Overview
Paragraph 1: New Legislation
2008 Legislation
Military tax relief. On May 22, 2008, following similar action by the House on May 20, the Senate unanimously approved the Heroes Earnings Assistance and Relief Tax Act of 2008 (HR 6081). The bill provides tax breaks for members of the military (active and reserve) and their families and clarifies the tax treatment of state and local benefits provided to volunteer firefighters and emergency medical responders. As revenue offsets, the bill changes the tax treatment of certain government contractors and individuals who expatriate as well as raises the failure to file penalty and extends the mental health parity excise tax.
(1) Immediate members of a military family, their spouses and qualifying children are not required to have a social security number to claim the refundable tax credit for eligible individuals for the 2008 tax year (the recovery rebate credit) if the credits are claimed on a joint return. (see ¶126).
(2) The availability of the election to treat combat zone compensation that is otherwise excluded from gross income under Code Sec. 112 as earned income for purposes of the earned income credit is made permanent. (see ¶1375).
(3) An eligible small business employer can claim a temporary tax credit for up to 20 percent of the military differential wage payments it makes to qualified workers during the tax year. The military differential credit does not apply to any payments made after December 31, 2009. (see ¶1323).
(4) The rules allowing for penalty-free distributions from retirement plans for individuals ordered or called to active duty on or after December 31, 2007 for more than 179 days are now permanent. (see ¶2157).
(5) For purposes of the exclusion of gain from the sale of a principal residence, an individual can elect to suspend the running of the five-year ownership and use testing period during any period that the individual or the individual's spouse is serving outside the U S as part of the Peace Corps. (see ¶1705).
(6) The mark-to-market tax is imposed on the net unrealized gain in the property of certain individuals who expatriate. (see ¶2457).
(7) The minimum penalty for failure to file a tax return within 60 days of the due date (with extensions) is increased to the lesser of $135 or 100 percent of the net amount of tax due. (see ¶ 2801).
Farm bill. The House, on May 22, 2008, and the Senate, on June 5, 2008, passed the Food, Conservation, and Energy Act of 2008 (HR 6124). The measure will now go to the White House. President Bush is expected to veto the measure, setting the stage for an override vote in Congress. HR 6124 would repeal previously passed farm legislation, HR 2419, also titled the Food, Conservation, and Energy Act of 2008, then re-enact the provisions of HR 2419 plus approximately 34 pages of trade provisions inadvertently omitted from the enrolled version of HR 2419. The Farm bill provides significant benefits to farmers, ranchers and timber producers, while raising revenue from certain groups of farmers, ethanol producers and large corporations.
(1) For most taxpayers who receive Commodity Credit Corporation loans or agricultural program payments, deductible farm losses are limited to the greater of $300,000 or total net farm income for the previous five years. (see ¶767).
(2) Payment thresholds increased and indexed for farm and nonfarm optional methods of computing net earnings from self-employment. (see ¶2676).
(3) The loan limits for agricultural bonds has been increased from $250,000 to $450,000, indexed for inflation and the dollar limitation in the definition of substantial farmland has been eliminated. (see ¶729).
(4) An alternative maximum tax rate of 15 percent will apply to the qualified timber gain of a C corporation for a tax year. (see ¶1772).
(5) A nonrefundable income tax credit of up to $1.01 per gallon for the production of cellulosic biofuel has been added as a component of the alcohol fuels income tax credit. (see ¶1329A).
(6) The credit amount for the alcohol mixture credit and the alcohol credit for the use or sale of ethanol as fuel in 2009 and 2010 is reduced from 51 cents per gallon to 45 cents per gallon for ethanol with a proof of greater than 190 (the blender amount) and from 37.78 cents per gallon to 33.33 cents per gallon for ethanol with a proof of at least 150 but less than 190 (the low-proof blender amount). (see ¶1326).
(7) Special rules for contributions of real property for conservation purposes extended through December 31, 2009. (see ¶1063).
(8) The estimated income tax payment required to be made by certain large corporations in July, August, or September of 2012, has been increased to 125 percent of the amount otherwise due. (see ¶1063).
(9) Many of the tax benefits extended to the victims of the Katrina, Wilma and Rita hurricanes are modified and available for victims of the tornadoes and storms that hit the Greensburg, Kansas area in May 2007. (see ¶897; ¶1134; ¶1141).
Economic stimulus package. President Bush signed the Economic Stimulus Act of 2008 (P.L. 110-185) on February 13, 2008, which includes a recovery rebate credit, business incentives and relief to assist the depressed real estate sector.
