Long-awaited Emergency Economic Stabilization Act Passed by Congress
Oct. 6, 2008
The financial bailout package, now passed by both House and Senate, includes numerous tax breaks added to the bill by the Senate, including an AMT patch, individual and business tax extenders, energy incentives, and disaster tax relief. It also contains an extension for home mortgage debt forgiveness relief, and a tax crackdown on compensation and severance pay for certain financial executives, and parity for mental health coverage in group health plans.
According to the analysts at the Tax & Accounting business of Thomson Reuters, the combined cost for the tax measures is over $150 billion over 10 years, and the revenue offsets in the package total about $43.5 billion.
Here are some of the highlights of the tax nuts and bolts of this Act, as well as their implications on taxpayers everywhere:
- For financial institutions that participate in the legislation's Troubled Asset Relief Program to the tune of $300 million or more, there will be new limits on golden parachutes and the tax deductibility of executive compensation. Specifically, executive compensation in excess of $500,000 would not be deductible, and the definition of executive compensation would be expanded to include performance pay and stock options. The current golden parachute tax regime would be expanded to apply to existing employee contracts -- a 20 percent excise tax would apply to parachute payments (normal three times salary rule) triggered by termination other than retirement of the employee, including involuntary termination of the employee, change in control or bankruptcy of the company. The employer would lose the corresponding deduction on the parachute payment. Golden parachutes would be prohibited prospectively for the top five executives in the case of termination, or in the case of bankruptcy, insolvency, or receivership of the financial institution.
- The package would provide assistance to homeowners who have been caught up in the current mortgage crisis and are trying to save their homes. The "Mortgage Forgiveness Debt Relief Act of 2007" excluded debt forgiven before the end of 2009 from taxable income. The relief package extends this treatment for three years, through 2012. Caution: It does not extend the relief to home equity loans.
- An increase in the AMT exemption amounts to $46,200 (individuals) and $69,950 (married filing jointly) for 2008. Additionally, personal credits could offset the AMT for 2008.
- Extensions of expiring family and business tax cuts include:
- A two-year extension of the option to deduct state and local general sales taxes, the above-the-line tax deduction for qualified higher education expenses, and the above-the-line deduction for up to $250 of educators' expenses.
- Extension through 2009 of the standard deduction for real property taxes for non-itemizers.
- Extension through 2009 of the ability of qualifying taxpayers to make tax-free contributions from their IRA plans to qualified charitable organizations.
- An extension of the research credit through 2009, plus an increase in alternative simplified credit from 12 percent to 14 percent for the 2009 tax year; the alternative incremental research credit would be repealed for the 2009 tax year.
- Extension through 2008 of the 15-year write-off for qualified leasehold, restaurant and retail improvements.
- Extension through 2009 of a provision allowing a Code Sec. 199 domestic production activities deduction for activities in Puerto Rico.
- Extension through 2009 of the expensing option for brownfields environmental remediation.
- Extension through 2009 of the special expensing rule for qualifying film and TV productions.
- A provision requiring hedge fund managers and others to account for deferred compensation (income held in offshore accounts and other corporate structures) as it accrues, rather than avoiding appropriate and timely income taxes.
- Additional relief provisions including liberalizations for the child tax credit, income averaging for Exxon Valdez litigation amounts, a five-year write-off for certain farming equipment, and a change in the standards for imposition of the tax return preparer penalty.
- Midwestern disaster area tax relief for victims of the disaster in Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska and Wisconsin, and a new tax relief package for victims of all Federally-declared disasters occurring after Dec. 31, 2007 and before Jan. 1, 2010 (e.g., eased loss deduction rules, a new business write-off for demolition, cleanup and repair, a five-year carryback for casualty losses or qualified disaster expenses, bonus 50 percent first year depreciation for property placed in service through Dec. 31, 2011 (Dec. 31, 2012 for real property), and increased expensing dollar limits).
- Clean-energy tax incentives totaling approximately $18 billion.
- A freeze in the tax deduction for domestic manufacturing activities of major American oil and gas companies.
- A one-year extension of the Federal Unemployment Tax Act (FUTA) surtax at the current level, and by increasing reporting requirements for brokers on sales of stock.