008,” was signed into law by the President on July 30, 2008 (P.L. 110-289). The sweeping measure is designed to shore up the ailing housing market as well as tighten lending practices and reform financial institutions associated with that market. It includes a tax title—the “Housing Assistance Tax Act of 2008.” Key provisions include the following:

¶1331. FHLB-guaranteed state & local bonds are eligible for tax-exempt bond treatment. The Housing Act provides that if certain conditions are met, bonds issued by state and local governments are not treated as federally guaranteed (thus allowing interest paid to be excluded from gross income) because of any guarantee by a Federal home loan bank (FHLB) made in connection with the original issuance of a bond during the period beginning on July 30, 2008, and ending on Dec. 31, 2010 (or a renewal or extension of a guarantee so made). (Code Sec. 149(b)(3)(A)(iv), as amended by Act § 3023(a)) The change is effective for guarantees made after July 30, 2008.

¶1331. Two additional counties included in GO Zone for bond purposes. For bonds issued after Dec. 21, 2005 and before Jan. 1, 2011, for tax years ending after Aug. 27, 2005, Colbert County and Dallas County, Alabama, are included in the Gulf Opportunity (GO) Zone for GO Zone bond purposes only. (Act § 3082(c))

¶1798. Election to include reimbursement for hurricane-related casualty in loss year. A taxpayer who claimed a casualty loss to a principal residence (within the meaning of the Code Sec. 121 homesale exclusion rules) from Hurricanes Katrina, Rita, or Wilma, and in a later year receives a grant under Public Laws 109-148, 109-234, or 110-116 as reimbursement of that loss, can elect to file an amended return for the tax year to which the deduction was allowed. On the amended return, the casualty loss deduction must be reduced, but not below zero, by the amount of the reimbursement. The election to file an amended return under the above rule applies for any grant only if any amended income tax returns with respect to that grant are filed by the later of: (1) the due date for filing the tax return for the tax year in which the taxpayer receives the grant, or (2) July 30, 2009 (one year after the July 30, 2008 enactment date). (Act § 3082(a)(2)(B)) No penalty or interest applies if payment is made no later than one year after the filing of the amended return. (Act § 3082(a))

¶1935, 2318, 2367. Election to accelerate AMT & research credits instead of bonus depreciation. For tax years ending after Mar. 31, 2008, corporations otherwise eligible for bonus depreciation under Code Sec. 168(k) may instead elect to claim additional research or minimum tax credits for eligible qualified property placed in service after Mar. 31, 2008. (Code Sec. 168(k)(4), as amended by Act § 3081(a))

A corporation making the election forgoes the depreciation deductions allowable under Code Sec. 168(k) and instead increases the Code Sec. 38(c) limit on the use of research credits or the Code Sec. 53(c) limit on the use of minimum tax credits. (Code Sec. 168(k)(4)(B)) The increases in the allowable credits are treated as refundable for purposes of the new rule. If the election is made, the depreciation for qualified property is calculated for both regular tax and AMT purposes using the straight-line method in place of the method that would otherwise be used absent the new election. (Code Sec. 168(k)(4)(A)(i))

The research credit or minimum tax credit limitation is increased by the bonus depreciation amount. This is an amount equal to 20% of any excess of:
(a) the aggregate amount of depreciation which would be allowed under Code Sec. 168 for eligible qualified property placed in service during the tax year if the bonus depreciation rule of Code Sec. 168(k)(1) applied to all such property; over
(b) the aggregate amount of depreciation which would be allowed under Code Sec. 168 for eligible qualified property placed in service during the tax year if the bonus depreciation rule of Code Sec. 168(k)(1) did not apply to any such property. (Code Sec. 168(k)(4)(C)(i))

The aggregate amounts in (a) and (b), above, are determined without regard to any election to use straight line depreciation.
Generally, eligible qualified property included in the calculation is bonus depreciation property that meets the following requirements:
(1) the original use of the property commences with the taxpayer after Mar. 31, 2008;
(2) the taxpayer purchases the property either (a) after Mar. 31, 2008, and before Jan. 1, 2009, but only if no binding written contract for the acquisition is in effect before Apr. 1, 2008, or (b) pursuant to a binding written contract which was entered into after Mar. 31, 2008, and before Jan. 1, 2009; and
(3) the property must be placed in service after Mar. 31, 2008, and before Jan. 1, 2009 (Jan. 1, 2010 for certain longer-lived and transportation property). (Code Sec. 168(k)(4)(D), Committee Report)
The bonus depreciation amount is limited to the lesser of: (1) $30 million, or (2) 6% of the sum of research credit carryforwards from tax years beginning before Jan. 1, 2006 and minimum tax credits allocable to the adjusted minimum tax imposed for tax years beginning before Jan. 1, 2006. (Code Sec. 168(k)(4)(C)(iii), Committee Report) All corporations treated as a single employer under Code Sec. 52(a) are treated as one taxpayer for purposes of the limitation, as well as for electing the application of new Code Sec. 168(k)(4). (Code Sec. 168(k)(4)(C)(iv))
Act § 3081(b) carries special election rules that apply to only one automotive partnership (Cerberus Capital Management, LP, owner of Chrysler).

¶1938. Deadline for bonus depreciation on construction of GO Zone property is waived. For property placed in service after 2007, the Jan. 1, 2008 date for beginning the manufacture, construction, or production of self-constructed GO Zone property is removed for purposes of the 50% additional (i.e., bonus) first-year depreciation allowance. (Code Sec. 1400N(d)(3)(B), as amended by Act § 3082(b)) Thus, the Housing Act removes this date for purposes of self-constructed GO Zone extension property. The placed in service date of Dec. 31, 2010 and the progress expenditure date of Jan. 1, 2010 are not changed. (Committee Report)
RIA observation: Because the elimination of the self-constructed property rule is effective retroactively for all property placed in service after 2007, a taxpayer who filed a return in which he didn't treat otherwise-eligible property as qualified GO Zone property, should consider filing an amended return.

¶2308, 2319. Tax credits and financing mechanisms for housing. The Housing Act's changes for low-income housing credits, rehabilitation credits, and housing bonds include the following:
... The state-by-state limit on the annual amount of Federal low-income housing tax credits that may be allocated by each state is increased from $2 per person to $2.20 per person for 2008 and 2009. States with small populations are provided with a special set-aside. The Act increases the small state set-aside by 10%. (Code Sec. 42(h), as amended by Act § 3001)
... The Housing Act carries numerous changes to the technical rules relating to low income housing tax credits. (Act § 3002 through Act § 3004)
... For expenses properly taken account for periods after Dec. 31, 2007, the Housing Act allows taxpayers to qualify for the full amount of the rehabilitation credit so long as less than 50% of the rehabilitated building (increased from 35%) is leased to State and local governments or other tax-exempt entities. (Code Sec. 47, as amended by Act § 3025)
... The Housing Act increases the national limit on the annual amount of tax-exempt housing bonds that each state may issue. The national limit for 2008 is increased to allow for the issuance of an additional $11 billion of tax-exempt bonds to provide loans to first-time home buyers and to finance the construction of low-income rental housing. The Act also temporarily allows qualified mortgage revenue bonds to be used to refinance certain subprime loans. (Code Sec. 142, Code Sec. 143 , Code Sec. 146, as amended by Act § 3021)
... The Housing Act also temporarily allows qualified mortgage revenue bonds to be used to help individuals purchase new homes in Presidentially-declared disaster areas. (Code Sec. 143, as amended by Act § 3026)

¶2340.2. New tax credit for first-time homebuyers. For qualifying home purchases in the U.S. after Apr. 8, 2008 and before July 1, 2009, eligible first-time homebuyers can claim a refundable tax credit equal to the lesser of 10% of the purchase price of a principal residence or $7,500 ($3,750 for married individuals filing separately). (Code Sec. 36, as amended by Act § 3011)
RIA observation: Based on a statement in the Committee Report, a binding contract in effect before Apr. 9, 2008 won't defeat the credit as long as the sale closes after Apr. 8, 2008 and before July 1, 2009.
RIA observation: If two or more unmarried persons purchase a home together, the $7,500 credit amount is to be shared among them in the manner IRS may prescribe. (Code Sec. 36(b)(1)(C)) Presumably, IRS will allocate the credit based on a method that takes into account each party's proportionate contribution to the purchase. But the exact methodology remains to be seen.
The credit, which is generally allowed for the tax year in which the principal residence is bought, phases out for individual taxpayers with modified adjusted gross income (MAGI) between $75,000 and $95,000 ($150,000-$170,000 for joint filers) for the year of purchase. MAGI is adjusted gross income for the tax year increased by any amount excluded from gross income under Code Sec. 911 (foreign earned income and foreign housing exclusions), Code Sec. 931 (exclusion of income derived from American Samoa) or Code Sec. 933 (exclusion of income from Puerto Rico). (Code Sec. 36(b)(2))
A taxpayer is considered a first-time homebuyer if he (or spouse, if married) had no present ownership interest in a principal residence during the 3-year period before the purchase of the home to which the credit applies. (Code Sec. 36(c)(1) )

No credit is allowed if:
... the D.C. homebuyer credit is allowable for the tax year the residence is bought (i.e., if the D.C. homebuyer credit is extended, as it has been several times before) or a prior tax year;
... the taxpayer's financing is from the proceeds of tax-exempt mortgage revenue bonds;
... the taxpayer is a nonresident alien;
... the taxpayer disposes of the home (or it ceases to be a principal residence) before the close of a tax year for which a credit otherwise would be allowable. (Code Sec. 36(d) )

Any home purchase (including, presumably, co-ops and condos) qualifies but only if (1) the property isn't acquired from a person related to the buyer (under detailed rules in new Code Sec. 36(c)(5)); and (2) the basis of the property in the hands of the buyer is not determined by reference to the adjusted basis of the property in the hands of the person from whom it was acquired, or under Code Sec. 1014(a) (property acquired from a decedent). (Code Sec. 36(c)(3) ) A home under construction by a taxpayer is treated as purchased by him on the date he first occupies it. (Code Sec. 36(c)(3)(B) )
Regular recapture rule. The credit for new homebuyers is recaptured ratably over fifteen years, with no interest charge, beginning with the second tax year after the tax year in which the home is purchased. For each tax year of the 15-year recapture period, the credit is recaptured as an additional income tax amount equal to 6 2/3% of the amount of the credit. (Code Sec. 36(f)(1), Code Sec. 36(f)(7))

RIA observation: In other words, the credit for new homebuyers is, as a practical matter, the equivalent of a long-term interest-free loan from the government.

RIA illustration : Frank and Mary Smith, eligible taxpayers with MAGI below the phaseout limits, buy a $200,000 principal residence in August of 2008. They may claim a first-time homebuyer credit of $7,500 on their 2008 income tax return (lesser of $20,000 (10% of the $200,000 cost of the home) or $7,500). On their income tax return for 2010, the Smiths will pay an additional income tax amount equal to $500 (6 2/3% of $7,500). They also will pay an additional income tax of $500 on their income tax returns for tax years 2011 through 2024 (assuming they own the home and use it as a principal residence for that period).

Accelerated recapture rule. If a taxpayer who claims the credit for new homebuyers sells the home (or he or his spouse no longer use it as a principal residence) before complete repayment of the credit, any remaining credit repayment amount is paid with the tax return for the year in which the home is sold (or ceases to be used as the principal residence). However, the credit repayment amount can't exceed the gain from the sale of the residence to an unrelated person. For this purpose, gain is determined by reducing the home's basis by the amount of the credit to the extent not previously recaptured. ( Code Sec. 36(f)(2), Code Sec. 36(f)(3))

Neither the regular nor the accelerated recapture rules apply to any tax year ending after the taxpayer's death. Additionally, if the home is involuntarily converted (e.g., it's destroyed in a storm), and the taxpayer buys a new principal residence within a two year period beginning on the date of the disposition or the date the home ceases to be the principal residence), (1) the accelerated recapture rule does not apply, but (2) the regular recapture rule applies to the replacement principal residence during the recapture period in the same way as if the replacement principal residence were the converted residence. (Code Sec. 36(f)(4))

In the case of a transfer of the residence to a spouse or to a former spouse incident to divorce, the accelerated recapture rule won't apply to the transfer, but both the regular and accelerated recapture rules will apply to the transferee spouse (and not the transferor spouse) who will be responsible for any future recapture. (Code Sec. 36(f)(4)(C))

Election for 2009 buyers to accelerate credit into 2008. Eligible first-time homebuyers who purchase a principal residence after Dec. 31, 2008, and before July 1, 2009, may elect to treat the purchase as made on Dec. 31, 2008. (Code Sec. 36(g))

RIA observation: The election effectively allows eligible first-time homebuyers who make a timely purchase in 2009 to claim the credit on their 2008 returns rather than on their 2009 returns. Thus, in some cases, an individual or couple may be able to get a refund of the credit shortly after the purchase closes and use the refund to pay off a short-term bridge loan that was obtained to help with closing costs.

¶2442. Reduced homesale exclusion for nonqualified use periods. For sales and exchanges after Dec. 31, 2008, the homesale exclusion won't apply to the extent gain from the sale or exchange of a principal residence is allocated to periods of nonqualified use. (Code Sec. 121(b)(4), as amended by Act § 3092) Generally, nonqualified use is any period (other than the portion of any period before Jan. 1, 2009) during which the property is not used as the principal residence of the taxpayer or spouse. However, nonqualified use does not include:
... any portion of the Code Sec. 121(a) 5-year period which is after the last date that the property is used as the principal residence of the taxpayer or spouse;
... any period (not to exceed an aggregate period of 10 years) during which the taxpayer or spouse is serving on qualified official extended duty; and
... any other period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or other unforeseen circumstances specified by IRS. (Code Sec. 121(b)(4)(C) )

The amount of gain allocated to periods of nonqualified use is the amount of gain multiplied by a fraction where the numerator is the aggregate periods of nonqualified use during the period the property was owned by the taxpayer and the denominator of which is the period the taxpayer owned the property. (Code Sec. 121(b)(4)(B), Committee Report)

RIA illustration 1: Jack Able, a single taxpayer, bought a home on Jan. 1, 2009, for $400,000, and uses it as rental property for two years claiming $20,000 of depreciation deductions (thereby reducing his basis in the home to $380,000). On Jan. 1, 2011, he converts the property to his principal residence. On Jan. 1, 2013, Jack moves out of the home and sells it for $700,000 on Jan. 1, 2014, and thus has a gain of $320,000 ($700,000 - $380,000). The $20,000 of gain attributable to Jack's depreciation deductions is included in income (and taxed at 25%). Of the remaining $300,000 gain, 40% (2 years ÷ 5 years), or $120,000, is allocated to nonqualified use and is not eligible for the exclusion (and is taxed at maximum rate of 15%). The remaining gain of $180,000 is excluded under Code Sec. 121, since it's less than the maximum excludible gain of $250,000. Thus, the new law change costs Jack $10,500 (.15 × $70,000).
Illustration: Joan Baker, a single individual, buys her principal residence on Jan. 1, 2009, for $400,000, moves out on Jan. 1, 2019, and on Dec. 1, 2021 sells the property for $600,000. The entire $200,000 gain is excluded from gross income under the Act, because periods after the last qualified use do not constitute nonqualified use. (Committee Report)
Coordination with recognition of gain attributable to depreciation. For determining the amount of gain allocated to nonqualified use of a principal residence, the following rules apply:
... the rule providing that gain allocated to periods of nonqualified use does not qualify for the exclusion is applied after the application of Code Sec. 121(d)(6) (rules providing that gain attributable to post-May 6, '97 depreciation does not qualify for the exclusion), and
... the rules providing for the allocation of gain to periods of nonqualified use are applied without regard to any gain to which Code Sec. 121(d)(6) applies. (Code Sec. 121(b)(4)(D))

¶3112. New property tax deduction for non-itemizers. For tax years beginning in 2008, taxpayers who claim the standard deduction instead of itemizing deductions can claim an additional standard deduction for State and local property taxes paid. The deduction can't exceed the lesser of State and local property taxes actually paid or $500 ($1,000 for joint return filers). (Code Sec. 63(c)(7), as amended by Act § 3012)

Taxes taken into account in arriving at adjusted gross income under Code Sec. 62(a) (i.e., taxes deducted as trade or business expenses in computing the taxpayer's adjusted gross income) aren't taken into account in computing the new property tax deduction. (Code Sec. 63(c)(7) )
RIA observation: A taxpayer who expects to be able to take this deduction should consider adjusting his withholding or estimated tax payments to gain an immediate benefit from the deduction.

¶3201. Low-income housing and rehabilitation credit offset AMT. For low-income housing credits (Code Sec. 42) attributable to buildings placed in service after Dec. 31, 2007, and for rehabilitation credits (Code Sec. 47) attributable to qualified rehabilitation expenses properly taken into account for periods after Dec. 31, 2007, the low-income housing tax credit and rehabilitation credit can offset alternative minimum tax (AMT) liability. This is accomplished by treating the tentative minimum tax as being zero for determining the tax liability limit for the low-income housing credit and the rehabilitation credit. (Code Sec. 38(c)(4)(B)(ii) and Code Sec. 38(c)(4)(B)(v), as amended by Act § 3022(b) and (c))

¶3205. Interest earned on exempt facility, qualified residential rental, and veterans' mortgage bonds isn't an AMT preference. For bonds issued after July 30, 2008, tax-exempt interest earned on the following instruments is not a preference item for alternative minimum tax (AMT) purposes: (1) exempt facility bonds issued as part of an issue 95% or more of the net proceeds of which are used to provide qualified residential rental projects; (2) qualified mortgage bonds; and (3) qualified veterans' mortgage bonds. (Code Sec. 57(a)(5)(C)(iii), as amended by Act § 3022(a)(1))
The above changes don't apply to interest on any refunding bond unless interest on the refunded bond (or in the case of a series of refundings, the original bond) was not an item of tax preference. Additionally, tax-exempt interest earned on the above three types of bonds is not included in the corporate AMT adjustment based on current earnings. (Code Sec. 56(g)(4)(B)(iii), as amended by Act § 3022(a)(2))

¶3213. Implementation of worldwide interest allocation is delayed. The Act delays the phase-in for two years (to tax years beginning after 2010) of a new liberalized election for allocating interest expense between U.S. sources and foreign sources for purposes of determining a taxpayer's foreign tax credit limitation. (Under pre-Act law, this election was not to be available to taxpayers until tax years beginning after 2008.) (Code Sec. 864(f), as amended by Act § 3093(a)) Special transition rules apply in the first year that the liberalized rule phases in. (Code Sec. 864(f)(7))

¶3349. Modified estimated tax payment rules for large corporations. The Housing Act makes two changes in the estimated tax payment rules for large corporations (those with assets of $1 billion or more): (1) It repeals the changes made by prior legislation for required installments of estimated tax for July, August, and September of 2012. Thus, large corporations will make regular estimated tax payments for these installments based on their income tax liability; (Act § 3094(a)) (2) It increases the required installments of estimated tax for July, August, and September of 2013, as in effect on July 30, 2008, by 16.75%, which corresponding reductions in the next required payment. (Act § 3094(b))

¶4202. Real estate investment trust (REIT) rules are liberalized. The Housing Act liberalizes the REIT rules by, among other items, clarifying that REITs can earn foreign currency income associated with real estate activities, increasing the permissible size of REIT investments in taxable REIT subsidiaries, modifying the REIT safe harbor for dealer sales, and extending the special rules for lodging facilities to health care facilities. For gains and items of income recognized after July 30, 2008, certain foreign currency gain recognized under Code Sec. 987 or Code Sec. 988 are excluded from the computation of qualifying income for purposes of the 75% income test or the 95% income test. The exclusion is solely for purposes of the computations under these tests. (Code Sec. 856(n), as added by Act § 3031, Code Sec. 856, as amended by Act § 3031, 3032, 3041, 3061; Code Sec. 857, as amended by Act § 3033, 3051, 3052; Committee Report)

¶4655. Alternate procedure for nonforeign affidavits under FIRPTA rules. For dispositions of U.S. real property interests (USRPIs) after July 30, 2008, an alternative procedure is provided for furnishing a nonforeign affidavit (which states that the transferor is not a foreign person and allows a transferee not to withhold). Under the new procedure, instead of furnishing a nonforeign affidavit to the transferee, a transferor may furnish the affidavit to a “qualified substitute.” The qualified substitute is then required to furnish a statement (the “statement”) to the transferee stating, under penalties of perjury, that the qualified substitute has the affidavit in his possession. (Code Sec. 1445(b)(9)(A) , as amended by Act § 3024(a)) A qualified substitute is the person (including any attorney or title company) responsible for closing the transaction (other than the transferor's agent), and the transferee's agent. (Code Sec. 1445(f)(6))

¶4894. Information reporting of merchants' credit card and third-party network sales—after 2010. After 2010, banks are generally required to file an information return with IRS reporting the gross amount of credit and debit card payments a merchant receives during the year, along with the merchant's name, address, and taxpayer identification number (TIN). Similar reporting is also required for third party network transactions (e.g., those facilitating online sales). (Code Sec. 6050W, as added by Act § 3091(a)) The object of the information reporting requirement is to boost the compliance rate of merchants.
The following is an overview of key terms, definitions, and requirements:
... The information reporting burden falls on any payment settlement entity making payment to a participating payee in settlement of reportable payment transactions. (Code Sec. 6050W(a))
... A payment settlement entity is, for a payment card transaction, a merchant acquiring entity (the bank or other organization with the contractual obligation to make payment to participating payees in settlement of payment card transactions). For a third party network transaction, a payment settlement entity is the third party settlement organization, namely the central organization which has the contractual obligation to make payment to participating payees of third-party network transactions. (Code Sec. 6050W(b))
... A reportable payment transaction is any payment card (e.g., credit or debit card) transaction and any third party network transaction (any transaction which is settled through a third party payment network). (Code Sec. 6050W(c))
... A participating payee means, for a payment card transaction, any person who accepts a payment card as payment and, for a third party network transaction, any person who accepts payment from a third party settlement organization in settlement of such a transaction. (Code Sec. 6050W(d))
... A third party settlement organization must make an information report with respect to third party network transactions of any participating payee only if the annual amount of such transactions exceeds $20,000 and the aggregate number of such transactions for the year exceeds 200. (Code Sec. 6050W(e))
... Reportable payment transactions subject to information reporting generally are subject to backup withholding requirements and failure to file penalties apply for noncompliance. (Code Sec. 3406(b)(3), Code Sec. 6724(d))
The new reporting requirement is effective for information returns for reportable payment transactions for calendar years beginning after Dec. 31, 2010. The backup withholding requirements apply to amounts paid after Dec. 31, 2011. (Act § 3091(e))

Heroes Earnings Assistance and Relief Tax Act of 2008 (Heroes Act)

On June 17, 2008, the President signed into law H.R. 6081, the "Heroes Earnings Assistance and Relief Tax Act of 2008" (Heroes Act, P.L. 110-245).

