The Emergency Economic Stabilization Act of 2008 (EESA) is designed to address the current U.S. credit crisis. But this "rescue" act also extends and expands a multitude of tax breaks for individuals and businesses that had already expired or were set to expire after this year, including many energy-related incentives. In addition, it provides relief for natural disaster victims in the Midwest, Louisiana and Texas.

AMT relief for individuals

Perhaps the most significant tax provision affecting individuals is the extension of alternative minimum tax (AMT) relief. The AMT is a separate tax system that limits some deductions and doesn't permit others — you must pay the AMT if your AMT liability exceeds your regular tax liability. Unlike the regular tax system, the AMT system isn't regularly adjusted for inflation. So if Congress hadn't acted, many middle class taxpayers would have had to pay AMT for 2008. EESA provides a one-year "patch" that increases the AMT exemption. The patch also expands the AMT income ranges over which the exemptions phase out and only partial exemptions are available.

EESA also provides more relief to many taxpayers whose incentive stock option (ISO) exercises have made them subject to the AMT. It abates unpaid AMT liability, as well as interest and penalties, generated by ISO exercises before 2008. It also increases the amount of refundable long-term AMT credit for AMT paid in past years. For calendar years 2008 through 2012, eligible taxpayers can now claim 50% — up from 20% — of their unused credit.

Despite these AMT-related provisions, many taxpayers will continue to be subject to this additional tax until more substantial changes are made.

Extensions benefiting individuals

Some other important tax breaks for individuals that expired in 2007 have now been extended through 2009:

The qualified tuition deduction. It allows eligible taxpayers to deduct up to $4,000 of qualified higher education tuition and fees "above the line," which means, unlike an itemized deduction, it reduces your adjusted gross income (AGI). But this deduction is limited to $2,000 for joint filers with AGIs of $130,000 to $160,000 ($65,000 to $80,000 for single filers) and is unavailable to taxpayers with higher AGIs. Taxpayers ineligible for education credits may be eligible for this deduction.

Additional breaks that have been extended through 2009 include:

• The provision allowing taxpayers age 70Ѕ or older to make tax-free distributions from their IRAs (up to $100,000 annually) to tax-exempt charities, and
• The additional standard deduction for real property taxes for nonitemizers (up to $1,000 for joint filers, $500 for single filers) that was provided earlier this year under the Housing and Economic Recovery Act.
Extensions benefiting businesses

Here are some of the more significant breaks for businesses that EESA has extended through 2009 and, in some cases, expanded:

The research and development (R&D) credit. Generally, it's equal to 20% of qualified research expenses in excess of a certain amount based on the company's historical activity. But businesses can instead take the alternative simplified credit (ASC), equal to 12% (14% for 2009) of qualified research expenses exceeding 50% of the previous three tax years' average expenses.

Accelerated depreciation for leasehold and restaurant improvements. This provision allows a shortened recovery period of 15 years — rather than 39 years — for qualified leasehold and restaurant improvements (generally those made by the lessor or the lessee to the interior of a nonresidential building more than three years after the building was placed in service).

EESA also expands the provision to cover certain:

• New construction for qualified restaurant property, and
• Improvements to retail space.

These expansions apply only to property placed in service after Dec. 31, 2008, and before Jan. 1, 2010.

Energy incentives

EESA extends many energy-related tax provisions and adds some new tax incentives. There are breaks for both individuals and businesses, including:

• An extended credit for nonbusiness energy property,
• A modified energy-efficient appliance credit,
• A new credit for qualified plug-in electric drive motor vehicles,
• An extended energy-efficient commercial buildings deduction,
• An accelerated recovery period for depreciation of smart meters and smart grid systems, and
• A special depreciation allowance for certain reuse and recycling property.

Contractors may benefit from breaks for qualified green building and sustainable design projects.

Natural disaster relief

EESA extends certain GO Zone relief provisions. The Act changes the 2-year hiring period of a Hurricane Katrina employee from the 2-year hiring period beginning on Aug. 28, 2005 in Katrina Emergency Tax Relief Act of 2005 to a 4-year hiring period beginning on Aug. 28, 2005, effective for individuals hired after Aug. 28, 2007.

EESA provides more limited relief for the Hurricane Ike disaster area, but it expands national disaster relief overall, generally for natural disasters occurring after Dec. 31, 2007, and before Jan. 1, 2010.

How will EESA affect you?

EESA is one of the largest tax acts in recent years and may significantly affect your tax liability in a variety of ways. So please contact us at 251-476-5500 if you have any questions about this or other tax laws, as well as strategies you might implement to minimize your taxes for 2008 and beyond.

This written advice is not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer.