House Passes Rescue Plan with Tax Changes

Extenders, AMT relief

By Kaye A. Thomas
Posted October 3, 2008

People owing tax on stock options bailed out, too.

It's now official: the Emergency Economic Stabilization Act of 2008 has been enacted into law. As reported here yesterday, the Senate added tax provisions to the bill before sending it to the House of Representatives. House approval of that legislation breaks a stalemate between the two houses over the tax legislation. Here's a summary of key tax provisions.

AMT patch

By far the biggest provision in dollar amount, providing over $60 billion in tax relief, is the "AMT patch," needed to prevent a vast expansion of the AMT for the 2008 tax year. The AMT patch consists of two pieces: one to prevent the AMT from encroaching on various tax credits, and another to increase the AMT exemption amount, a deduction designed to prevent the AMT from applying to people with moderate income. The new figures for the AMT exemption amount are available in our Reference Room.

This provision affects only the 2008 tax year, so the next Congress will face the same issue, with an even higher price tag, for 2009.

Refundable AMT credit

People who have unrecovered AMT credit — or unpaid AMT tax that would be allowed as a credit — receive generous new relief in this bill. These provisions apply only to people whose AMT payments relate to "timing adjustments," primarily individuals who exercised incentive stock options and held the shares. People who pay AMT for other reasons are not affected.

Previous legislation provided relief in the form of a refundable AMT credit (explained here). Relief was incomplete because the credit was phased out at higher income levels, because recovery was spread over five years, and because people who had not been able to pay the tax continued to deal with collection efforts of the IRS. The new legislation addresses all these issues, eliminating the phase-out, permitting full recovery of unused credit in just two years and, in the case of people owing AMT because of incentive stock options, abating past tax and interest. We'll post full details and a discussion of the implications of this change shortly.

Extenders

A number of popular tax benefits have expiration dates, not because Congress intended them to be temporary, but instead because Congress could not find room in the budget for a permanent provision. Every year or two, Congress has to pass a new law extending these provisions. Among the extenders this year are the following items, all of which have been extended for two years (2008 and 2009):

A deduction of state and local sales tax is allowed as an alternative to the deduction for state and local income tax.
A deduction is allowed for qualified tuition and related expenses.
IRA owners are allowed to make tax-free distributions to charities.
The non-itemizer deduction for real property tax, a new provision for 2008, is extended to 2009.

A host of other tax benefits, including many aimed at businesses, were extended as well.

Disaster relief

Tax relief provisions similar to those made available for victims of Hurricane Katrina will be available to taxpayers and businesses suffering damage in disaster areas caused by Hurricanes Gustav and Ike.