With real estate prices falling and the economy pulling back, Congress wisely decided to pass legislation estimated to return $152 billion to individual and business taxpayers in the form of rebates and other tax incentives. With over 130 million Americans expected to benefit, please read on to see if you might qualify.
Sound familiar? They are. About six years ago, Congress did the same type of thing. This year's rebate might be more appropriately called "pre-bate." The rebate is technically a cash advance against the refund that you would qualify for on your 2008 tax return. What's the catch? You must both qualify for the rebate according to new legislation, and more importantly, file your 2007 tax return before any 2008 rebate is paid to you.
There are two key questions on everyone's mind: (1) When, and (2) How much? Presuming you have filed your 2007 tax return, the US treasury expects to begin sending the rebates in late May and continuing throughout the summer. Generally speaking, there will be one rebate sent per 2007 tax return filed (e.g. household), and the total maximum rebate (subject to Adjusted Gross Income "AGI" limitations) is your total tax liability up to the sum of the following:
- $600 for yourself,
- $600 for your spouse, and
- $300 for each qualifying child (age 16 or younger as of 12/31/08)
The rebate is an advance credit up to the amount of your projected 2008 tax liability. If you file next year's 2008 tax return at a later date, and the IRS determines that you did not qualify for as much of the rebate as you actually received, you still get to keep your rebate. Finally, if you owe little or no tax but received Social Security benefits or certain veterans' benefits, then you can still qualify for up to a $300 rebate if you pass a few fairly lenient requirements. Please call us for details.
High income earners or households will not receive a rebate. However, if you own a business, other tax benefits may be available to you (see below). As the title of this article suggests, the purpose of the rebate is to stimulate the economy at large. Accordingly, the rebate is generally phased out for AGI levels as follows:
- For single individuals, between AGI of $75,000 to $87,000, and
- For married couples, between AGI of $150,000 to $174,000.
There are a few things you should note. First, your gross income is different from AGI. To the extent you make deductible or pre-tax contributions to retirement accounts, health savings accounts and the like (even before April 15th), you will lower your AGI. Second, if you have qualifying children, the upper limit of the phase out limit may be extended a bit. Please call us for details.
To help illustrate, a few examples of the potential rebate are as follows:
- A single individual: $600 maximum if AGI < 75,000; $0 if AGI>$87,000
- A single mother with 2 qualifying children: $1,200 maximum if AGI < $75,000; $0 if AGI> 99,000 (extended limit because of qualifying children)
- A married couple with 3 qualifying children: $2,100 maximum if AGI < $150,000; $0 if AGI >$192,000 (extended limit because of qualifying children)
The IRS will give you 2 chances to qualify for up to the maximum 2008 tax rebate: (1) Based on your 2007 income tax return (e.g. as an estimate or proxy for your 2008 tax credit / rebate), and (2) Based on your 2008 income tax return (filed later in 2009), if that works out more to your advantage to increase your rebate. Finally, Congress was so determined to stimulate the economy that they also added this provision: If you qualify for a rebate based on your 2007 tax return, but not your 2008 tax return, you still get to keep the rebate you initially received.
There are 2 primary tax incentives for businesses to spend money in the economy in 2008:
1. Increased Section 179 "full write-off" limits of qualified depreciable tangible personal property (e.g. computers, office furniture, etc.)
2. First-year 50% bonus depreciation for qualifying property.
Section 179 Expensing
For one year (the tax year beginning in 2008), Congress will allow up to $250,000 of Section 179 expensing / full write-offs of qualified depreciable tangible personal property, such as computers, office equipment, or office furniture. As this benefit is targeted for small to medium sized businesses, the ability to fully expense these items begins to phase out if the business spends more than $800,000 in 2008 for this type of property. After 2008, the Section 179 expense limit should return approximately to its prior level of $128,000 (as adjusted periodically by the IRS). If the taxpayer subsequently uses the property less than 50% for business purposes, the expense (benefit) is subject to recapture provisions (e.g. it is taxed).
First Year 50% Bonus Depreciation
For one year (the tax year beginning in 2008), Congress will alternatively allow a first-year 50% bonus depreciation to be tacked on to the normal depreciation the asset would otherwise receive. For example, if a new asset is purchased for $50,000 on July 1, 2008 and the useful life is 5 years, the business could generally depreciate $25,000 (50%) as bonus depreciation, then depreciate an additional ˝ year of the remaining $25,000 (e.g. 10%) as regular depreciation, for a total first year deduction of $27,500.
As has been the case for well over a decade, an exception exists for automobiles. Automobiles have a maximum 50% bonus depreciation of $8,000 in 2008, and a maximum regular depreciation amount of $3,060. Therefore, the total a taxpayer could deduct for an automobile is $11,060. For taxpayers looking for more of a deduction, they could alternatively consider leasing a vehicle. Please call us for additional details, as the rules can get technical.
You may have heard that there was some mortgage foreclosure relief in the recent tax law as well. There was. Briefly, the tax law addressed some technicalities regarding forgiveness of debt income. Additionally, it temporarily raised the Fannie Mae and Freddie Mac loan limits for regular mortgages by 75%, from $417,000 (before the new law) up to $729,750. Any loan over $729,750 would be considered a "jumbo" loan. The limits will revert back down to $417,000 after December 31, 2008. Raising the limits temporarily will provide a window of relief to homeowners needing to refinance their mortgage loans due to the subprime lending fiasco.
In closing, this article highlights some of the key points of the Economic Stimulus Act, however, by its nature it cannot include every potential benefit that may exist for your particular situation. Please call us at your convenience to discuss how the new tax law may benefit you in 2008. As always, we look forward to your call.
Jeffrey A. Miller is Of Counsel with the Law Offices of Marc J. Lane, A Professional Corporation. Mr. Miller received his undergraduate degree from the University of Illinois. Mr. Miller received his law degree and his masters of laws (LLM) in taxation, with honors, from IIT Chicago-Kent College of Law.
The Lane Report is a publication of The Law Offices of Marc J. Lane, a Professional Corporation. We attempt to highlight and discuss areas of general interest that may result in planning opportunities. Nothing contained in The Lane Report should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein. Copyright © 2008 by The Law Offices of Marc J. Lane, A Professional Corporation. Reproduction, in whole or in part, is forbidden without prior written permission.