In October 2008, Congress passed a $700 billion emergency bill designed to help shore up the nation's financial system. Fortunately, it also included a few provisions that may help reduce the tax burden for some Americans.
Here's a look at some of the most valuable new or newly extended tax breaks for 2008 filers.
The alternative minimum tax is a parallel method of calculating income taxes , enacted in the late 1960s to prevent a small group of high-income earners from avoiding taxes. Because it has never been indexed for inflation, the ATM has threatened to affect more middle-income taxpayers.
The rescue bill increased the AMT income-exemption amount for the 2008 tax year, which should help an estimated 24 million families avoid the AMT and the $2,000 average tax increase associated with it.
The rescue plan also extended a popular charitable-giving incentive through tax year 2009. Taxpayers who are 701/2 or older may transfer as much as $100,000 tax-free directly from an IRA to a qualified charitable organization. The transfer counts toward the yearly required minimum distribution, but is not included in adjusted gross income.
The IRS will show some mercy to unfortunate homeowners who faced foreclosure, sold their homes "short" (for less than they owned on the mortgage) or restructured debt with a lender in 2008. In recent years, any forgiven or canceled debt was treated as taxable income, and strapped families who lost their homes would also owe taxes to the federal government.
The current law allowing taxpayers to exclude from federal tax up to $2 million of mortgage-debt forgiveness was extended through 2012. However, this applies only to mortgage debt associated with primary residence, not equity lines used to pay credit cards or other expenses.
Through 2009, taxpayers will continue to have the option to deduct state and local sales taxes, instead of state and local income taxes. This deduction benefits those who live in places with little or no state income tax, in addition to individuals who made costly purchases such as cars and boats during the tax year.
Single filers with adjusted gross income of $65,000 or less ($130,00 for joint filers) who pay qualified higher-education expenses for themselves, a spouse or a dependent can deduct up to $4,000 annually in tax years 2008 and 2009. Higher-income filers (no more than $80,000 single or $160,000 joint status) can deduct up to $2,000.
It's likely that you will need some guidance to take full advantage of these temporary changes to the tax code. Before you take a specific action, be sure to consult with your tax professional or financial adviser.
In 2009, one of the most favorable estate-tax provisions of our lifetimes will become law. The first $3.5 million of an estate will be exempt from the federal estate tax, up from the $2 million exemption that's been in effect since 2005.
Only the scheduled full repeal of the estate tax in 2010 will exempt more estate from a levy that American taxpayers say is the most unfair federal tax.
But, as the George Harrison song says, "All things must pass." All things except, apparently, the estate tax. The scheduled reduction and repeal of the federal estate tax are temporary. Under current law, the estate tax will return to its pre-repeal levels in 2011 with a $1 million exemption amount and a maximum 55 percent tax rate.
It's unclear whether the current law will be allowed to run its course, or whether Congress will intervene. If Congress does take action, it's also not clear whether it will increase or decrease the estate tax. This means that the outlook for the estate tax may be more uncertain than at any other point in our lifetimes.
Fortunately, the use of a properly structured trust can help reduce exposure to estate taxes and help reserve assets for heirs.
Assets placed in a trust typically don't go through probate. Probate is often a costly and time-consuming legal process that typically takes place when individuals leave titled property behind, regardless of whether they had a valid will. Moreover, the contents and activities of a trust are private, unlike a will, which is typically made public after probate.
A trust can be sued to coordinate an entire estate conservation strategy, helping to reduce confusion and avoid property going to beneficiaries in disproportionate amounts. Certain trusts can be structured to manage the finances of a special-needs child, preserve assets for minor children until they reach an appropriate age, or enforce conditions that heirs must meet before receiving an inheritance.
The use of trusts can involve a complex web of tax rules and regulations. You should consider the counsel of an experienced estate-planning professional before implementing such strategies.
Until we see how Congress plans to treat the estate tax, it's wise to assume that it will remain with us in one form or another.
Craig Langweiler is president of Langweiler Financial Group and can be reached at 215-860-8088.