Last Updated: October 13, 2008
Making Sense of the Emergency Economic Stabilization Act of 2008
On Oct. 3, 2008, President Bush signed into law one of the largest tax bills in years, the "Emergency Economic Stabilization Act of 2008." That law, which makes 290 changes to the tax code, gives the Treasury Department up to $700 billion to purchase, manage and sell assets held by financial institutions that are considered to be "troubled" or "toxic." The central feature of the EESA, which represents some 442 pages, is the establishment of a troubled asset relief program or TARP, which will purchase "troubled assets" from "financial institutions."
But the new law (PDF | 697KB) also has provisions that deal with 2008 AMT tax patch and individual taxpayer incentives. Key provisions of the new law include:
Individual Incentives
- Allows IRA owners over age 70½ to transfer up to $100,000 of their IRA directly to charity through the end of 2009. This provision had previously expired December 31, 2007.
- Lowers the 2008 earned income threshold for purposes of the refundable portion of the child tax credit from $12,050 to $8,500.
- Allows itemized deduction for state and local sales taxes in lieu of state and local income taxes for 2008 and 2009.
- Extends a provision allowing an additional standard deduction for real property taxes paid by taxpayers who do not itemize. The amount of the deduction is the lesser of the amount allowable as a deduction of state and local real property taxes, or $500 ($1,000 for married persons filing a joint return).
- Extends the above-the-line $4,000 maximum deduction for higher education tuition and related expenses through 2009.
- Enhances child tax credit by reducing the earned income floor from $12,050 to $8,500.
- Extends $250 deduction for classroom expenses of elementary and secondary school teachers through 2009.
Other Provisions
Increases FDIC insurance $100,000 to $250,000 per depositor. This increase would be temporary and end on Dec. 31, 2009.
AMT Patch
Includes another Alternative Minimum Tax (AMT) patch for the 2008 tax year. For 2008, the AMT exemption amounts are $69,950 for married couples filing jointly and surviving spouses, $46,200 for single taxpayers and heads of household and $34,975 for married couples filing separately. This patch should help an estimated 21 million taxpayers in tax year 2008, according to published reports.
- Extends ability to offset AMT with nonrefundable personal credits, such as dependent care and education tax credits, through 2008.
- Modifies and extends AMT credit allowance against incentive stock options (ISOs) and abates certain ISO-related AMT underpayments and associated penalties and interest.
FPA member, Michael Kitces, CFP®, director of financial planning for Pinnacle Advisory Group, notes that "many of the tax changes under EESA are passive and taxpayers will simply enjoy their benefit with no further action." However, as Kitces notes, "the renewed opportunity to make charitable contributions directly from an IRA, suddenly available for the final months of 2008, provides significant additional tax planning opportunities."
For those in affected disaster areas, the EESA tax provisions include several additional tax relief provisions as well.
