December 2008Client Alert

Changes All Taxpayers Can Believe In: What’s New for 2008 Year End Tax Planning and What Lies Ahead in 2009 for Individuals

As year end approaches, it’s a good time to look at recent changes in tax laws that may still lower your individual tax bill in 2008, and to set a plan for lowering taxes in 2009 if you think individual income tax rates are going to be increasing. If taxpayers think income tax rates are going to be increasing in the near future, they will need to determine if it makes sense to accelerate recognition of income to 2008 and defer deductions until 2009.

The Emergency Economic Stabilization Act (the “Act”), referred to in most media outlets as the $700 Billion Bailout package, signed by President Bush on October 3, 2008, contained many provisions that also help individual taxpayers. There are also changes for 2009 that were enacted as part of the tax changes implemented in 2001 to help minimize estate, gift and generation skipping taxes. Finally, recent changes have also helped depositors in financial institutions by increasing FDIC insurance coverage.

Individual Income Tax Changes in the Act

AMT Patch: The Alternative Minimum Tax (AMT) was initially enacted to make sure wealthy taxpayers did not escape paying income tax, but increasingly, the AMT has trapped more middle class taxpayers due to its initially low exemption amount that has not been indexed for inflation. Without relief in 2008, an estimated 20 million additional taxpayers would pay tax as a result of AMT. The exemption amounts were increased in 2007, and the Act provides a one year “patch” by extending and increasing the AMT exemption amounts for 2008. The exemption amount is $69,950 for married individuals filing a joint return or surviving spouses, $46,200 for single individuals, and $34,975 for married individuals filing a separate return.

Distribution from an IRA to Charity: The Pension Protection Act of 2006 allowed for direct contributions from an IRA to a qualified charity in 2006 and 2007 for taxpayers who had reached their required beginning date for mandatory annual distributions. The Act reintroduced this tax break for distributions made in 2008 and 2009, which allows taxpayers who are over 70 ½ years of age to contribute up to $100,000 to certain charities directly from their IRA. (See article from 2006 linked here for more specifics).

Selected Renewals or Extensions of Expired or Expiring Provisions: The following provisions that either expired prior to January 1, 2008, or were set to expire in 2008 have been extended to be in effect for 2008 and 2009:

1) the option of claming an itemized deduction for state and local sales taxes instead of state and local income taxes;

2) the above the line deduction for qualified tuition and related higher education expenses.

Enhancement of Hope and Lifetime Learning Credits: For students who attend college (do not need to live in the effected area) at a university located in a county effected by Midwestern floods during 2008, the amount that is allowed to be taken as a Hope Credit or Lifetime Learning credit is doubled in 2008 and 2009. The maximum Hope Credit raises from $1,800 to $3,600, and the maximum Lifetime Learning Credit raises from $2,000 to $4,000. In Wisconsin, students who attended colleges located in Milwaukee, Waukesha, Ozaukee, Racine, and Dane Counties are eligible for the increased credit. Both credits are subject to phase-outs related to income, so the enhancement may not be overly beneficial to many of our clients, but it may be useful for children of clients who will not be claimed as dependents on their parents’ returns in 2008 and 2009.

Estate and Gift Tax Changes from the 2001 Act

Beginning in 2001, the amount of assets that could pass free of estate tax to someone other than a spouse, called the applicable exclusion amount, began to increase and the estate tax rates began to fall. The application exclusion amount in 2008 is $2,000,000, increasing to $3,500,000 in 2009. The generation skipping tax exemption amount is tied to the applicable exclusion amount, so it also increases to $3,500,000 in 2009. The annual exclusion amount for gift tax purposes is increasing to $13,000 in 2009, up from $12,000 in 2008. The top estate and gift tax bracket remains at 45% in 2009.

Planning for 2009 and Beyond

Based on what was said during the presidential campaign, it can be anticipated that some income tax rates will be increasing in 2009. Any changes made during 2009 can be made retroactive to January 1. At present, the top capital gains rate is 15%, which is the same as the rate for qualified dividends. Since the tax rates are identical, when redemptions of corporate stock occur now, with the exception of basis issues, the structure of the redemption proceeds being treated as dividends versus a sale (i.e. capital gains) was lessened. With potential changes in these rates, the structuring of redemptions will once again need to be examined carefully to determine the best result.

Recent declines in the stock market and in real estate create an opportunity to move these assets, either through sale or gift, from the senior generation to their children and/or grandchildren at lower values, which results in lower gift or income tax results. It may be beneficial for clients to lock in sales to children using a 15% capital gains rate, while also freezing the value of those assets. The lower values and favorable capital gains rates also provide an opportunity to restructure companies to consolidate holdings in a family by purchasing the interests of nonfamily or other minority owners.

It is also possible that Congress may enact legislation that eliminates the ability to discount business interests for lack of marketability and minority interests. That may spur clients to take advantage of gifts or sales using interests that utilize these discounts prior to year end.

FDIC Changes

The current financial situation has caused many clients to worry about the safety of their savings in banks and other financial institutions. Prior to recent changes, the federal insurance limits were $100,000 per depositor per institution. Recent temporary changes have been instituted to increase protection to $250,000 per depositor per institution. The increased insurance protection is effective from October 3, 2008 through December 31, 2009. Additionally, the prior rules related to coverage of accounts held by revocable living trusts (“living trusts”) were vague, and new interim rules have been issued to provide clearer guidance on insurance coverage for accounts held in revocable trusts.

As a reminder, FDIC insurance covers funds in deposit accounts, including checking and savings accounts, money market deposit accounts and certificates of deposit (CDs). The FDIC provides separate insurance coverage for deposits held in different ownership categories such as single accounts, joint accounts, Individual Retirement Accounts (IRAs) and trust accounts.

Special Interim Rules Related to Trust Accounts

Due to the increased complexity of living trusts used in estate plans, past efforts by the FDIC to simplify and clarify the coverage rules for accounts held in the name of living trusts have not cleared up confusion and uncertainty encountered by bankers and depositors in trying to determine FDIC insurance coverage on trust accounts. On September 26, 2008, the FDIC issued an interim ruling to help clarify insurance coverage of trust accounts. There are two sets of rules, one for accounts with less than $500,000, and the other for accounts with more than $500,000.

Under the interim rules, a living trust account owner with up to $500,000 in trust accounts at one FDIC-insured institution is insured up to $100,000 per beneficiary. This is the rule that will apply to the vast majority of living trust account owners. Living trust account owners with more than $500,000 and more than five different beneficiaries named in the trust(s) are insured for the greater of either: (a) $500,000; or (b) the aggregate amount of all the beneficiaries' interests in the trust, limited to $100,000 per beneficiary. Under the interim rules, coverage is based on the existence of any beneficiary named in the living trust, as long as the beneficiary is a natural person, or a charity or other non-profit organization.

For more information, please contact Bradley J. Kalscheur at 414.225.2763, or

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