¶1207.1. Excluded amounts for volunteer firefighters and emergency medical responders aren't subject to social security or unemployment tax, or withholding. For tax years beginning after Dec. 31, 2007 and before Jan. 1, 2011 (i.e., effective as if included in the Mortgage Forgiveness Debt Relief Act of 2007), the Heroes Act clarifies that any qualified State or local tax benefit and any qualified reimbursement payment excluded from gross income under Code Sec. 139B is not subject to social security tax, unemployment tax, or withholding. (Code Sec. 3121(a)(23), Code Sec. 3306(b)(20), and Code Sec. 3401(a)(23), as amended by Act § 115)

¶1224. State bonus payments to service members excluded as qualified military benefits. Effective for payments made before, on, or after June 17, 2008, the Heroes Act provides that an excludable qualified military benefit includes any bonus payment made by a state or political subdivision to any member or former member of the U.S. uniformed services, or to his dependent, by reason of the member's service in a "combat zone" as defined under Code Sec. 112(c)(2) (see above), but without regard to the June 24, 1950 date. (Code Sec. 134(b)(6), as amended by Act § 112)

RIA observation: This new exclusion could create a refund opportunity for uniformed service members who served in a combat zone and received a state bonus payment in prior open years.

¶1270, ¶1381. Reservists have extra time to make health FSA payouts. Under the Heroes Act, a plan won't fail to be treated as a cafeteria plan or health flexible spending account (FSA) merely because it provides for qualified reservist distributions. A qualified reservist distribution is a distribution to a health FSA participant of all or a portion of his FSA balance if: (1) the participant is a reservist called to active duty for a period of at least 180 days (or for an indefinite period); and (2) the distribution is made during the period beginning with the call to active duty and ending on the last day of the coverage period of the FSA that includes the date of the call to active duty. (Code Sec. 125(h), as amended by Act § 114(a)) The liberalized rule for FSA payouts is effective for distributions after June 17, 2008.

¶1332. Use of qualified mortgage bonds to finance veterans' mortgages without regard to three-year requirement is made permanent. The Heroes Act makes the veterans' exception permanent for qualified mortgage bonds issued after 2007. (Code Sec. 143(d)(2)(D), as amended by Act § 103(a)) Qualified mortgage bonds, a type of tax-exempt private activity bond, must meet a number of requirements, including a "three-year requirement" (also known as the "first-time homebuyer requirement"). However, veterans can receive mortgages financed by qualified mortgage bonds without regard to the three-year requirement. Under pre-Heroes Act law, the veterans' exception was available for bonds issued after Dec. 20, 2006, and before Jan. 1, 2008.

¶2206, ¶4369. Military death gratuity can be rolled over to Roth IRAs and Coverdell Savings Accounts. The Heroes Act provides that a military death gratuity and amount received under the Service members' Group Life Insurance (SGLI) program may be rolled over to a Roth IRA or Coverdell education savings account, notwithstanding the Roth or Coverdell contribution limits that otherwise apply. (Code Sec. 408A(e) and Code Sec. 530(d)(9), as amended by Act § 109) The rollover must be made no later than one year after the date on which the military death gratuity or SGLI payment is received. The maximum amount that can be contributed to a Roth IRA or Coverdell Savings Account is limited to the sum of the military death gratuity and SGLI payments that the individual receives. The relaxed rollover rule generally applies for deaths from injuries occurring on or after June 17, 2008, (Act § 109(d)(1)) but a grandfather rule applies the relaxed rollover rules to contributions made for a military death gratuity or SGLI payment from death from injury occurring on or after Oct. 7, 2001, and before June 17, 2008, if the contribution is made no later than one year after June 17, 2008. (Act § 109(d)(2))

¶2302. New credit for small business employers that pay differential wages. The Heroes Act creates a new tax credit for eligible small business employers that pay differential wages (as defined above) to qualifying employees. The credit is equal to 20% of up to $20,000 of differential pay to each qualifying employee during the tax year, but only for payments after June 17, 2008 and before 2010. A qualified employee is one who has been an employee for the 91-day period immediately preceding the period for which any differential wage payment is made. (Code Sec. 45P, as added by Act Sec. 111(a))
An eligible small business employer is one that: (1) employed on average less than 50 employees on business days during the tax year; and (2) under a written plan, provides eligible differential wage payments to each of its qualified employees.
Taxpayers under common control are aggregated when determining if a taxpayer is an eligible small business employer.
The differential wage payment credit is part of the general business credit and thus is subject to the rules for business credits. The credit is not allowable against a taxpayer's alternative minimum tax liability. (Code Sec. 38(b)(33), as amended by Act § 111(b)) Rules prevent taking a double deduction or credit. (Code Sec. 280C(a), as amended by Act § 111(c))

¶2340.1, ¶4847.1. Recovery rebate qualification rule eased for military families. Under the Heroes Act, retroactively effective as if included in the Economic Stimulus Act of 2008, the identification number requirement for qualifying for the recovery rebate does not apply in the case of a joint return where at least one spouse is a member of the Armed Forces of the United States at any time during the tax year. (Code Sec. 6428(h)(3), as amended by Act § 101) The Committee Report observes that the term "armed forces" include all regular and reserve components of the uniformed services under Code Sec. 7701(a)(15).

¶2342. Election to treat combat pay as earned income for EITC made permanent. The Heroes Act makes permanent the election to treat combat pay that is excluded under Code Sec. 112 as earned income for purposes of the earned income tax credit (EITC). (Code Sec. 32(c)(2)(B)(vi), as amended by Act § 102(a))

RIA observation: Under Code Sec. 219(f)(7), tax-free combat pay counts in determining whether and the extent to which a servicemember may contribute to either a Roth or traditional IRA. Thus, such a contribution can be made even if all of the servicemember's pay is excluded under Code Sec. 112 .

¶2442, ¶2445. Homesale exclusion ownership and use periods tolled for Peace Corps Volunteers. The Heroes Act provides that, effective for tax years beginning after 2007, Peace Corps volunteers are entitled to the same tolling of the Code Sec. 121 homesale exclusion ownership and use period that currently applies to members of the uniformed services, Foreign service, and intelligence community. (Code Sec. 121(d)(12), as amended by Act § 110(a)) Thus, an individual may elect to suspend for a maximum of 10 years the homesale exclusion's five-year test period for ownership and use during certain absences due to volunteer service in the Peace Corps. If the election is made, the five-year period ending on the date of the sale or exchange of a principal residence does not include any period up to 10 years during which the taxpayer or the taxpayer's spouse is serving as a Peace Corps volunteer.

¶2442, ¶2445. Relaxed home sale rules for intelligence community employees made permanent and liberalized. The relaxed home sale exclusion rules under Code Sec. 121 for intelligence community employees are made permanent. Also, for sales or exchanges after June 17, 2008, for purposes of qualifying for the related home sale rules an intelligence community employee's qualified extended duty can take place at a duty station located within or outside of the U.S. (Code Sec. 121(d)(9), as amended by Act § 113)

¶3000. Revised tax treatment of differential pay. Under the Heroes Act, differential pay is subject to withholding (for remuneration paid after 2008); must be treated as compensation for retirement plan purposes; and qualifies as compensation for purposes of the IRA contribution rules (the latter two changes apply for years beginning after 2008). (Code Sec. 3401(h), Code Sec. 414(u)(12), and Code Sec. 219(f)(1), as amended by Act § 105) Differential pay is any payment which is: (1) made by an employer to individuals with respect to any period during which they are performing service in the uniformed services while on active duty for a period of more than 30 days; and (2) represents all or part of the wages that they would have received from the employer if they were performing services for the employer. (Code Sec. 3401(h)(2), as amended by Act § 105(a)(1))
In general, qualified plans may be retroactively amended to reflect the above changes no later than the last day of the first plan year beginning on or after Jan. 1, 2010 (Jan. 1, 2012 for govermental plans). This applies only if in the interim the plan or contract is operated as if the differential-pay-related amendments were in effect. (Act § 105(c))

RIA observation: These new requirements for differential pay may discourage employers from making such payments to called-up reservists. Small businesses get some relief in the form of a tax credit; see discussion above.

¶4319. New plan-related survivor benefits. Under the Heroes Act, a tax-qualified retirement plan must provide that if a participant dies while performing qualified military service, his survivors are entitled to any additional benefits (other than benefit accruals relating to the period of qualified military service) that would have been provided had he resumed employment and then terminated employment on account of death. (Code Sec. 401(a)(37), as amended by Act § 104(a)) This provision applies for deaths occurring after 2006. (Act § 104(d)(1)) Employers who operate their retirement plans in compliance with the new Code Sec. 401(a)(37) requirements have until the last day of the first plan year beginning on or after Jan. 1, 2010 (Jan. 1, 2012 for governmental plans) to amend their plans.

¶4330. Plan benefit accruals for death or disability. Under new Code Sec. 414(u)(9), for benefit accrual purposes, retirement plans may permit individuals who leave for qualified military service and cannot be reemployed on account of death or disability to be treated as if they had resumed employment in accordance with their reemployment rights under the Uniformed Services Employment and Reemployment Rights Act of '94 (USERRA) as of the day before death or disability and then had terminated employment on the date of death or disability. (Code Sec. 414(u)(9), as amended by Act § 104(b)) The new optional benefit accrual rule applies to deaths or disabilities occurring after 2006. (Act § 104(d)(1))

¶4344. Early withdrawal penalty exception for reservist. The Heroes Act permanently extends the exception to the early withdrawal penalty that applies to qualified reservist distributions. The exception had previously applied to individuals ordered or called to active duty before Dec. 31, 2007. Under the Heroes Act, the 10% additional tax does not apply to any qualified reservist distribution made to individuals ordered or called to active duty for more than 179 days after Sept. 11, 2001. (Code Sec. 72(t)(2)(G)(iv), as amended by Act § 107(a))

¶4658. Expatriates recognize mark-to-market gain on expatriation. For expatriates whose expatriation date occurs on or after June 17, 2008, the Heroes Act adds a new mark-to-market deemed sale rule, under which the property of certain U.S. citizens who relinquish their U.S. citizenship and certain long-term U.S. residents who terminate their U.S. residency (i.e., covered expatriates) is treated as sold on the day before the expatriation date for its fair market value. (Code Sec. 877A(a)(1), as added by Act § 301(a)) Any gain is taken into account at that time without regard to other Code provisions, and any loss generally is taken into account to the extent otherwise provided in the Code, except that the Code Sec. 1091 wash sale rules don't apply. Net gain on the deemed sale is recognized to the extent it exceeds $600,000 (as adjusted for inflation for calendar years after 2008). (Code Sec. 877A(a)(2), Code Sec. 877A(a)(3)) Subsequent gains or losses that are realized are to be adjusted for the gains and losses taken into account under the deemed sale rules, without regard to the $600,000 exemption. (Code Sec. 877A(a)(2)) Special rules apply for an expatriate's deferred compensation items; specified tax deferred accounts; and an interest in a nongrantor trusts, instead of the new mark-to-market rule. (Code Sec. 877A(c))

An individual may elect to defer payment of the new mark-to-market tax imposed on the deemed sale of property. Interest is charged for the period the tax is deferred at the rate normally applicable to individual underpayments. (Code Sec. 877A(b)(1), as added by Act § 301)

¶4854. Longer limitations period for claiming refund for service-connected disability. Length-of-service-based military retirement benefits are included in income but veterans' benefits based on a service-connected disability are excluded. Where individuals receive includible retirement benefits and they are later retroactively determined to be eligible for service-connected disability benefits, the retirement benefits attributable to the disability are retroactively excluded. Effective for claims for credit or refund filed after June 17, 2008, the time period for filing a refund claim is extended until one year after the date of the disability determination (if later than the time allowed under the general limitations period for filing a claim for refund or credit). However, the extended time period does not apply with respect to any tax year beginning more than five years before the date of the disability determination. (Code Sec. 6511(d)(8), as amended by Act § 106(a)) Under a transition rule, for a disability determination made after 2000, and on or before June 17, 2008, the refund period is extended until June 17, 2009 (if later than the time periods allowed under pre-Heroes Act law), but the longer refund period won't apply with respect to any tax year which began before Jan. 1, 2001. (Act § 106(c))

RIA observation: That's how the transition rule is described in the Committee Report. The provision itself appears to be missing text and may require a technical correction.

