Tax Law Changes Are Already Here for 2009, With More Likely to Come
Scott E. Vincent
Vincent, Fontg & Hansen, L.L.C.
Kansas City
As we start the year with a new administration and economic stimulus a priority on legislative agendas, we all expect many tax law changes over the coming months. However, we need to also remember the multiple changes from last year’s legislation that are now taking effect for 2009. This article highlights several non-business changes that may affect you or your clients and bear your consideration. As always, I encourage you to watch for continuing changes that could affect these items and consult a tax advisor with respect to any complex transactions and with respect to the best approaches for your particular tax circumstances.
Retirement and Estate Planning
Required Minimum Distributions Suspended. Retirement plan account participants, IRA owners, and their beneficiaries do not have to take required minimum distributions for 2009. This change is targeted to help retired taxpayers who now can avoid selling stock or mutual fund shares held in retirement accounts when their value is depressed. This is particularly beneficial for retired taxpayers who do not rely on their required minimum distributions for current living expenses. By not making the distributions for 2009 (or making lower distributions) from their qualified plan accounts and/or IRAs, these taxpayers will wind up with less taxable income for 2009, possibly avoid (or mitigate the effect of) income-based tax break phase-outs and retain greater tax-sheltered amounts to leave to their beneficiaries. Please note that suspension of the distributions requirements applies regardless of whether the account or IRA is “in distress” because of market conditions.
Increased Estate Tax Exemption. The applicable exclusion amount (the amount excluded from estate tax by the unified credit) has increased from $2 million to $3.5 million for estates of decedents dying in 2009. The highest tax rate remains at 45%. Barring further Congressional action, the estate tax is repealed for 2010 deaths, only to be reinstated for deaths occurring in 2011 and later with a $1 million exemption and a top rate of 55%.
All indications are that Congress will not let the estate tax return to a $1 million exemption and a top rate of 55% in 2011. On the other hand, it is doubtful that Congress will permanently repeal the estate tax. Common scenarios being currently discussed in Washington would target a permanent increase in the exemption to somewhere between $3.5 and $5 million, perhaps with inflation adjustments.
Nonqualified Deferred Compensation. For amounts deferred which are attributable to services performed after 2008 for certain “tax indifferent” nonqualified entities, compensation of a service provider that is deferred under a nonqualified deferred compensation plan is includible in gross income by the service provider only when there is no substantial risk of forfeiture of the service provider’s rights to the compensation. The IRS recently issued guidance to help navigate the complexities of this rule (see Notice 2009-8).
Travel-Related Income Tax Incentives
Plug-In Electric Drive Vehicles. Starting in 2009, a tax credit is allowed for new qualified plug-in electric drive motor vehicles under Code Section 30D. Subject to a limit based on weight, the credit amount is the sum of: (1) $2,500; plus (2) $417 for each kilowatt hour of traction battery capacity in excess of six kilowatt hours. The portion of the credit for the vehicle that is attributable to property with an allowance for depreciation (generally, property used in a trade or business or for the production of income) is treated as part of the general business credit, and the non-depreciable property portion is treated as a personal credit.
Qualified Bicycle Commuting Reimbursement. Effective for 2009, qualified bicycle commuting reimbursements will be considered qualified transportation fringe benefits. Qualified reimbursements are the employer reimbursements during the 15-month period beginning with the first day of the calendar year for reasonable expenses incurred by the employee during that calendar year for the purchase of a bicycle and bicycle improvements, repair, and storage. The benefit is limited to $20 (not adjusted for inflation) multiplied by the number of months during the year that an employee regularly uses a bicycle for a substantial portion of the travel between their residence and place of employment. Unlike other qualified transportation fringe benefits, qualified bicycle commuting reimbursements cannot be used in conjunction with commuter highway vehicle transportation, transit passes, or parking benefits.
Home-Related Tax Benefits
Non-Business Energy Property Credit. For property placed in service in 2009, a taxpayer can claim (on Form 5695) a lifetime nonrefundable credit of up to $500 for making qualifying energy saving improvements to a home, but only $200 of this credit amount may be for qualifying window expenditures. The expenses must be made on or in connection with a dwelling unit located in the U.S., owned and used by the taxpayer as a principal residence and originally placed in service by the taxpayer. The specific calculations of the credit are outlined in Code § 25C(c). Please also note that a credit allowed for an expense with respect to a property reduces the increase in the basis of that property that would otherwise result from the expenditure.
