In addition to the new restrictions on deferred compensation described in the prior article, the Emergency Economic Stabilization Act of 2008 contained numerous other tax provisions. Most of them are of too limited interest to report on here, but there are a few of general interest to high net worth taxpayers. These include:
IRA Charitable Rollover Provisions Extended. The provision that allows an IRA owner to make a direct transfer to a charity without taking the amount transferred into his taxable income was extended through 2009. The amount transferred is not deductible (because it is not included in the owner’s taxable income) but it does count against the required minimum distribution that the account owner must otherwise take. In order to qualify: i) the owner of the IRA must be 70 ½ or older; ii) the gift must be made by December 31, 2008 (to fulfill the distribution requirement for 2008) or December 31, 2009 (to fulfill the distribution requirement for 2009); iii) the transfer cannot exceed $100,000 per year; and iv) the charity must be publicly supported. Transfers to private foundations and donor advised funds do not qualify.
To avoid an unpleasant surprise, before you do this make sure your state also permits the tax free charitable rollover. Given its own budget problems, California may not conform its tax law to permit these rollovers.
Alternative Minimum Tax Changes. Consistent with recent history, Congress once again applied a one year patch to prevent the alternative minimum tax (“AMT”) from applying to about twenty million middle class families. This is done by increasing the exemption amount and generally is not of interest to high income taxpayers because the exemption amount is phased out as alternative minimum taxable income increases.
Of significance to some high net worth taxpayers is a provision that abates any alternative minimum tax liability that arose in a tax year ending before 2008 that is attributable to the exercise of “Incentive Stock Options” (“ISOs”). When a taxpayer exercised an ISO, the difference between the option strike price and the value of the stock at the time of exercise did not have to be included as income for purposes of the regular income tax but did have to be included for purposes of the alternative minimum tax.
Many people who exercised these options during the technology stock boom became obligated to pay AMT. When the value of the shares quickly plummeted or became worthless, they were often unable to pay the tax. After considerable lobbying by the National Taxpayer Advocate’s office, Congress finally addressed the problem by simply eliminating their tax liability. Anyone who actually paid the AMT will receive a refundable credit they can use to obtain a future refund.
Suspension of 50% AGI Deduction Limit. The 50% of adjusted gross income limitation on charitable income tax deductions for individuals has been temporarily suspended through December 31, 2008, for charitable cash contributions dedicated to Midwestern disaster relief efforts. This provision is effective for all cash contributions paid during the period beginning on the earliest applicable disaster date for all States and ending on December 31, 2008. The donor must obtain a written acknowledgement from the charity that the gift was used for relief efforts in one or more Midwestern disaster areas and the donor must elect this treatment with respect to the contribution.
Again, you should also determine whether your state recognizes this provision. On prior occasions when the 50% limitation has been suspended for the federal income tax, California has not conformed its law to that provision.
Extension of 15 Year Amortization for Leasehold Improvements. Qualified leasehold improvements that were placed in service in commercial buildings before January 1, 2008, could be amortized on a straight line basis over 15 years instead of the 39 year period otherwise applicable to the building. This provision has been extended to improvements placed in service before January 1, 2010. The improvements must also be placed in service more than three years after the date on which the building was first placed in service.
Donations of Appreciated Property by S Corporations. Under a special rule that expired on December 31, 2007, if an S corporation made a charitable contribution of appreciated property, it was permitted to deduct the fair market value of the property (assuming it otherwise qualified) but the shareholder only had to reduce the tax basis of his shares by the adjusted tax basis of the contributed property. This provision has been extended to contributions made on or before December 31, 2009.