¶4666. U.S. employer status for domestically controlled foreign entities working for U.S. government. For services performed in calendar months beginning more than 30
days after June 17, 2008, a foreign person is treated as an American employer with respect to an employee of the foreign person who is performing services in connection with a contract between the U.S. government (or any instrumentality thereof) and any member of any domestically controlled group of entities which includes such foreign person. (Code Sec. 3121(z), as added by Act § 302(a))

¶4872. Failure to file income, estate or gift tax returns when due. For returns the due date for which (including extensions) is after 2008, the minimum penalty for failure to file a tax return within 60 days of the due date increases from the lesser of $100 or 100% of the amount of tax required to be shown on the return to the lesser of $225 or 100% of the amount required to be shown on the return. (Code Sec. 6651(a), as amended by Act § 304)

¶5036, ¶5038. Gifts and bequests from an expatriate citizen or long-term resident. The Heroes Act provides a special transfer tax on certain "covered gifts or bequests" received by a U.S. citizen or resident. The tax is calculated as the product of (1) the highest marginal rate of tax specified in the table applicable to estate tax (i.e., Code Sec. 2001(c)) or, if greater, the highest marginal rate of tax specified in the table applicable to gift tax (i.e., Code Sec. 2502(a)), both as in effect on the date of receipt of the covered gift or bequest; and (2) the value of the covered gift or bequest. (Code Sec. 2801, as added by Act § 301(b)) The tax applies to covered gifts and bequests received on or after June 17, 2008 from transferors (or from the estates of transferors) whose expatriation date is on or after June 17, 2008. (Act § 301(g)(2))

Food, Conservation, and Energy Act of 2008

On May 22, the Senate joined the House of Representatives in overriding the President's veto of H.R. 2419, the Food, Conservation, and Energy Act of 2008 (Farm Act). As a result, except for the trade title, it became law on May 22 (P.L. 110-234, 05/22/2008). After the President signed the bill, it was discovered that the trade title was omitted in error. Congress is expected to pass the trade title when it returns. In the meantime, Congressional parliamentarians said the measure with the fourteen titles that was sent to the President is now law by virtue of the override.

¶1773. Limitation on deduction of farm losses. For tax years beginning after 2009, the Farm Act limits the farming loss of a taxpayer, other than a C corporation, for any tax year in which any applicable subsidies are received. The losses are limited to the greater of (a) $300,000 ($150,000 for a married person filing separately), or (b) the taxpayer's total net farm income for the prior five tax years. Applicable subsidies are (1) any direct or counter-cyclical payments under title I of the Food, Conservation, and Energy Act of 2008 (or any payment elected in lieu of any such payment), or (2) any Commodity Credit Corporation (CCC) loan. For partnerships and S corporations, the limit is applied at the partner or shareholder level. (Code Sec. 461(j)(5))

Total net farm income is an aggregation of all income and loss from farming businesses for the prior five tax years. Any loss that is disallowed under the new rule in a particular year is carried forward to the next tax year and treated as a deduction attributable to farming businesses in that year. Farming losses arising because of fire, storm, or other casualty, or by reason of disease or drought, are disregarded for purposes of calculating the limitation. (Code Sec. 461(j), as amended by Act section 15351)

For purposes of the provision, “farming business” has the meaning provided in Code Sec. 263A(e)(4), but it is broadened to include the processing of commodities, without regard to whether such activity is incidental, by a taxpayer otherwise engaged in a farming business with respect to such commodities. The farming activities of a cooperative are attributed to each member for purposes of this rule. (Code Sec. 461(j)(4)(B)(ii))

¶1844, ¶1941, ¶1946. Kansas tornado disaster relief. The Gulf Opportunity Zone Act of 2005 (GO Zone Act), which was enacted late in 2005, provided tax relief measures for victims of Hurricanes Katrina, Rita and Wilma, plus special incentives to encourage rebuilding in the hurricane disaster areas. The Farm Act extends a host of GO Zone Act style tax breaks to the Kiowa, Kansas Presidential disaster area because of severe storms and tornados beginning on May 4, 2007. This is the area declared by the President under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act and determined by the President to warrant individual or individual and public assistance from the Federal Government with respect to damages attributable to storms and tornados. The relief includes 50% first-year bonus depreciation; enhanced expensing allowance; partial expensing of demolition and cleanup costs; 5-year NOL carryback; exemption from the 10% penalty tax for up to $100,000 of qualified retirement plan distributions; eased casualty loss rules; an employee retention credit; and bond provisions designed to stimulate rebuilding in the affected area. (Act section 15345)

¶1913, ¶1915. All racehorses are three-year property for depreciation purposes. For property placed in service after 2008 and before 2014, under the Farm Act, all racehorses are assigned a three-year recovery period under MACRS, regardless of their age. However, for property placed in service after 2013, only those racehorses that are more than two years old when placed in service by the purchaser are in the three-year recovery period. (Code Sec. 168(e)(3)(A), as amended by Act section 15344)

¶2124. Two-year extension for treatment of capital gain property donated for qualified conservation. For qualified conservation contributions (i.e., contribution of a qualified real property interest to a qualified organization exclusively for conservation) made in tax years beginning in 2008 and 2009, the 30% limit is 50% of the contribution base less all other charitable contributions, and the carryforward period is 15 years. For qualified farmers and ranchers (more than 50% of gross income from farming as defined at Code Sec. 2032A(e)), the limit is 100% of the contribution base less all other charitable contributions. For property in agriculture or livestock production to be eligible for the 100% limit, the qualified real property interest must include a restriction that the property remains generally available for such production. (Code Sec. 170(b)(1)(E)(vi) and Code Sec. 170(b)(2)(B)(iii), as amended by Act section 15302)

¶ 2302. Agricultural chemicals security tax credit. For expenses paid or incurred after May 22, 2008, and before Jan. 1, 2013, the Farm Act creates a 30% credit for qualified chemical security expenditures for the tax year with respect to eligible agricultural businesses. The new credit, which is a component of the general business credit, is limited to $100,000 per facility reduced by the aggregate amount of the credits allowed for the facility in the prior five years. In addition, each taxpayer's annual credit is limited to $2,000,000. The taxpayer's deductible expense is reduced by the amount of the credit claimed. (Code Sec. 45O), as added by Act section 15343)

¶2312. Modification of the advanced coal project credit and the gasification project credit. Effective for credit allocation awards issued before, on, or after May 22, 2008, the Farm Act directs IRS, in implementing either Code Sec. 48A (relating to the advanced coal project credit) or Code Sec. 48B (relating to the coal gasification credit), to modify the terms of any competitive certification award and any associated closing agreements when it (1) is consistent with the objectives of the credit provision, (2) is requested by the award recipient, and (3) involves moving the project site to improve the potential to capture and sequester carbon dioxide emissions, reduce costs of transporting feedstock, and serve a broader customer base. (Code Sec. 48A(h), as amended by Act section 15346)

¶2317. Credit for production of cellulosic biofuel. For fuel produced after Dec. 31, 2008, the Farm Act adds a new component to the alcohol fuel credit of Code Sec. 40--the “cellulosic biofuel producer credit.” (Code Sec. 40(b)(6), as amended by Act section 15321(b)) Also, the Act modifies the small ethanol producer credit so that it may be claimed for cellulosic ethanol in excess of 15 million gallons. (Code Sec. 40(b)(4)(C), as amended by Act section 15321(e)) Cellulosic biofuel and alcohol cannot qualify as biodiesel, renewable diesel, or alternative fuel for purposes of the credit and payment provisions relating to those fuels. (Code Sec. 40A(d) and Code Sec. 40A(f), as amended by Act section 15321(f))

¶2317. Modification of alcohol credit. The 51-cent-per-gallon incentive for ethanol is adjusted by the Farm Act to 45 cents per gallon for 2009 and 2010. If IRS determines, in consultation with the EPA, that 7,500,000,000 gallons of ethanol (including cellulosic ethanol) were not produced in or imported into the U.S. in 2008, the reduction in the credit amount will be delayed. (Code Sec. 40(h), as amended by Act section 15331)

¶2317. Calculation of volume of alcohol for fuel credits. The Code provides a per-gallon credit for the volume of alcohol used as a fuel or in a qualified mixture. In determining the number of gallons of alcohol with respect to which the credit is allowable, the volume of alcohol includes any denaturant, including gasoline. The denaturant must be added under a formula approved by IRS and the denaturant cannot exceed 5% of the volume of such alcohol (including denaturants). For fuel sold or used after Dec. 31, 2008, the Farm Act reduces the amount of allowable denaturants to 2% of the volume of the alcohol. (Code Sec. 40(d)(4), as amended by Act section 15332)

¶2326.1. Qualified forestry conservation bonds. For bonds issued after May 22, 2008, the Farm Act creates a new category of tax-credit bonds—qualified forestry conservation bonds. They are bonds issued by qualified issuers (States and Code Sec. 501(c)(3) organizations) to finance qualified forestry conservation projects. (Code Sec. 54B, as added by Act section 15316)

¶ 2418. Swaps of stock in certain farm-related entities are eligible for like-kind treatment under Code Sec. 1031. Under the Farm Act, for exchanges completed after May 22, 2008, the rule barring exchanges of stocks from the Code Sec. 1031 nonrecognition rule does not apply to shares in a mutual ditch, reservoir, or irrigation company, if at the time of the exchange: (1) the company is an organization described in Code Sec. 501(c)(12)(A) (determined without regard to the percentage of its income that is collected from its members for the purpose of meeting losses and expenses); and (2) the shares in the company have been recognized by the highest court of the State in which the company was organized or by applicable State statute as constituting or representing real property or an interest in real property. (Code Sec. 1031(i), as amended by Act section 15342)

¶2687, ¶2688. One-year cut in tax rate for a corporation's qualified timber gain. The Act provides a 15% alternative tax rate for corporations on the portion of taxable income that consists of qualified timber gain (or, if less, the net capital gain) for a tax year. Qualified timber gain means the net gain described in Code Sec. 631(a) (election to treat cutting of standing timber as eligible for capital gain treatment) and Code Sec. 631(b) (capital gain treatment for disposition of timber with a retained economic interest or outright sale of the timber), determined by taking into account only trees held more than 15 years. (Code Sec. 1201(b), as amended by Act section 15311(a)) The alternative 15% tax rate applies for both regular tax and alternative minimum tax purposes. (Code Sec. 55(b)(4), as amended by Act section 15311(a))

The 15% alternative tax rate for qualified timber gain of corporations applies only to tax years ending after May 22, 2008 and beginning on or before May 22, 2009. (Code Sec. 1201(b)(1)) If a tax year includes May 22, 2008, qualified timber gain can't exceed the qualified timber gain properly taken into account for the portion of the year after that date. If a tax year includes May 22, 2009, qualified timber gain can't exceed the qualified timber gain properly taken into account
for the portion of the year on or before that date. (Code Sec. 1201(b)(3))

¶3143 et seq. Dollar thresholds for optional methods of computing net earnings from self-employment are increased and indexed. For tax years beginning after Dec. 31, 2007, the Farm Act modifies the farm optional method so that electing taxpayers may be eligible to secure four credits of Social Security benefit coverage each tax year by increasing and indexing the thresholds. Similar modifications are made to the nonfarm optional method. (Code Sec. 1402(a)(17) and Code Sec. 1402(l), as amended by Act section 15352).

¶3349. Corporate estimated taxes of large corporations. The Farm Act provides that the percentage under section 401(1)(B) of TIPRA (Tax Increase Prevention and Reconciliation Act of 2005) in effect on May 22, 2008 is increased by 7.75 percentage points. (Section 401(1)(B), P.L. 109-22, 5/17/2006) as amended by Act section 15202) Thus, for a corporation with assets of at least $1 billion, the payments due in July, Aug., and Sept., 2012, are increased by 7.75 percentage points of the payment otherwise due and the next required payment is reduced accordingly.

