TAX LAW CHANGES IN 2009

Many important tax changes go into effect in 2009 (apart from the numerous indexing changes). These non-indexing changes result from various laws that were enacted over the past few years. This article carries an overview of the non-indexing changes for individuals for 2009.

Changes Affecting Retirement and Estate Planning

New law waives required minimum distributions (RMDs) for calendar year 2009.
A new law enacted in late 2008 provides that retirement plan account participants, IRA owners, and their beneficiaries do not have to take RMDs for 2009. (Code Sec. 401(a)(9)(H)) Thus, taxpayers who can take advantage of this change will not be forced to sell stock or mutual fund shares held in retirement accounts when their value is exceptionally depressed. This change helps retired taxpayers who do not need to rely on their RMDs for living expenses. By not making the RMD for 2009 (or withdrawing less than the RMD) from their qualified plan accounts and/or IRAs, they will wind up with less taxable income for 2009, and, possibly, avoid (or mitigate the effect of) AGI-based phaseouts of tax breaks. They will also have more tax-sheltered amounts to leave to their beneficiaries.

There is no need to show that a retirement plan account or IRA is “in distress” because of stock market conditions in order to qualify for the 2009 RMD suspension. Thus, for example, the RMD suspension applies equally to IRAs invested entirely in FDIC-insured bank-CDs as well as to IRAs invested in depressed-in-value stocks or mutual funds.  The suspension of RMDs for 2009 does not help those older taxpayers who must make regular withdrawals (sometimes in excess of the RMD) from their retirement plan accounts and IRAs in order to get by each month.

Increase in estate tax exemption.
The applicable exclusion amount (the amount excluded from estate tax by the unified credit) increased from $2 million to $3.5 million for estates of decedents dying in 2009. (Code Sec. 2010(c)) The top rate remains at 45%. Barring further Congressional action, the estate tax is repealed for 2010 deaths, only to be reinstated for deaths occurring in 2011 and later with a $1 million exemption and a top rate of 55%.

Congress presumably will not let the estate tax return to a $1 million exemption and a top rate of 55% in 2011. On the other hand, it is doubtful that Congress will permanently repeal the estate tax. The most likely scenario would be a permanent increase in the exemption to somewhere between $3.5 and $5 million, perhaps with inflation adjustments. 

Nonqualified deferred compensation from certain tax indifferent parties.
Generally effective for amounts deferred which are attributable to services performed after 2008, any compensation of a service provider that is deferred under a nonqualified deferred compensation plan of a nonqualified entity is includible in gross income by the service provider when there is no substantial risk of forfeiture of the service provider's rights to the compensation. (Code Sec. 457A)

Travel-Related Income Tax Breaks

Credit for plug-in electric drive vehicle.
For tax years beginning after Dec. 31, 2008, a tax credit is allowed for new qualified plug-in electric drive motor vehicles (NQPEDMVs). (Code Sec. 30D) Subject to a limit based on weight, the credit amount is the sum of: (1) $2,500; plus (2) $417 for each kilowatt hour of traction battery capacity in excess of 6 kilowatt hours. (Code Sec. 30D(a)(2)) The portion of the credit for NQPEDMVs that is attributable to property of a character subject to an allowance for depreciation (generally, property used in a trade or business or for the production of income) is treated as part of the general business credit; the nondepreciable property portion is treated as a personal credit. (Code Sec. 30D(d))

Qualified bicycle commuting reimbursement.
For tax years beginning after Dec. 31, 2008, qualified bicycle commuting reimbursements are qualified transportation fringe benefits. (Code Sec. 132(f)(1)(D)) Qualified bicycle commuting reimbursements are, for any calendar year, any employer reimbursement during the 15-month period beginning with the first day of that calendar year for reasonable expenses incurred by the employee during that calendar year for the purchase of a bicycle and bicycle improvements, repair, and storage. The benefit is limited to $20 (not adjusted for inflation) multiplied by the number of months during the year that an employee regularly uses a bicycle for a substantial portion of the travel between his residence and his place of employment. Unlike other qualified transportation fringe benefits, qualified bicycle commuting reimbursements cannot be used in conjunction with commuter highway vehicle transportation, transit passes, or parking benefits. (Code Sec. 132(f)(5)(F))

Standard mileage rates for down for 2009.
The optional mileage allowance for using a car to get medical care or in connection with a move that qualifies for the moving expense deduction is 24¢ per mile, down 3¢ from the 27¢ per mile allowance for the last half of 2008.

Home-Related Tax Breaks

Non-business energy property credit for energy-efficient improvements to principal residence in 2009.
For property placed in service in 2009, a taxpayer can claim (on Form 5695) a lifetime nonrefundable credit of up to $500 for making qualifying energy saving improvements to his home, but only $200 of this credit amount may be for qualifying window expenditures. The expenses must be made on or in connection with a dwelling unit located in the U.S., owned and used by the taxpayer as his principal residence and originally placed in service by the taxpayer. (Code Sec. 25C)

The credit per improvement is:

(1) 10% of the cost of energy efficient building envelope components which meet criteria established by the 2000 International Energy Conservation Code. These consist of: insulation materials or systems that reduce heat loss/gain; exterior windows (including skylights); exterior doors; and certain metal roofs with pigmented coatings or (where placed in service after Oct. 3, 2008) asphalt roofs with cooling granules (which meet the Energy Star requirements) designed to reduce heat gain. The components must be expected to last for at least five years. (Code Sec. 25C(c))