Accelerated Homebuyer Credit for 2008. Certain first-time homebuyers purchasing principal residences in the U.S. after April 8, 2008, and before July 1, 2009, may claim a refundable tax credit (on Form 5405) equal to the lesser of 10% of the purchase price or $7,500 ($3,750 for married individuals filing separately). For purchases after December 31, 2008, and before July 1, 2009, taxpayers may elect to treat the purchase as made on December 31, 2008, and therefore reportable as a 2008 transaction.
Restriction on Home Sale Exclusion. For sales and exchanges after December 31, 2008, the Code § 121(a) rules excluding gain if the two-out-of-five-year ownership and use rules are met do not apply to the extent gain from the sale or exchange of a principal residence is allocated to periods of nonqualified use. Generally, nonqualified use is any period (other than the portion of any period before January 1, 2009) during which the property is not used as the principal residence of the taxpayer or spouse. For example, use of a residence as rental property or as a vacation home is nonqualified use. The application of this rule is somewhat tricky, so be sure to note that it is not the exclusion that is reduced for nonqualified use; it is the actual gain potentially eligible for the exclusion. As a result, if the gain is large enough, the seller may be able to use the full home sale exclusion despite extensive periods of nonqualified use.
Child-Related Tax Issues
Revised Definition of Qualifying Child. The definition of a qualifying child for various tax purposes has the following changes effective for 2009:
• The taxpayer’s qualifying child must be younger than the taxpayer;
• A child cannot be the taxpayer’s qualifying child if he or she files a joint return, unless the return was filed only as a claim for refund;
• If the parents of a child can claim the child as a qualifying child but they do not do so, no one else can claim the child as a qualifying child unless that person’s adjusted gross income is higher than the highest adjusted gross income of any parent of the child; and
• The taxpayer’s child is a qualifying child for purposes of the child tax credit only if the taxpayer can and does claim an exemption for him or her.
Refundable Child Credit Reduced. A taxpayer may claim a $1,000 tax credit for each qualifying child under the age of 17. To the extent the child credit exceeds the taxpayer’s tax liability, the taxpayer is eligible for a refundable credit (the additional child tax credit) equal to 15% of earned income in excess of a threshold dollar amount (the “earned income” formula). For 2009, the earned income formula for the determination of the refundable child credit is 15% of earned income in excess of $12,550. For 2008, the earned income formula for the determination of the refundable child credit was 15% of earned income in excess of $8,500. Thus, the rule for 2008 produces a larger refundable credit than the rule for 2009.
Loss and Penalty Rules
Personal Casualty and Theft Loss Limit. Generally, a personal casualty or theft loss must exceed $500 (up from $100) to be allowed for 2009. This is in addition to the 10% of adjusted gross income limit that generally applies to the net loss.
Minimum Penalty for Failure to File. For tax returns required to be filed after December 31, 2008, the minimum penalty for a failure to file a tax return within 60 days of the due date (including extensions) is the lesser of $135 (increased from $100) or 100% of the amount of tax required to be shown on the return.
Alternative Minimum Tax (AMT) Rules Tightened
AMT Exemption Reduced. For 2009, the AMT exemption amount has decreased to $33,750 for unmarried taxpayers, $45,000 for married taxpayers filing jointly or qualifying surviving spouses, and $22,500 for married taxpayers filing separately. These changes from the 2008 AMT exemption amounts of $46,200, $69,950, and $34,975, respectively, will generally result in higher AMT for 2009.
Credit Reduction for AMT. Personal tax credits (other than the adoption credit, the child tax credit, the credit for elective deferrals and IRA contributions, the residential energy efficient property credit, and the new qualified plug-in electric drive motor vehicle credit) cannot exceed the excess of regular tax liability over tentative minimum tax. For tax years beginning in 2008, the combined total of the following credits was limited to the sum of (1) regular tax liability reduced by the foreign tax credit allowable under Code Section 27(a), and (2) the 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 non-business energy property credit for energy-efficient improvements to a principal residence;
• Code Sec. 25D residential energy efficient property credit; and
• Code Sec. 1400C first-time D.C. homebuyer credit.
Please note that in past years when the AMT exemption amounts were set to drop and the use of nonrefundable personal credits against AMT was set to be limited, Congress came through with last minute fixes. Be sure to watch for any applicable fix this year.
Hopefully, these are helpful notes as the New Year begins, and as we all watch carefully for the tax provisions that are being contemplated in the stimulus package(s) expected to be unveiled this year.