¶4202. Liberalized rules for REITs holding timber investments. The Farm Act temporarily liberalizes the rules for real estate investment trusts (REITs) holding timber in numerous ways. These include: (1) treating timber gains as qualifying income and not prohibited transactions income, regardless of whether the one-year holding period is satisfied; (2) providing new rules for a new “timber REIT” entity; (3) reducing the time period from 4 to 2 years for the REIT prohibited transaction safe harbor for timber property. (Act section 15312 through Act section 15315)

¶4521. New deduction for endangered species recovery expenses. Under the Farm Act, expenses paid or incurred after 2008 by farmers to achieve site-specific management actions under the Endangered Species Act of '73 are treated as not chargeable to capital account and are deductible under Code Sec. 175 subject to the 25% of gross farming income limitation.
(Code Sec. 175(c)(1), as amended by Act section 15303)

¶ 4527. Conservation Reserve Payments to retired and disabled farmers excluded from SECA tax. The Farm Act provides that Conservation Reserve Program payments made after 2007 are not treated as self-employment income for SECA tax purposes if received by an individual who is getting Social Security retirement or disability payments. (Code Sec. 1402(a)(1), as amended by Act section 15301) In addition, for loans repaid on or after Jan. 1, 2007, the Farm Act codifies the requirements of Notice 2007-63, 2007-33 IRB 353, which provides that the CCC reports market gain associated with the repayment of a CCC loan, regardless of whether the taxpayer repays the loan with cash or uses CCC certificates in repayment of the loan. (Code Sec. 6039J, as added by Act section 15353)

Economic Stimulus Act of 2008 benefits individuals and businesses

On Feb. 13, President Bush signed H.R. 5140, the “Economic Stimulus Act of 2008” (Stimulus Act) into law. The centerpiece of the Stimulus Act is a recovery rebate credit which most eligible taxpayers will receive as an advance cash rebate in 2008. The Act also provides for business incentives in increased limits for Section 179 expensing and 50% bonus first-year depreciation for qualifying property. Highlights of these provisions are discussed below.

¶2340, ¶4856. Advance rebate of recovery rebate credit. The Economic Stimulus Act of 2008 (Stimulus Act) provides for a refundable recovery rebate credit--composed of a basic credit amount and a qualifying child amount--to eligible individuals in 2008. Any individual, other than a nonresident alien, an estate or trust, or a person who could be claimed as a dependent, that meets the requirements is eligible. (Code Sec. 6428, as added by Stimulus Act § 101) Most eligible taxpayers will receive this credit in an advance rebate check in 2008, but others will get the tax credit in 2009 when they file their returns for tax year 2008.

Basic credit amount. An eligible individual receives a basic credit for the first tax year beginning in 2008 equal to the greater of:
(1) his net income tax liability up to a maximum of $600 ($1,200 for a joint return); (Code Sec. 6428(a)) or
(2) $300 ($600 for a joint return) if either (a) the taxpayer's “qualifying income” is at least $3,000; or (b) his net income tax liability is at least $1 and gross income is greater than the sum of the applicable basic standard deduction amount and one personal exemption (two personal exemptions for a joint return). (Code Sec. 6428(b)(1)(A))

“ Net income tax liability ” for this purpose is the excess of the sum of the individual's regular tax liability (under Code Sec. 26(b)) and alternative minimum tax (under Code Sec. 55) over the sum of all nonrefundable credits (other than the child credit). It is not reduced by the refundable recovery rebate credit or any other currently refundable credit. (Code Sec. 6428(e)(1))

“ Qualifying income ” includes: (1) earned income; (2) Social Security benefits (as defined in Code Sec. 86(d)); and (3) any compensation or pension received under chapter 11 (compensation for service-connected disability or death), chapter 13 (dependency and indemnity compensation for service-connected deaths), or chapter 15 (pension for non-service-connected disability) of title 38, U.S. Code. (Code Sec. 6428(e)(3)) “ Earned income ” has the same meaning as used for the earned income credit, except that it includes combat pay and doesn't include net earnings from self-employment which are not taken into account in computing taxable income. (Code Sec. 6428(e)(4))

Additional credit for qualifying children. If an individual is eligible for any amount under the basic credit, he may be eligible for a qualifying child credit. An additional $300 is added for each qualifying child (as defined under the Code Sec. 24 child credit, see ¶2357). (Code Sec. 6428(b)(1)(B))

Phaseout. The amount of the recovery rebate credit (both the basic and the child's amount) is reduced (but not below zero) by 5% of a taxpayer's adjusted gross income (AGI) above $75,000 ($150,000 for joint returns). (Code Sec. 6428(d))

Illustration: A married couple filing jointly have $175,000 AGI, two qualifying children, and a net tax liability of $31,189.

Before applying the phaseout, they have an $1,800 rebate: [$1,200 + $600 ($300 × 2 children)]. The phaseout reduces the $1,800 rebate to a $550 rebate: [$1,800 - $1,250 reduction, i.e., ($175,000 AGI - $150,000) × 5%]. (JCX-05-08)

Identification requirement. No credit is allowed to an individual if he doesn't include on his return a valid identification number (i.e., his Social Security Number (SSN)). For a joint return, both spouses have to include their SSNs. A child's SSN must be included on the return to claim the child credit amount. A Taxpayer Identification Number (TIN) issued by IRS cannot be substituted for a SSN. (Code Sec. 6428(h))

Mechanics of relief. The recovery rebate credit is a credit against tax for the 2008 tax year. (Code Sec. 6428(a)) But most eligible individuals for the 2007 tax year will get an advance refund of the credit in 2008—via a check from the Treasury or direct deposit to their bank accounts— based on their filing status and income on their 2007 return that they file in 2008. (Code Sec. 6428(g)) No rebate checks will be issued after Dec. 31, 2008. (Code Sec. 6428(g)(3)) An eligible individual must file a 2007 return to get a rebate check even if the individual wouldn’t ordinarily have to file a return.

When taxpayers file their 2008 return (generally in April of 2009), they will use a worksheet to: (1) calculate the amount of the rebate credit based on their 2008 tax return, and (2) reconcile that amount against the advance rebate payment they received based on their tax situation as reported on their 2007 return. (Code Sec. 6428(f), JCX-16-08) If the allowable credit amount exceeds the rebated amount, the taxpayer can claim the additional amount as a credit against 2008 tax liability. No interest is allowed on any overpayment. (Code Sec. 6428(g)(4)) If the allowable credit amount is less than the rebated amount, the taxpayer will not have to repay the rebate amount to IRS. (Code Sec. 6428(f)) Rebate payments aren’t includible in gross income and it don't otherwise reduce the amount of withholding.

¶1944. Increased 179 expensing limits for 2008. For tax years beginning in 2008, the Stimulus Act increases the $128,000 expensing limit to $250,000 and the overall investment limit from $510,000 to $800,000. The $250,000 and $800,000 amounts are not indexed for inflation. (Code Sec. 179(b)(7), as amended by Stimulus Act § 102) The increase in these limits is a temporary measure that only applies to 2008. The increased expensing and ceiling limits also affect the special expensing rules for empowerment zone property, renewal property, and GO Zone property (¶1945, ¶1946).

¶1935. 50% first-year bonus depreciation for property placed in service in 2008. For property placed in service after Dec. 31, 2007, in tax years ending after that date, the Stimulus Act provides an additional depreciation deduction in the placed-in-service year equal to 50% of the adjusted basis of “qualified property.” (Code Sec. 168(k)(1), as amended by Act Sec. 103(a)) The adjusted basis of qualified property is reduced by the additional 50% depreciation deduction before computing the amount otherwise allowable as a depreciation deduction for the tax year and any later tax year.

There is no AMT depreciation adjustment for qualified property recovered under Code Sec. 168(k), which provides for the additional 50% first-year depreciation allowance. (Code Sec. 168(k)(2)(G))

The 50% additional first year depreciation allowance applies to qualified property unless the taxpayer “elects out.” The election out may be made for any class of property for any tax year, and if made applies to all property in that class placed in service during that tax year. (Code Sec. 168(k)(2)(D)(iii))

Qualified property. To be qualified property, an asset must fall within one of four asset classes:
(1) property to which MACRS applies with a recovery period of 20 years or less;
(2) water utility property;
(3) computer software other than computer software covered by Code Sec. 197; or
(4) qualified leasehold improvement property. (Code Sec. 168(k)(2)(A))

Original use requirement. The original use of the property must begin with the taxpayer after Dec. 31, 2007. The property must be new property in the hands of the taxpayer. (Code Sec. 168(k)(2)(A)) If property is originally placed in service after Dec. 31, 2007, by a person, and is sold and leased back by that person within three months after the date that property was originally placed in service, the property is treated as originally placed in service not earlier than the date on which the property is used under the leaseback (the sale-leaseback rule). (Code Sec. 168(k)(2)(E)(ii))

RIA observation: The main effect of the sale-leaseback original use rule is to shift eligibility for 50% bonus depreciation from the seller-lessee to the buyer-lessor.

Purchase requirement. The taxpayer generally must purchase the property (a) after Dec. 31, 2007, and before Jan. 1, 2009, but only if no binding written contract for the acquisition is in effect before Jan. 1, 2008, or (b) under a binding written contract which was entered into after Dec. 31, 2007, and before Jan. 1, 2009. For a taxpayer manufacturing, constructing or producing property for the taxpayer's own use, the purchase requirement is treated as met if the taxpayer begins manufacturing, constructing, or producing the property after Dec. 31, 2007 and before Jan. 1, 2009. (Code Sec. 168(k)(2)(E)(i))

Placed-in-service requirement. The property generally must be placed in service after Dec. 31, 2007, and before Jan. 1, 2009. This placed-in-service date is extended one year (i.e., to Jan. 1, 2010) for certain property with a recovery period of ten years or longer and certain transportation and aircraft property. (Code Sec. 168(k)(2)(B), Code Sec. 168(k)(2)(C))

Ineligible property. 50% bonus depreciation isn’t available for: (1) property that must be depreciated under the alternative depreciation system; (2) listed property that isn't used more than 50% for business; and (3) qualified New York Liberty Zone leasehold improvement property. (Code Sec. 168(k)(2)(D))

¶1956. Increased luxury auto limits. The Stimulus Act increases by $8,000 the first-year depreciation dollar limit for a passenger auto that is “qualified property” (see discussion above on 50% bonus depreciation) that meets the original use and acquisition and placed-in-service requirements. (Code Sec. 168(k)(2)(F)(i), as amended by Act Sec. 103(c)(4))

RIA observation: Thus, assuming that the inflation-adjusted dollar caps for 2008 are the same as for 2007, the maximum first-year depreciation allowance would be $11,060 ($3,060 plus $8,000) for a new passenger auto acquired and placed in service in 2008, and used entirely for business; for a light truck or van the limit would be $11,260 ($3,260 plus $8,000).

RIA caution: A passenger auto must be used more than 50% for trade or business purposes in order to be eligible for the additional first-year depreciation amount (see discussion above).

The increased depreciation limit is reduced to the extent of non-business use and doesn't apply if the taxpayer “elects out” of bonus first year depreciation.