(2) Residential energy property expenses (including labor costs for onsite preparation, assembly, or original installation which meet specific standards, in an amount up to: (a) $300 for the cost of energy-efficient building property (electric heat pump water heater, electric heat pump; central air conditioner; natural gas, propane or oil water heater; or a stove burning biomass fuel to heat or provide hot water to a taxpayer's residence in the U.S.) that meets specific energy efficiency standards); (b) $150 for a natural gas, propane, or oil furnace or hot water boiler; and (c) $50 for an advanced main air circulating fan. ( Code Sec. 25C )
If a credit is allowed for an expense for a property, the increase in the basis of that property that would otherwise result is reduced by the credit allowed. (Code Sec. 25C(f), Code Sec. 1016(a)(34))

Election to accelerate homebuyer credit into 2008.
Eligible first-time homebuyers buying principal residences in the U.S. after Apr. 8, 2008 and before July 1, 2009, may claim a refundable tax credit (on Form 5405) equal to the lesser of 10% of the purchase price or $7,500 ($3,750 for married individuals filing separately). (Code Sec. 36) Purchases after Dec. 31, 2008, and before July 1, 2009, may be treated as made on Dec. 31, 2008.

New restriction on homesale exclusion.
For sales and exchanges after Dec. 31, 2008, the Code Sec. 121(a) rule excluding homesale gain if the two-out-of-five-year rule is met does not apply to the extent gain from the sale or exchange of a principal residence is allocated to periods of nonqualified use. (Code Sec. 121(b)(4)) Generally, nonqualified use is any period (other than the portion of any period before Jan. 1, 2009) during which the property is not used as the principal residence of the taxpayer or spouse. For example, use of a residence as rental property or as a vacation home is nonqualified use.

It is important to note that the exclusion is not reduced for nonqualified use; rather, it is the gain potentially eligible for the exclusion. Thus, if the homesale gain is large enough, the seller may be able to use the full homesale exclusion despite extensive periods of nonqualified use.

Child-Related Tax Breaks

Qualifying child definition revised.
The following changes to the uniform definition of a qualifying child apply to tax years beginning after 2008.

• The taxpayer's qualifying child must be younger than the taxpayer. (Code Sec. 152(c)(3)(A))
• A child cannot be the taxpayer's qualifying child if he or she files a joint return, unless the return was filed only as a claim for refund. (Code Sec. 152(c)(1)(E))
• If the parents of a child can claim the child as a qualifying child but no parent so claims the child, no one else can claim the child as a qualifying child unless that person's AGI is higher than the highest AGI of any parent of the child. (Code Sec. 152(c)(4))
• The taxpayer's child is a qualifying child for purposes of the child tax credit only if he can and does claim an exemption for him or her. ( Code Sec. 24(a) )

Refundable child credit rule tightened.
A taxpayer may claim a $1,000 tax credit for each qualifying child under the age of 17. To the extent the child credit exceeds the taxpayer's tax liability, the taxpayer is eligible for a refundable credit (the additional child tax credit) equal to 15% of earned income in excess of a threshold dollar amount (the “earned income” formula). For 2009, the earned income formula for the determination of the refundable child credit is 15% of earned income in excess of $12,550. For 2008, the earned income formula for the determination of the refundable child credit was 15% of earned income in excess of $8,500. (Code Sec. 24(d))

Toughened Loss and Penalty Rules

Personal casualty and theft loss limit.
Generally, a personal casualty or theft loss must exceed $500 (up from $100) to be allowed for 2009. This is in addition to the 10% of AGI limit that generally applies to the net loss. (Code Sec. 165(h))

Minimum penalty for failure to file a tax return is increased.
For tax returns required to be filed after Dec. 31, 2008, the minimum penalty for a failure to file a tax return within 60 days of the due date (including extensions) is the lesser of $135 (increased from $100) or 100% of the amount of tax required to be shown on the return. (Code Sec. 6651(a))

Tightened Alternative Minimum Tax (AMT) Rules

Decreased AMT exemption amount.
For 2009, the AMT exemption amount has decreased to $33,750 for unmarried individuals, $45,000 for marrieds filing jointly or qualifying surviving spouses, and $22,500 for marrieds filing separately. (Code Sec. 55(d)) For 2008, the AMT exemption amounts were $46,200, $69,950, and $34,975, respectively.

Credits reduced by AMT calculation.
Personal tax credits (other than the adoption credit, the child tax credit, the credit for elective deferrals and IRA contributions, the residential energy efficient property credit, and the new qualified plug-in electric drive motor vehicle credit) cannot exceed the excess of regular tax liability over tentative minimum tax. (Code Sec. 26(a)(1)) For tax years beginning in 2008, the combined total of the following credits was limited to the sum of: (1) regular tax liability reduced by the foreign tax credit allowable under Code Sec. 27(a), and (2) the AMT:

• Code Sec. 21 dependent care credit;
• Code Sec. 22 credit for the elderly and permanently and totally disabled;
• Code Sec. 23 adoption credit;
• Code Sec. 24 child tax credit;
• Code Sec. 25 mortgage credit;
• Code Sec. 25A Hope and Lifetime Learning credits;
• Code Sec. 25B lower income saver's credit;
• Code Sec. 25C nonbusiness energy property credit for energy-efficient improvements to a principal residence;
• Code Sec. 25D residential energy efficient property credit; and
• Code Sec. 1400C first-time D.C. homebuyer credit.

I hope this information is helpful.

Please contact the Law Offices of William H. Copperthwaite Jr., L.L.C. if you have any questions.

Please note that the information contained in this summary is intended for informational purposes only and is not to be considered tax/legal advice. For specific advice, please contact the Law Offices of William H. Copperthwaite Jr., L.L.C.