Fed Tax: Emergency Economic Stabilization Act
California CPA magazine: December 2008
by Stuart R. Josephs, CPA
The following are highlights of the 2008 Emergency Economic Stabilization Act (Act), signed into law Oct. 3, 2008.Stuart R. Josephs, CPA has a San Diego-based Tax Assistance Practice that specializes in assisting practitioners in resolving their clients’ tax questions and problems. Josephs, chair of the Federal Subcommittee of CalCPA’s Committee on Taxation, can be reached at (619) 469-6999 or email@example.com.
Preparer Penalty Standards Retroactively Relaxed
Background: Before enactment of the 2007 Small Business and Work Opportunity Tax Act, an income tax return preparer who prepared a tax return, which had a tax understatement due to an undisclosed position for which there was no realistic possibility of being sustained on its merits, was liable for a penalty. For a disclosed position, the preparer was liable only if the position was frivolous.
The 2007 Act broadened the scope of this penalty by applying it to all tax return preparers and altering the standards of conduct a preparer must meet to avoid the penalty. A preparer could have been penalized for preparing a return that had a tax understatement resulting from an “unreasonable position.”
Any position that a preparer did not reasonably believe was more likely than not to be sustained on its merits was an “unreasonable position” unless it was disclosed on the return and there was a reasonable basis for the position.
New Law: The Act revises the definition of an “unreasonable position” and changes the standards for imposing the preparer penalty.
The preparer standard for undisclosed positions is reduced to “substantial authority,” which conforms to the taxpayer standard. The preparer standard for disclosed positions is set at “reasonable basis.”
The preparer standards for tax shelters and transactions subject to Sec. 6662A remains unchanged. For these transactions, the preparer must have a reasonable belief that the position would more likely than not be sustained on its merits.
Transactions subject to Sec. 6662A are:
• Listed transactions; and
• Reportable transactions (other than listed transactions) that have a significant purpose of avoiding or evading Federal income tax.
Effective Dates: The new law generally is effective for returns prepared after May 25, 2007. For tax shelters and Sec. 6662A transactions, the new law apples to returns prepared for tax years ending after Oct. 3, 2008.
Old Law: The following AMT exemptions applied to individuals:
• Married filing jointly or surviving spouses—$45,000; and
• Other individuals—$33,750.
Personal credits were not allowed against the AMT.
At the end of 2007, H.R. 3996 increased these exemptions for 2007 only to $66,250 and $44,350, respectively, and allowed personal credits against the AMT.
New Law: For 2008 only, the Act increases these exemptions to $69,950 and $46,200, respectively.
The Act also allows personal credits against the AMT.
Extension and Modification of AMT Credit Against Incentive Stock Options
Background: Under the regular tax, ISOs are not taxed upon exercise. However, under the AMT, a taxpayer must pay tax on the stock value when the option is exercised.
Old Law: An individual was allowed a refundable AMT credit that was the greater of:
(1) The lesser of $5,000 or the unused AMT credit; or
(2) 20 percent of the unused AMT credit.
The AMT credit was reduced for those with adjusted gross income above $150,000 (joint filers) and $100,000 (single filers), before inflation adjustments.
New Law: The Act allows 50 percent of long-term unused minimum tax credits to be refunded over two years instead of 20 percent over five years. It also eliminates the AGI phase out. In addition, the Act abates any tax underpayment outstanding as of Oct. 3, 2008, related to ISOs and the AMT, including any associated interest or penalty, for any tax year ending before 2008.
Tax-Free IRA Distributions to Qualified Charities
Existing Law: The 2006 Pension Protection Act provides an exclusion from gross income for otherwise taxable IRA distributions from a traditional or Roth IRA for qualified charitable distributions. This exclusion may not exceed $100,000 per taxpayer, per tax year. Distributions are eligible for the exclusion only if made on or after the date that the IRA owner attains age 70.5.
These distributions are taken into account for purposes of the required minimum distribution rules, applicable to traditional IRAs, to the same extent that the distribution would have been taken into account under those rules if the distribution had not been made directly to the charity.
This exclusion applies only if a charitable contribution deduction for the entire distribution would be otherwise allowable (ignoring percentage limitations). Excluded distributions cannot be claimed as charitable contribution deductions.
This tax benefit expired Dec. 31, 2007.
New Law: Effective for post-2007 distributions, the Act extends this PPA provision through Dec. 31, 2009.