The additional first-year deduction allowed on qualified property that is “listed property” (which includes passenger autos) is taken into account for purposes of computing the recapture amount under Code Sec. 280F(b)(2) (which provides for recapture where business use of listed property declines to 50% or less of total use after the placed-in-service year). (Code Sec. 168(k)(2)(F)(ii))

Late-2007 Tax Laws--AMT Patch, Mortgage Debt Relief, Technical Corrections and Other Tax Laws

In the final days before it adjourned for 2007, Congress passed a number of important tax provisions. These included The Tax Increase Prevention Act of 2007 (2007 TIPRA, P.L. 110-166); The Mortgage Forgiveness Debt Relief Act of 2007 (the Mortgage Relief Act (MRA)); The Tax Technical Corrections Act of 2007 (TCA, P.L. 110-172); The Energy Independence and Security Act of 2007 (Energy Act, P.L. 110-140, 12/19/2007); and The Virginia Tech Victims Relief Act (P.L. 110-141, 12/19/2007). Highlights of these provisions are reflected below:

FUTA surcharge extended by one year (¶1109). The Federal Unemployment Tax Act (FUTA) imposes a 6.2% gross tax rate on the first $7,000 paid annually by covered employers to each employee, consisting of a permanent tax rate of 6%, and a temporary surtax rate of 0.2. Under the Energy Act, the temporary surtax rate is extended through Dec. 31, 2008. (Code Sec. 3301, as amended by Energy Act § 1501) Thus, the FUTA rate remains at 6.2% through the end of 2008.

Exclusion for Virginia Tech victims (¶1206). The Virginia Tech Victim's Relief Act, which does not amend the Internal Revenue Code, excludes from income payments from the Hokie Spirit Memorial Fund made on account of the tragic shootings at Virginia Polytechnic Institute and State University on Apr. 16, 2007. (Virginia Tech Victim's Relief Act §1)

New exclusion for volunteer firefighters and emergency medical responders (¶1208). The MRA provides, effective for tax years beginning after Dec. 31, 2007 and before Jan. 1, 2011, an exclusion from gross income to members of qualified volunteer emergency response organizations for: (1) any qualified State or local tax benefit; and (2) any qualified payment. (Code Sec. 139B(a), as added by MRA § 5(a))

A qualified State or local tax benefit is any reduction or rebate of State or local income, real property, or personal property taxes on account of services performed by individuals as members of a qualified volunteer emergency response organization. (Code Sec. 139B(c)(1)) The amount of State or local taxes taken into account by a taxpayer in determining his deduction for taxes under Code Sec. 164 is reduced by the amount of any qualified State or local tax benefit. (Code Sec. 139B(b)(1))

A qualified payment is a payment (whether reimbursement or otherwise) provided by a State or political subdivision on account of the performance of services as a member of a qualified volunteer emergency response organization. The amount of these payments is limited to $30 multiplied by the number of months during the year that the taxpayer performs such services. (Code Sec. 139B(c)(2)) Expenses paid or incurred by the taxpayer in connection with the performance of services are taken into account for a charitable contribution deduction by him only to the extent they exceed the amount of excluded qualified payments. (Code Sec. 139B(b)(2))

RIA Observation: The maximum exclusion for qualified payments in a year is $360 ($30 × 12 months).

RIA Observation: A transfer in a particular month isn't required to get the $30 exclusion for that month. Rather, the exclusion for a particular month of service is allowed regardless of when paid. Thus, a taxpayer who serves for 12 months could exclude $360 received during the year even if it was received all in one month (for example, in the first or last month of the year).

A qualified volunteer emergency response organization is any volunteer organization which is: (1) organized and operated to provide firefighting or emergency medical services for persons in the State or its political subdivision; and (2) required (by written agreement) by the State or political subdivision to furnish firefighting or emergency medical services in the State or political subdivision. (Code Sec. 139B(c)(3))

Home mortgage debt forgiveness relief (¶1388). For indebtedness discharged on or after Jan. 1, 2007 and before Jan. 1, 2010, the MRA generally allows taxpayers to exclude up to $2 million of mortgage debt forgiveness on their principal residence. Specifically, the MRA provides that gross income doesn't include any discharge of qualified principal residence indebtedness. (Code Sec. 108(a)(1)(E), as amended by MRA § 2(a)) Qualified principal residence indebtedness is acquisition indebtedness under Code Sec. 163(h)(3)(B) with respect to the taxpayers' principal residence, but with a $2 million limit ($1 million for married individuals filing separately). (Code Sec. 108(h)(2), as amended by MRA § 2(b)) “Principal residence” has the same meaning as under the homesale exclusion rules of Code Sec. 121. (Code Sec. 108(h)(5)) Acquisition indebtedness of a principal residence is indebtedness incurred in the acquisition, construction, or substantial improvement of an individual's principal residence that is secured by the residence. It includes refinancing of debt to the extent the amount of the refinancing doesn't exceed the amount of the refinanced indebtedness. (JCX-86-07)

The basis of the taxpayer's principal residence is reduced by the excluded amount, but not below zero. (Code Sec. 108(h)(1))

RIA Observation: The mortgage forgiveness exclusion only applies with respect to a taxpayer's principal residence. Thus, while interest for a taxpayer's vacation home may be deductible, debt forgiven with respect to a taxpayer's vacation home isn't excludible.

If any loan is discharged, in whole or in part, and only part of the loan is qualified principal residence indebtedness, the mortgage forgiveness exclusion applies only to so much of the amount discharged as exceeds the amount of the loan (as determined immediately before the discharge) which is not qualified principal residence indebtedness. (Code Sec. 108(h)(4))

The exclusion doesn't apply to the discharge of a loan if the discharge is on account of services performed for the lender or any other factor not directly related to a decline in the value of the residence or to the taxpayer's financial condition. The exclusion also doesn't apply to a taxpayer in a Title 11 bankruptcy. (Code Sec. 108(h)(3)) An insolvent taxpayer (other than one in a Title 11 bankruptcy) can elect to have the mortgage forgiveness exclusion not apply and can instead rely on the Code Sec. 108(a)(1)(B) exclusion for insolvent taxpayers. (Code Sec. 108(a)(2), as amended by MRA § 2(c))

Extension of treatment of mortgage insurance premiums as interest (¶1736). The MRA extends the rules treating qualified mortgage insurance premiums as deductible qualified residence interest for three years. Thus, they apply if the amounts: (1) are paid or accrued before Jan. 1, 2011; (2) aren't properly allocable to any period after Dec. 31, 2010; and (3) are paid or accrued with respect to a mortgage insurance contract issued after Dec. 31, 2006. (Code Sec. 163(h)(3)(E)(iv), as amended by MRA § 3)

Partnerships treated as leases; tax-exempt loss rules clarified (¶1782). The TCA provides that tax-exempt use property doesn't include any property that would be tax-exempt use property solely by reason of Code Sec. 168(h)(6) . (Code Sec. 470(c)(2)(B), as amended by TCA § 7(c)) The TCA provision refers, via a cross-reference, to Code Sec. 7701(e) for circumstances in which a partnership is treated as a lease to which Code Sec. 168(h) applies. (Code Sec. 470(c)(2)(C)) Thus, if a partnership is recharacterized as a lease under Code Sec. 7701(e) , and a provision of Code Sec. 168(h) (other than Code Sec. 168(h)(6) ) applies to cause the property characterized as leased to be treated as tax-exempt use property, then the Code Sec. 470 loss deferral rules apply. (JCX-119-07)

Longer writeoff for large oil companies' geological and geophysical expenditures (¶1975). Effective for amounts paid or incurred after Dec. 19, 2007, major integrated oil companies must amortize their geological and geophysical expenditures over seven years. (Code Sec. 167(h)(5), as amended by Energy Act § 1502)

Donee use of donated personal property must be substantially related to avoid problems for donor (¶2110). The reduction and/or recapture under Code Sec. 170(e) can be avoided if the donee provides a certification, which among other requirements certifies that the donee's use of the property was related to the purpose or function that was the basis for its tax-exemption. Under the TCA, the written statement satisfies this requirement only if, in addition to certifying that its use of the donated property was related to its exempt use or function, it certifies that its use of the donated property was substantial. (Code Sec. 170(e)(7)(D)(i)(I), as amended by TCA § 3(c))

Personal nonrefundable credits may offset AMT and regular tax for 2007 (¶2366). Under the 2007 TIPRA, for tax years beginning in 2007, the combined total of the following credits is limited to the sum of: (1) regular tax liability reduced by the foreign tax credit allowable under Code Sec. 27(a), and (2) the alternative minimum tax (AMT):
... Code Sec. 21 dependent care credit;
... Code Sec. 22 credit for the elderly and permanently and totally disabled;
... Code Sec. 23 adoption credit;
... Code Sec. 24 child tax credit;
... Code Sec. 25 mortgage credit;
... Code Sec. 25A Hope and Lifetime Learning credits;
... Code Sec. 25B lower income saver's credit;
... Code Sec. 25C nonbusiness energy property credit for energy-efficient improvements to a principal residence;
... Code Sec. 25D residential energy efficient property credit for solar electric, solar hot water, and fuel cell property added to a residence; and
... Code Sec. 1400C first-time D.C. homebuyer credit. (Code Sec. 26(a)(2), as amended by 2007 TIPRA § 3(a))

RIA Observation: In other words, under the 2007 TIPRA, the sum of the above credits may offset both regular tax and AMT.

AMT refundable credit amount liberalized (¶2367). Under the TCA, the alternative minimum tax (AMT) refundable credit amount for a year beginning before 2013 (before any reduction by reason of adjusted gross income) is an amount (not in excess of the long-term unused MTC for that year) equal to the greater of:
(1) $5,000;
(2) 20% of the long-term unused minimum tax credit; or
(3) the AMT refundable credit amount (if any) for the prior tax year—the preceding year's credit amount—before any reduction by reason of adjusted gross income. (Code Sec. 53(e)(2)(A), as amended by TCA § 2(a))

RIA Observation: By providing that an individual's AMT refundable credit amount for a tax year is the greatest of items (1), (2), and (3) listed above, the TCA gives the taxpayer an AMT refundable credit amount of at least $5,000 for a tax year, provided the individual's long-term unused MTC is at least $5,000.

Homesale exclusion liberalized for surviving spouse (¶2442). For sales and exchanges after Dec. 31, 2007, the MRA allows surviving single spouses to qualify for the up-to-$500,000 exclusion if the sale occurs not later than 2 years after their spouse's death and the requirements for the $500,000 exclusion under Code Sec. 121(b)(2)(A) were met immediately before the spouse's death. (Code Sec. 121(b)(4), as amended by MRA § 7(a))
RIA Caution: The measuring period is 2 years from a spouse's death. A sale or exchange in the second tax year following a spouse's death will not qualify for the relief provision if it occurs more than 2 years from the spouse's death.

RIA Observation: Apart from the homesale exclusion, where the spouses jointly owned the residence, the surviving spouse's basis in the decedent's half of the property is stepped-up to its date-of-death or alternate-valuation-date value. That is, half of the gain on the property will be virtually eliminated since the gain (sales proceeds - property basis) on the decedent's half of the property will only be the difference between the fair market value of the property on the date of sale and on the date of the spouse's death (or alternate valuation date).

Revised AMT computation when foreign earned income exclusion is claimed (¶3201). For tax years beginning after 2006, the TCA amends the alternative minimum tax (AMT) computation when an individual taxpayer excludes amounts under the foreign earned income or foreign housing cost exclusion. (See discussion below at ¶4612)

Increased AMT exemption amounts for 2007 (¶3202). Under the 2007 TIPRA, the 2007 alternative minimum tax (AMT) exemption amounts (before phaseout) for individuals are:
... $66,250 for married individuals filing jointly and surviving spouses (up from $62,550 for 2006);
... $44,350 for unmarried individuals (up from $42,500 for 2006); and
... $33,125 for married individuals filing separately (up from $31,275 for 2006). (Code Sec. 55(d)(1), as amended by 2007 TIPRA § 2(a))

RIA Observation: The 2007 TIPRA does not tinker with the AMT phaseout rules. They remain the same.