(1) A refundable rebate is available for individuals in 2008, and the rebate amount is equal to the greater of: the taxpayer's net income tax liability (not to exceed $600, or $1,200 for joint filers) or $300 ($600 for joint filers) if the individual has either: (a) at least $3,000 of earned income, Social Security benefits or certain veterans' benefits (including survivors of disabled veterans), or (b) net income tax liability of at least $1 and gross income greater than the sum of the applicable basic standard deduction amount and one personal exemption (two if a joint return). (see ¶126).
(2) The Code Sec. 179 expensing amounts are increased for 2008. The dollar limit is increased to $250,000 and the investment limit is increased to $800,000. (see ¶1208).
(3) The 50 percent first-year bonus depreciation deduction is available for qualifying property acquired after December 31, 2007 and placed in service before January 1, 2009. Qualifying property must be (a) eligible for the modified accelerated cost recovery system (MACRS) with a depreciation period of 20 years or less; (b) water utility property; (c) computer software (off-the-shelf); or (d) qualified leasehold property. (see ¶1237).
2007 Legislation
Year-end tax legislation. In a flurry of last-minute voting before adjournment, Congress several measures providing tax relief for taxpayers who otherwise may be affected by the alternative minimum tax and assistance to homeowners facing foreclosure. Congress also passed comprehensive energy legislation containing several tax provisions, tax breaks for victims of the Virginia Tech tragedy, an omnibus FY 2008 budget bill that increases funding for the IRS, and a technical corrections bill.
AMT. On December 26, 2007, President Bush signed the Tax Increase Prevention Act of 2007 (P.L. 110-166), which is expected to provide relief to millions of middle-income taxpayers from AMT, however, the measure does not include any revenue offsets.
(1) The alternative minimum tax (AMT) exemption amount for individuals is increased for tax years beginning in 2007, to $66,250 for married individuals filing a joint return and surviving spouses; $44,350 for unmarried individuals; and $33,125 for married individuals filing separate returns. (see ¶1405).
(2) The use of nonrefundable personal tax credits against an individual's regular tax and alternative minimum tax liability is extended to tax years beginning in 2007. (see ¶1415).
Mortgage debt relief. President Bush, on December 20, 2007, signed the Mortgage Forgiveness Debt Relief Act of 2007 (P.L. 110-142) which includes tax relief for debt forgiveness and mortgage insurance payments.
(1) The discharge of an individual's qualified principal residence indebtedness which occurs in 2007, 2008 or 2009 is excluded from the gross income of that individual up to $2 million in debt ($1 million for a married taxpayer filing a separate return). (see ¶885).
(2) The deduction for premiums for qualified mortgage insurance as qualified residence interest is extended through December 31, 2010. (see ¶1047).
Energy legislation. On December 19, 2007, President Bush signed the Energy Independence and Security Act of 2007 (P.L. 110-140) which includes two tax provisions.
(1) The temporary surtax of 0.2 percent of taxable wages added to the permanent FUTA tax rate is extended through December 31, 2008. (see ¶2661).
(2) The geological and geophysical expenses paid or incurred by major integrated oil companies are required to be ratably amortized over a seven-year period instead of a five-year period. (see ¶987; ¶1287).
Virginia Tech Victims Tax Relief. President Bush, on December 19, 2007, signed the Prevent Taxation of Payments to Virginia Tech Victims and Families Act (P.L. 110-141) which excludes from gross income the payments from a special memorial fund to victims of the Virginia Tech tragedy and increases the penalty for failure to file a partnership return by $1 to pay for the tax break.
(1) Gross income does not include amounts received from the Hokie Spirit Memorial Fund established by Virginia Tech Foundation that were paid as a result of the tragic shooting on April 16, 2007. (see ¶897).
Technical corrections. The Technical Corrections Act of 2007 (P.L. 110-172), signed by President Bush on December 29, 2007, contains over 25 provisions that impact nine major tax laws. Some of the provisions address the following:
(1) The rule limiting the amount of losses and deductions which an S corporation shareholder may take into account in any tax year to the shareholder's adjusted basis in his stock and indebtedness of the corporation is clarified. (see ¶1062).
(2) The AMT refundable credit amount (before any reduction by reason of adjusted gross income) is redefined as the amount (not in excess of the long-term unused minimum tax credit) equal to the greater of: $5,000, 20 percent of the long-term unused minimum tax credit for the tax year, or the amount (if any) of the AMT refundable credit amount determined for the taxpayer's preceding tax year (before any reduction by reason of adjusted gross income). (see ¶1410).
