Senate approves one year fix to AMT; extends tax credits for individuals and businesses

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The U.S. Senate Tuesday voted to approve a one-year AMT Patch, and extend expired and expiring tax credits for individuals and businesses. The Senate bill will also extend energy tax breaks. The measure will return to the House this week where legislators will reconsider the requirements for revenue offsets in the alternative minimum tax (AMT) and extenders bills already passed in the House.

The Senate bill does not contain any revenue measures to offset the expected cost of the AMT patch and calls for only partial offsets to the costs of other tax credit extensions. Energy tax credits will be paid for by tightening the rules by which oil and gas companies pay taxes on income earned overseas

The Senate bill also provides that mental health coverage should be on par with benefits offered for other health issues, and changes the standard for imposing penalties on tax return preparers.

Last year, the House did not pass an AMT patch until December. House Ways and Means Chairman Charles B. Rangel (S-NY) said last week that he expects problems with the Senate package, but not overwhelming ones, reports. The White House has said it supports the Senate bill.

Individual Extenders

Most of the deductions and business tax credits are extended until the end of 2009. Extensions that will have broad application among individual taxpayers include:

  • AMT Patch The bill increases the exemption amounts from $33,750 to $46,200 (individuals) and from $45,000 to $69,950 (married filing jointly) for 2008. The proposal will also allow the personal credits against the AMT. This extension applies to 2008 only.
  • Deduction of State and Local General Sales Tax The itemized deduction for State and local general sales taxes in lieu of the itemized deduction which expired on December 31, 2007 would be extended to December 31, 2009.
  • Qualified Tuition Deduction The current tuition deduction of $4,000 for taxpayers with adjusted gross incomes (AGI) of $65,000 or less ($130,000 for joint returns) or $2,000 for taxpayers with of $80,000 or less ($160,000 for joint returns), which expired on December 31, 2007, would be extended to December 31, 2009.
  • Teacher Expense Deduction. The bill extends the provision allowing teachers an above-the-line deduction for up to $250 for educational expenses until December 31, 2009.
  • Additional Standard Deduction for Real Property Taxes. The recently enacted Housing and Economic Recovery Act of 2008 added a real property tax calculation to the standard deduction for taxpayers who do not itemize. The real property tax deduction is the lesser of the amount allowable as a deduction of state and local and foreign real property taxes, or $500 ($1,000 in the case of a joint return). This provision currently expires on December 31, 2008. The extension would be until December 31, 2009.

Business Extenders

General business extenders include:

  • Research and Development Credit. The bill would extend the research tax credit equal to 20 percent of the amount by which a taxpayer's qualified research expenses for a taxable year exceed its base amount for that year. the current credit expired on December 31, 2007. The extension would be until December 31, 2009.
  • 15-Year Straight-Line Cost Recovery for Qualified Leasehold, Restaurant, and Retail Improvements. In the American Jobs Creation Act of 2004, Congress shortened the cost recovery of certain leasehold improvements and restaurant property from 39 to 15 years. The proposal would extend the provision, which expired on December 31, 2007, to the end of 2009. Retail owners and new restaurants would receive the shortened recovery period for 2009 only.
  • Enhanced Charitable Deduction for Qualified Computer Contributions. The bill extends a provision that encourages businesses to contribute computer equipment and software to elementary, secondary, and postsecondary schools by allowing an enhanced deduction for such contributions. This provision expired on December 31, 2007. The extension would cover two years, until December 31, 2009.

Other provisions

  • Child Tax Credit. The Economic Growth and Tax Reconciliation Act of 2001 set the income threshold for a refundable child tax credit at $10,000 (indexed). The threshold for 2008 is $12,050. The proposal lowers the refundable threshold for the child tax credit to $8,500 for the 2008 tax year.
  • Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008. This bill would require private insurance plans that offer mental health benefits as part of the coverage to offer such benefits on par with the medical-surgical benefits. Any cost-sharing or benefit limits imposed on mental health services must not be any more restrictive than those imposed on med-surgical services. The proposal is effective January 1, 2009. Modification of Penalty on Understatement of Taxpayer's Liability by Tax Return Preparer. The Senate bill changes the standards for imposition of the tax return preparer penalty. The preparer standard for undisclosed positions is reduced to "substantial authority." The preparer standard for disclosed positions is "reasonable basis." This element of the legislation would be effective for tax returns prepared after May 25, 2007.

On Wednesday, the House voted 393-30 to increase the AMT exemption in 2008, saving more than 20 million taxpayers from getting hit with a tax increase averaging about $2,000.

Energy Tax Credits

In separate legislation, the Senate voted to extend the tax credit for producing electricity from wind for one year and for other renewable sources for two years. Businesses would receive a 30 percent tax credit for eight more years for investing in solar, wind, geothermal and ocean energy equipment.

Homeowners would receive a comparable 30 percent tax credit for eight additional years for the cost of installing solar equipment at their residences. Homeowners may also claim a tax credit of up to 10 percent of the cost of all qualified energy efficiency improvements, such as insulation, replacement windows, water heaters, and heating and cooling equipment.

The green energy bill would create a tax credit for plug-in electric cars, with purchasers getting tax credits ranging from $2,500 to $7,500, depending on the battery capacity of the vehicle.

Evolution of the Emergency Economic Stabilization Act of 2008:

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