Higher estimated taxes in 2012 for large corporations (¶3349). The MRA increase in the required installment amount for estimated tax payments by corporations with assets of $1 billion or more that is otherwise due in July, August, or September of 2012 by 1.50 percentage points. (Tax Increase Prevention and Reconciliation Act of 2005 § 401(1)(B), as amended by MRA § 10) Thus, the “115.75%” amount (which goes into effect when the Peru Trade Agreement enters into force, see § 107 and § 601 of H.R. 3688) will be increased to “117.25%” of any required installment of corporate estimated tax that is otherwise due in July, August, or September of 2012. As under pre-MRA law, the next payment is reduced accordingly.

Revised rules for contributions of appreciated property by S corporations (¶3374). The 2006 Pension Protection Act amended the S corporation rules for contributions made in tax years beginning after Dec. 31, 2005, but does not apply for contributions in tax years beginning after Dec. 31, 2007. so that the decrease in a shareholder's basis in his S corporation stock by reason of a charitable contribution made by the S corporation equals the shareholder's pro rata share of the adjusted basis of the contributed property. The TCA provides that where the above rule applies to limit the decrease in the basis resulting from the charitable contribution, the rule that limits the aggregate amount of losses and deductions that may be taken by the S corporation shareholder to his basis in the S corporation's stock and debt does not apply to the extent of the excess (if any) of: (a) the shareholder's pro rata share of the charitable contribution, over (b) the shareholder's pro rata share of the adjusted basis of such property. (Code Sec. 1366(d)(4), as amended by TCA § 3(b))

Illustration A 100% shareholder in an S corporation has a $300 basis in his S corporation stock. The S corporation contributes property with a basis of $200 and a fair market value of $500 to a charity. Under pre-TCA law, the shareholder could only take a $300 deduction for the contribution, since his basis in the stock was $300. The TCA allows the shareholder to take a full $500 deduction. The shareholder reduces his basis in his S corporation stock from $300 to $100. (JCX-119-07)

Modification of Section 355 active business definition (¶3558). The TCA removes from the Code Sec. 355(b)(2)(A) active business test requirements for a tax-free Code Sec. 355 corporate division (e.g., a spin-off) the requirement that: substantially all of its assets had to consist of stock and securities of a corporation (or corporations) it controlled immediately after the distribution and the controlled corporations were engaged in the active conduct of a trade or business. (Code Sec. 355(b)(2)(A), as amended by TCA § 4(b)(1)) The TCA clarifies that in determining if a corporation meets the Code Sec. 355(b)(2)(A) active business test all members of the corporation's separate affiliated group are treated as one corporation. (Code Sec. 355(b)(3)(A))

The TCA also provides that, if a corporation becomes a member of a separate affiliated group by reason of one or more transactions in which gain or loss was recognized in whole or in part any trade or business conducted by the corporation when it became a member, it will be treated as acquired in a transaction in which gain or loss was recognized in whole or in part. (Code Sec. 355(b)(3)(C) ) Thus, such a stock acquisition is subject to the provisions of Code Sec. 355(b)(2)(C) , and may qualify as an expansion of an existing active trade or business conducted by the distributing corporation or the controlled corporation as the case may be. (JCX-119-07)
While the above changes are generally effective for distributions after May 17, 2006, transition rules (most of which were contained in the pre-TCA law) apply, unless the distributing corporation elects otherwise. (TCA § 4(d))
Designated Roth contributions are subject to FICA (¶4369). The TCA clarifies the wage treatment of elective deferrals that are designated as Roth contributions. As under pre-TCA law, elective deferrals are included in wages for purposes of social security and Medicare taxes. (Code Sec. 3121(v)(1)(A), as amended by TCA § (8)(a)(2))

Elective deferral limit for 403(b) annuity affected by designated Roth contributions (¶4388). Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), a special rule allows certain employees to make additional elective deferrals to a tax-sheltered Code Sec. 403(b) annuity, subject to (1) an annual limit of $3,000, and (2) a cumulative limit of $15,000 minus the amount of additional elective deferrals made in previous years under the special rule. Pre-TCA law provides a rule to coordinate the cumulative limit with the ability to make designated Roth contributions, but inadvertently reduces the $15,000 amount by all designated Roth contributions made in previous years.
The TCA clarifies that the $15,000 amount is reduced only by additional designated Roth contributions made under the special rule. (Code Sec. 402(g)(7), as amended by TCA § 8(a)(1))

Revised tax computation when foreign earned income exclusion is claimed (¶4612 et seq.). For tax years beginning after 2006, the TCA amends the regular tax computation when an individual taxpayer excludes amounts under the foreign earned income or foreign housing cost exclusion to provide that where a taxpayer has excluded amounts and has taxable income for the tax year, the regular tax is equal to the excess (if any) of:
(A) the regular tax that would be imposed for the tax year if the taxpayer's taxable income were increased by the amount of these exclusions for the tax year; over
(B) the tax which would be imposed for the tax year if the taxpayer's taxable income were equal to the amount of these exclusions for the tax year. (Code Sec. 911(f)(1)(A), as amended by TCA § 4(c))
However, if the taxpayer's net capital gain exceeds his taxable income for a tax year (i.e., there is a “capital gain excess”):
(1) the taxpayer's net capital gain (determined without including any qualified dividend income in net capital gain) is reduced (but not below zero) by the net capital gain excess;
(2) the taxpayer's qualified dividend income is reduced by the portion of the capital gain excess that exceeds the taxpayer's net capital gain (determined without including any qualified dividend income in net capital gain) and the reduction under item (1), above;
(3) adjusted net capital gain, unrecaptured section 1250 gain, and 28% rate gain are each determined after increasing the amount in Code Sec. 1(h)(4)(B) that is treated as capital loss for purposes of calculating 28% rate gain and unrecaptured section 1250 gain by the capital gain excess. (Code Sec. 911(f)(2)(A)) Thus, it is treated as a long-term capital loss carried to the tax year.

AMT computation. For tax years beginning after 2006, the TCA also amends the alternative minimum tax (AMT) computation when an individual taxpayer excludes amounts under the foreign earned income or foreign housing cost exclusion to provide that where a taxpayer has excluded amounts and has a taxable excess, his tentative minimum tax before reduction by the AMT foreign tax credit is equal to the excess (if any) of:
(a) the amount that would be the tentative minimum tax (taking into account the special capital gains rates) for the tax year before reduction by the AMT foreign tax credit if the taxpayer's taxable excess (generally, the AMTI minus the exemption amount) were increased by the amount of these exclusions for the tax year; over
(b) the amount that would be the tentative minimum tax (taking into account the special capital gains rates) for the tax year before reduction by the AMT foreign tax credit if the taxpayer's taxable excess were equal to the amount of these exclusions for the tax year. (Code Sec. 911(f)(1)(B))
Thus, in computing the tentative minimum tax on the remaining income, the tax computation is made before the reduction for the AMT foreign tax credit. This conforms the AMT computation to the regular tax computation, which is also made before the application of the foreign tax credit.
Where, without regard to this rule, a taxpayer's net capital gain would exceed his taxable excess for a tax year, the amount in item (A), using the Code Sec. 55(b)(3) alternative minimum tax capital gains calculation, is determined:
... by applying the regular tax rules described above in items (1), (2), and (3) under the “Regular tax computation,” but substituting the taxable excess for taxable income and
... the reference in the alternative minimum tax capital gains calculation to the net capital gain that is subject to a 5% rate under (Code Sec. 1(h)(1)(B)) is to be read as a reference to that amount determined: by applying the regular tax rules described in items (1), (2), and (3). (Code Sec. 911(f)(2)(B))

Look-through rule clarified for related CFCs (¶4630). A look-through rule provides that for purposes of inclusion in subpart F income, foreign personal holding company income (FPHCI) doesn't include dividends, interest, rent, and royalties received or accrued from a CFC which is a related person to the extent attributable or properly allocable to income of the related person which is neither subpart F income nor income effectively connected to a trade or business.

The TCA clarifies (as stated in a previous IRS notice) that the look-through rule doesn't apply to any interest, rent, or royalty to the extent it creates (or increases) a deficit which under Code Sec. 952(c) may reduce the subpart F income of the payor or another CFC. (Code Sec. 954(c)(6)(B), as amended by TCA § 4(a)) Thus, interest, rents, and royalties will be treated as subpart F income, notwithstanding the general look-through rule, if the payment creates or increases a deficit of the payor corporation and that deficit is from an activity that could reduce the payor's subpart F income under Code Sec. 952(c)(1)(B) or Code Sec. 952(c)(1)(C). This provision is effective for tax years of foreign corporations beginning after Dec. 31, 2005 and before Jan. 1, 2009, and tax years of U.S. shareholders with or within which such tax years for foreign corporations end.

Penalty for substantial and gross valuation misstatements attributable to incorrect appraisals (¶4886). The TCA provides that the valuation misstatement penalty will also apply to any person who prepares an appraisal upon which a Code Sec. 6662(g) substantial estate or gift tax valuation understatement is based. (Code Sec. 6695A(a)(2), as amended by TCA § 3(e))

RIA Observation: Thus, in addition to persons who are currently subject to the penalty for valuation misstatements attributable to incorrect appraisals, that penalty will also apply to any person who:
(A) prepares a property appraisal and knows, or reasonably should have known, that the appraisal would be used in connection with a return or a refund claim, and
(B) the claimed property value on the return or refund claim that is based on the appraisal results in a substantial estate or gift tax valuation understatement under Code Sec. 6662(g) .

The TCA also provides that the Code Sec. 6695A penalty for valuation misstatements attributable to incorrect appraisals is subject to a 3-year limitation period. (Code Sec. 6696(d)(1), as amended by TCA § 3(e)(2))
These changes are effective for appraisals prepared for returns or submissions filed after Aug. 17, 2006. However, in the case of a contribution of a qualified real property interest that is a restriction regarding the exterior of a building described in Code Sec. 170(h)(4)(C)(ii) and any property appraisal for that contribution, these changes apply to returns filed after July 25, 2006. (TCA §3(j))

Partnership failure to file penalty increased (¶4895). The MRA extends the maximum period for calculating the monthly failure-to-file-penalty for partnership returns from 5 to 12 months and increases the per-partner penalty amount from $50 to $85 per partner, effective for returns required to be filed after Dec. 20, 2007. ( Code Sec. 6698(a) and Code Sec. 6698(b), as amended by Act § 8(a) and (b))

RIA Observation: Under the Virginia Tech Victim's Relief Act (P.L. 110-141), for tax years beginning in 2008 only, the dollar amount per partner in effect under Code Sec. 6698(b)(1) is increased by $1. (§ 2 of P.L. 110-141) Thus, for tax years beginning in 2008, the per-partner penalty for failure to file a partnership return is $86.

New failure to file penalty for S corporation returns (¶4895). The MRA imposes a monthly penalty for any failure to timely file an S corporation return or any failure to provide the information required to be shown on such a return, effective for returns required to be filed after Dec. 20, 2007. The penalty, assessed against the S corporation, is $85 times the number of shareholders in the S corporation during any part of the tax year for which the return was required, for each month (or a fraction of a month) during which the failure continues, up to a maximum of 12 months. (Code Sec. 6699, as added by MRA § 9)

Limitation on disclosure of taxpayer returns to partners, S shareholders, and beneficiaries of trusts and estates (¶4895). Effective on Dec. 20, 2008, in the case of an inspection or disclosure under Code Sec. 6103(e) relating to the return of a partnership, S corporation, trust, or an estate, the information inspected or disclosed is not to include any supporting schedule, attachment, or list that includes the taxpayer identity information of a person other than the entity making the return or the person conducting the inspection or to whom the disclosure is made. (Code Sec. 6103(e)(10), as amended by MRA § 8(c))

Federal Tax Handbook Tax Calendar

2008 Tax calendar (¶1000). The Tax Calendar below lists the due dates for 2008. It replaces the tax calendar at ¶1000 of the 2008 Federal Tax Handbook that incorrectly lists the 2007 due dates.