(3) The definition of tax-exempt use property under Code Sec. 470 is modified retroactively so that partnerships will not be subject to the loss deferral rules unless the partnership is treated as a lease of property under Code Sec. 7701(e)(2). (see ¶2080).
(4)The civil penalty imposed on a person who prepares an appraisal that results in a substantial or gross valuation misstatement has been expanded to apply to substantial estate or gift tax valuation understatements. (see ¶1071).
Appropriations. The Consolidated Appropriations Act, 2008 (P.L. 110-161) was signed by President Bush on December 26, 2007, and includes funding for the Treasury and IRS in FY 2008. (see ¶2701).
IRS commissioner. The untitled Senate bill, Sen 2436, ( P.L. 110-176), signed by President Bush on January 4, 2008, clarified that an individual appointed and confirmed to replace an IRS commissioner appointed for a five-year term will serve the remainder of the five-year term rather than start a new five-year term. (see ¶2701).
Chapter 1: Individuals
Paragraph 137B
Remove Example 1 and replace with the following two paragraphs:
The IRS in Notice 2008-5 (I.R.B. 2008-2) clarified its position on the claiming of a child as a qualifying relative. Prior to the passage of the Working Families Tax Relief Act of 2004 (P.L. 108-311) (WFTRA), which introduced the concepts of a qualifying child and qualifying relative for dependency exemption determination, a boyfriend, who supported his girlfriend and her child from another relationship, was allowed to claim the child as dependent. Following WFTRA, the unrelated child could no longer be claimed as an exemption by boyfriend because he lacked the necessary relationship to the child and, as interpreted by the IRS, the child was the qualifying child of the mother. Thus, despite living with and being supported by the boyfriend, if the mother did not file an income tax return, no one was allowed to claim the dependency exemption for the child.
Notice 2008-5 redefines for dependent exemption determination who is a taxpayer under the dependency requirement for qualifying relative. An unrelated child that lives with and is supported by the taxpayer may be claimed by the taxpayer if the other individual for whom the child is a qualifying child does not file a return or files only to claim a refund of withheld taxes (see also Paragraph 138). This means that the boyfriend would be allowed to claim a dependency exemption for his girlfriend's unrelated child if she either does not file a tax return or files only to claim a refund. If she files to claim the earned income credit, then she is considered to have filed a return and the boyfriend is denied the dependency exemption.
Chapter 13: Tax Credits
Paragraph 1341
An employer in the food and beverage industry may claim a nonrefundable income tax credit for a portion of the employer’s social security and Medicare taxes (FICA taxes) paid or incurred on employee tips (Code Sec. 45B). Employee tip income is treated as employer-provided wages for purposes of Federal Insurance Contributions Act (FICA) taxes (Code Sec. 3121(q)). The credit is equal to the employer’s FICA obligation of an employee attributable to tips in excess of those tips treated as wages for purposes of satisfying the minimum wage provisions of the Fair Labor Standards Act. No credit may be claimed for the employer’s portion of FICA taxes on the tips used to meet the Federal minimum wage rate. For purposes of calculating the credit, the minimum wage rate has been permanently established at the amount in effect on January 1, 2007, or $5.15 per hour (Code Sec. 45B(b)(1)(B), as amended by the Small Business and Work Opportunity Tax Act of 2007 (P.L. 110-28)).
The credit is allowed for tips received from customers in connection with the providing, delivering, or serving of food or beverages for consumption if the tipping of employees delivering or serving food or beverages by customers is customary. The credit is available whether or not the employee reported the tips and regardless of where the services were performed. The employer may not deduct any amount considered in determining this credit to claim any other tax benefit. An election may be made to have this credit not apply.
The credit is claimed on Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips. The FICA tip credit is a component of the general business credit and for tax years ending prior to January 1, 2007, is subject to the credit limitation rule as discussed at ¶1323. For tax years beginning after December 31, 2006, it is no longer subject to the general business credit limitation rule. For purposes of determining the amount of the FICA tip credit that may be claimed in the current tax year and any credit carry backs from the current tax year, the tentative minimum tax is considered zero and the net regular tax liability is further reduced by the general business credit amount of the year less this credit and the alcohol fuels credit, the electricity from renewable sources credit, and the work opportunity credit (Code Sec. 38(c)(4)(A), as amended by the American Jobs Creation Act of 2005 (P.L. 108-357)). The result of setting the minimum tax at zero and reducing the net tax liability allows taxpayers to claim the maximum amount of the FICA tip credit against both their regular and the alternative minimum tax liabilities. Any credit that remains unused at the end of the carryover period is lost.
