ECONOMIC STIMULUS ACT of 2008

The president signed into law the Economic Stimulus Act (ESA) on February 13, 2008.  The bill provides three major provisions: Rebates, Business Incentives, and Mortgage Stimulus.  Minnesota has not adopted the changes made by the ESA, and is not likely to do so in the future.  Other states have given preliminary interest in changing their tax laws to make the federal rebates non-taxable.  It will be a few months before the state legislatures will have a definitive idea of how they will treat the changes within the ESA.

Rebates
The rebate portion of the ESA has been given the most press; however it may not pertain to a fair number of our clients. 

Individuals are entitled to a rebate equal to the lesser of net income tax liability or $600 ($1,200 in the case of a joint return). The package provides for a minimum tax rebate of $300 ($600 for joint returns) for taxpayers with earned income, social security benefits, and certain veterans’ benefits of at least $3,000. 

All eligible individuals entitled to the basic tax rebate are also entitled to an additional credit of $300 per qualifying child.

Nonresident aliens or estates and trusts do not qualify for the rebate.  Only taxpayers with Social Security numbers will be eligible (this includes spouses and children).  However, decedents for whom a final income tax return for 2007 is filed are entitled to a rebate if their income qualifies.

The amount of such rebate is reduced by 5% of the amount that exceeds an adjusted gross income of $75,000 ($150,000 for married taxpayers filing jointly).  Therefore, you will not receive a rebate if you are a single taxpayer above $87,000 AGI or for joint filers above $174,000.  These amounts are for families without children.  These limits may be larger depending on the number of children.

The rebate checks paid in 2008 are an advance on what will be filed on your 2008 tax return.  The IRS will base these checks on your 2007 tax returns or information from the Social Security Administration or Veterans Administration.  After 2008, those who missed out on the rebate or received only a partial rebate get a second shot at qualifying with 2008 data when they file their 2008 return.  The taxpayer will not be required to give back any portion of the rebate received in 2008 if their 2008 tax return shows a smaller amount than the check they received based on 2007 information.

Rebate checks are expected to be mailed sometime during summer 2008.  To administer the distribution of the checks, the supporting agencies were given $297,000,000.

Business Incentives

Sec. 179

The ESA increases the Section 179 expense limit from $128,000 to $250,000 and raises the overall investment limit from $510,000 to $800,000.  These limits apply to property purchased and placed in service in tax years beginning in 2008.  Businesses not on a calendar year should note that the higher expensing limits do not start until the beginning of their fiscal year that starts in 2008 and ends in 2009.

The ESA does not change the rules for the types of property that are eligible for expensing.

Bonus Depreciation
The ESA provides for bonus depreciation that is similar to the previous bonus depreciation packages.  The ESA allows a bonus deduction on first year depreciation equal to 50% of the adjusted basis of certain property.  To qualify property must eligible for (1) MACRS with a period of 20 years or less; (2) water utility property; (3) computer software (off-the-shelf); or (4) qualified leasehold property. 

The property must generally be placed in service during 2008.  There cannot be a binding written contract before January 1, 2008 to acquire the property.  However, property qualifies if it is acquired under a binding written contract entered into during 2008.  Businesses on a fiscal year should note that the bonus depreciation is based on purchases within the calendar year 2008.  The placed in service date is extended one year for transportation property, certain aircraft and property with a recovery period of 10 years or longer. 

The bonus depreciation must be claimed for both regular tax and AMT unless the taxpayer makes an election out.

The ESA also raises the first year limitation on “luxury” auto depreciation to $8,000.  

Mortgage Stimulus

The ESA continues the assistance of the Mortgage Forgiveness Debt Relief Act of 2007 to provide help to the depressed real estate sector.  This section of the ESA is largely overlooked, but could have some tax consequences.  The ESA was passed to increase the availability of larger loans or “jumbo mortgages” (loans greater than $417,000).  The current rate on a normal mortgage is 5.8%, while the jumbo rate is 7%.

The ESA raises the limit for Fannie Mae and Freddie Mac to acquire mortgages to 125% of the median area home price capped at 175% of pre-legislation limitations.  Freddie and Fannie are not allowed to purchase loans above this limit.  This applies to mortgages originating between July 1, 2007 and December 31, 2008.  This translates to a cap for the “jumbo mortgage” limit of $729,750. 

The median (not average) home price in Hennepin County at the end of 2007 was just over $300,000.  This would not translate into a change in the jumbo loan amount of $417,000 ($300k * 125% = $375k).  We will have to wait and see if HUD further separates Hennepin County into zip codes.  It is possible some western zip codes could have their limits increased.  Many commentators believe the jumbo limits may not change until the end of July.

The possible limited tax consequences to this part of the ESA relates to qualified residence interest.  The interest that is allowed to be deducted on Schedule A is limited to the interest generated from $1,000,000 acquisition indebtedness.  The amount that can be deducted on Schedule A has not changed.  Some clients may be able to afford larger mortgages on their 1st and 2nd homes and be surprised that their interest may be limited. 

Retirement Plan Options Increase Savings Opportunities

Do you wish to put more money away into qualified retirement plans?

Depending on your business structure, you should consider a Keogh plan with a 401K feature. Some brokers call these plans Solo 401K plans and they can work for a sole proprietor who files a Schedule C or for a corporation where you are the sole employee.

Normally qualified retirement plans are limited to 25% (sometimes 20%) of the earned income of the participant. However, due to one of the tax bills passed by congress over the past few years, the 401K employee deferral no longer counts as part of this 25% (20%) limit. This allows people with lower W-2s or lower schedule C's to defer a much higher percentage of their earned income. We have listed a sample calculation below:

Retirement Deduction (For 2006)

$100,000 Schedule C income
       Normal profit sharing Keogh $18,587
       Profit sharing Keogh with 401K $33,587

And if you are over 50, the 401K amount increases by $5,000 due to catch up features in the tax bill.

The opportunity to use the Keogh Plan with a 401k feature does not work if you are already contributing to a 401K at another job, as you are allowed only one 401K limit per year.

Please contact us if you want to learn more about qualified retirement plans. If you plan on implementing such a plan for 2006, it must be in place by December 31, 2006.