¶ 1000. Tax Calendar—2008 Due Dates.
General Tax Calendar

This tax calendar, excerpted from IRS Pub. 509 (Rev. October 2007), has the
due dates for 2008 that most taxpayers will need. Employers and persons who
pay excise taxes also should use IRS's Excise Tax Calendar.

FISCAL-YEAR TAXPAYERS. If you file your income tax return for a fiscal year
rather than the calendar year, you must change some of the dates in this
calendar. These changes are described under Fiscal-Year Taxpayers at the
end of this calendar.

FIRST QUARTER

The first quarter of a calendar year is made up of January, February, and
March.

JANUARY 10

Employees who work for tips. If you received $20 or more in tips during
December, report them to your employer. You can use Form 4070,
Employee's Report of Tips to Employer.

JANUARY 15

INDIVIDUALS. Make a payment of your estimated tax for 2007 if you did not pay
your income tax for the year through withholding (or did not pay in enough
tax that way). Use Form 1040-ES. This is the final installment date for 2007
estimated tax. However, you do not have to make this payment if you file your
2007 return (Form 1040) and pay any tax due by January 31, 2008.

FARMERS AND FISHERMEN. Pay your estimated tax for 2007 using Form 1040-ES.
You have until April 15 to file your 2007 income tax return (Form 1040).
If you do not pay your estimated tax by January 15, you must file your 2007
return and pay any tax due by March 3, 2008, to avoid an estimated tax
penalty.

JANUARY 31

INDIVIDUALS WHO MUST MAKE ESTIMATED TAX PAYMENTS. If you did not pay your
last installment of estimated tax by January 15, you may choose (but are
not required) to file your income tax return (Form 1040) for 2007 by
January 31. Filing your return and paying any tax due by January 31 prevents
any penalty for late payment of the last installment. If you cannot file and
pay your tax by January 31, file and pay your tax by April 15.

ALL BUSINESSES. Give annual information statements to recipients of certain payments you made during 2007. You can use the appropriate version of Form 1099 or other information return. Form 1099 can be issued electronically with the consent of the recipient.

Payments that may be covered include the following.

o Cash payments for fish (or other aquatic
life) purchased from anyone engaged
in the trade or business of catching fish.
o Compensation for workers who are not
considered employees (including fishing
boat proceeds to crew members).
o Dividends and other corporate distributions.
o Interest.
o Amounts paid in real estate transactions.
o Rent.
o Royalties.
o Amounts paid in broker and barter exchange transactions.
o Payments to attorneys.
o Payments of Indian gaming profits to tribal members.
o Profit-sharing distributions.
o Retirement plan distributions.
o Original issue discount.
o Prizes and awards.
o Medical and health care payments.
o Debt cancellation (treated as payment to debtor).
o Cash payments over $10,000. See the instructions for
Form 8300, Report of Cash Payments Over $10,000 Received
in a Trade or Business.

See the 2007 General Instructions for Forms 1099, 1098, 5498, and W-2G
for information on what payments are covered, how much the payment must
be before a statement is required, which form to use, when to file, and
extensions of time to provide statements to the IRS.

FEBRUARY 11

Employees who work for tips. If you received $20 or more in tips during
January, report them to your employer. You can use Form 4070.

FEBRUARY 15

INDIVIDUALS. If you claimed exemption from income tax withholding last
year on the Form W-4 you gave your employer, you must file a new Form W-4
by this date to continue your exemption for another year.

FEBRUARY 28

ALL BUSINESSES. File information returns (Form 1099) for certain payments
you made during 2007. These payments are described under January 31. There
are different forms for different types of payments. Use a separate Form 1096
to summarize and transmit the forms for each type of payment. See the 2007
General Instructions for Forms 1099, 1098, 5498, and W-2G for information on
what payments are covered, how much the payment must be before a return is
required, which form to use, and extensions of time to file.

If you file Forms 1098, 1099, or W-2G electronically (not by magnetic media),
your due date for filing them with the IRS will be extended to March 31. The
due date for giving the recipient these forms remains January 31.

MARCH 3

FARMERS AND FISHERMEN. File your 2007 income tax return (Form 1040) and pay
any tax due. However, you have until April 15 to file if you paid your 2007
estimated tax by January 15, 2008.

MARCH 10

Employees who work for tips. If you received $20 or more in tips during
February, report them to your employer. You can use Form 4070.

MARCH 17

CORPORATIONS. File a 2007 calendar year income tax return (Form 1120 or
1120-A) and pay any tax due. If you want an automatic 6-month extension of
time to file the return, file Form 7004, Application for Automatic 6-Month
Extension of Time To File Certain Business Income Tax, Information, and Other
Returns, and deposit what you estimate you owe.

S CORPORATIONS. File a 2007 calendar year income tax return (Form 1120S) and
pay any tax due. Provide each shareholder with a copy of Schedule K-1 (Form
1120S), Shareholder's Share of Income, Deductions, Credits, etc., or a
substitute Schedule K-1. If you want an automatic 6-month extension of time
to file the return, file Form 7004 and deposit what you estimate you owe.

S CORPORATION ELECTION. File Form 2553, Election by a Small Business
Corporation, to choose to be treated as an S corporation beginning with
calendar year 2008. If Form 2553 is filed late, S treatment will begin with
calendar year 2009.

ELECTING LARGE PARTNERSHIPS. Provide each partner with a copy of
Schedule K-1 (Form 1065-B), Partner's Share of Income (Loss) From an
Electing Large Partnership, or a substitute Schedule K-1. This due date is
effective for the first March 17 following the close of the partnership's tax
year. The due date of March 17 applies even if the partnership requests an
extension of time to file the Form 1065-B by filing Form 7004.

MARCH 31

ELECTRONIC FILING OF FORMS 1098, 1099, AND W-2G. File Forms 1098, 1099, or
W-2G with the IRS. This due date applies only if you file electronically (not
by magnetic media). Otherwise, see February 28.

The due date for giving the recipient these forms remains January 31.

For information about filing Forms 1098, 1099, or W-2G electronically, see
Publication 1220, Specifications for Filing Forms 1098, 1099, 5498 and W-2G
Electronically or Magnetically.

SECOND QUARTER

The second quarter of a calendar year is made up of April, May, and June.

APRIL 10

Employees who work for tips. If you received $20 or more in tips during March,
report them to your employer. You can use Form 4070.

APRIL 15

INDIVIDUALS. File a 2007 income tax return (Form 1040, 1040A, or 1040EZ) and
pay any tax due. If you want an automatic 6-month extension of time to file
the return, file Form 4868, Application for Automatic Extension of Time To
File U.S. Individual Income Tax Return, or you can get an extension by phone
or over the Internet. Then, file Form 1040, 1040A, or 1040EZ by October 15.

HOUSEHOLD EMPLOYERS. If you paid cash wages of $1,500 or more in 2007 to a
household employee, you must file Schedule H. If you are required to file a
federal income tax return (Form 1040), file Schedule H with the return and
report any household employment taxes. Report any federal unemployment (FUTA)
tax on Schedule H if you paid total cash wages of $1,000 or more in any
calendar quarter of 2006 or 2007 to household employees. Also, report any
income tax you withheld for your household employees. For more information,
see Publication 926.

INDIVIDUALS. If you are not paying your 2008 income tax through withholding
(or will not pay in enough tax during the year that way), pay the first
installment of your 2008 estimated tax. Use Form 1040-ES. For more
information, see Publication 505.

PARTNERSHIPS. File a 2007 calendar year return (Form 1065). Provide each
partner with a copy of Schedule K-1 (Form 1065), Partner's Share of Income,
Deductions, Credits, etc., or a substitute Schedule K-1. If you want an
automatic 6-month extension of time to file the return and provide Schedule
K-1 or a substitute Schedule K-1, file Form 7004. Then, file Form 1065 by
October 15.

ELECTING LARGE PARTNERSHIPS. File a 2007 calendar year return (Form 1065-B).
If you want an automatic 6-month extension of time to file the return, file
Form 7004. Then, file Form 1065-B by October 15. See March 17 for the due date
for furnishing Schedules K-1 or substitute Schedules K-1 to the partners.

CORPORATIONS. Deposit the first installment of estimated income tax for 2008.
A worksheet, Form 1120-W, is available to help you estimate your tax for the
year.

MAY 12

EMPLOYEES WHO WORK FOR TIPS. If you received $20 or more in tips during April,
report them to your employer. You can use Form 4070.

JUNE 10

EMPLOYEES WHO WORK FOR TIPS. If you received $20 or more in tips during May,
report them to your employer. You can use Form 4070.

JUNE 16

INDIVIDUALS. If you are a U.S. citizen or resident alien living and working
(or on military duty) outside the United States and Puerto Rico, file Form
1040 and pay any tax, interest, and penalties due. Otherwise, see April 15. If
you want additional time to file your return, file Form 4868 to obtain
4 additional months to file. Then, file Form 1040 by October 15.

However, if you are a participant in a combat zone, you may be able to
further extend the filing deadline. See Publication 3, Armed Forces' Tax
Guide.

INDIVIDUALS. Make a payment of your 2008 estimated tax if you are not paying
your income tax for the year through withholding (or will not pay in enough
tax that way). Use Form 1040-ES. This is the second installment date for
estimated tax in 2008. For more information, see Publication 505.

CORPORATIONS. Deposit the second installment of estimated income tax for 2008.
A worksheet, Form 1120-W, is available to help you estimate your tax for the
year.

THIRD QUARTER

The third quarter of a calendar year is made up of July, August, and
September.

JULY 10

EMPLOYEES WHO WORK FOR TIPS. If you received $20 or more in tips during June,
report them to your employer. You can use Form 4070.

AUGUST 11

EMPLOYEES WHO WORK FOR TIPS. If you received $20 or more in tips during July,
report them to your employer. You can use Form 4070.

SEPTEMBER 10

EMPLOYEES WHO WORK FOR TIPS. If you received $20 or more in tips during
August, report them to your employer. You can use Form 4070.

SEPTEMBER 15

INDIVIDUALS. Make a payment of your 2008 estimated tax if you are not paying
your income tax for the year through withholding (or will not pay in enough
tax that way). Use Form 1040-ES. This is the third installment date for
estimated tax in 2008. For more information, see Publication 505.

CORPORATIONS. File a 2007 calendar year income tax return (Form 1120 or
1120-A) and pay any tax, interest, and penalties due. This due date applies
only if you timely requested an automatic 6-month extension. Otherwise, see
March 17.

S CORPORATIONS. File a 2007 calendar year income tax return (Form 1120S)
and pay any tax due. This due date applies only if you timely requested an
automatic 6-month extension. Otherwise, see March 17. Provide each shareholder
with a copy of Schedule K-1 (Form 1120S) or a substitute Schedule K-1.

CORPORATIONS. Deposit the third installment of estimated income tax for 2008.
A worksheet, Form 1120-W, is available to help you estimate your tax for the
year.

FOURTH QUARTER

The fourth quarter of a calendar year is made up of October, November, and
December.

OCTOBER 10

Employees who work for tips. If you received $20 or more in tips during
September, report them to your employer. You can use Form 4070.

OCTOBER 15

INDIVIDUALS. If you have an automatic 6-month extension to file your income
tax return for 2007, file Form 1040, 1040A, or 1040EZ and pay any tax,
interest, and penalties due.

PARTNERSHIPS. File a 2007 calendar year return (Form 1065). This due date
applies only if you were given an additional 6-month extension. Provide each
partner with a copy of Schedule K-1 (Form 1065) or a substitute Schedule K-1.

ELECTING LARGE PARTNERSHIPS. File a 2007 calendar year return (Form 1065-B).
This due date applies only if you were given an additional 6-month extension.
See March 1