The American Recovery and Reinvestment Act of 2009, commonly referred to as the “Stimulus Bill,” was signed into law on February 17, 2009. This Act was designed to pump money into the economy in a variety of ways, including tax reductions that will leave Americans with more spendable income. Although these changes were intended to be temporary, President Obama’s budget proposals would make many of them permanent and include many additional changes that would not take effect until 2011

Following are some of the key provisions of the Act and budget proposal.

THE STIMULUS BILL: WHAT'S HERE

Alternative Minimum Tax (AMT).
The AMT was originally enacted to target a handful of taxpayers, who despite having a large amount of income, paid little or no tax. Over the years, because of inflation and the reduction of regular income tax rates, millions of taxpayers have become burdened by this tax. The Stimulus Bill contained a one-year AMT patch that increased the amount of the AMT exemption for 2009.

First-Time Homebuyer Tax Credit Expanded.
Under prior law, eligible first-time homebuyers were permitted to claim a refundable tax credit equal to the lesser of 10% of the purchase price of a principal residence or $7,500, but the credit had to be repaid ratably over 15 years. The Stimulus Bill expands the maximum amount of the credit from $7,500 to $8,000, and, more importantly, eliminates the repayment requirement as long as the house remains the principal residence of the taxpayer for 36 months. The expanded credit is available only for purchases between January 1, 2009, and November 30, 2009, and begins to phase out when income exceeds $75,000 for single filers and $150,000 for joint filers.

Sales Tax Deduction for New Vehicles.
In addition to the many manufacturer/dealer discounts and incentives available for new vehicle purchases, the Stimulus Bill permits taxpayers to deduct the sales tax on that portion of a new vehicle purchase price that does not exceed $49,500. The deduction is allowable for the AMT, but begins to phase out as income exceeds $125,000 for single filers and $250,000 for joint filers.

Expanded Net Operating Loss Carryback Period.
The Stimulus Bill permits eligible small businesses with gross receipts of $15 million or less to elect to extend the carryback period for 2008 net operating losses (NOLs) from two years to three, four, or five years. Allowing the carryback to earlier years increases the likelihood that a taxpayer who has realized profits over the past two years will be entitled to a refund of taxes paid in the past. Because a taxpayer’s rates and deductions may differ for each year, the ability to choose the prior year to which the NOL will be applied may increase the refund value of the NOL.

Deferral of Debt Forgiveness Income.
Taxpayers are often surprised to learn that the forgiveness or modification of debt generally results in taxable income to the debtor. Longstanding exceptions permit debtors who are either in bankruptcy or insolvent to avoid the recognition of debt discharge income and permit solvent debtors to exclude debt discharge income attributable to certain types of debt. Legislation in 2008 extended relief to individual taxpayers who restructure their acquisition debt on a principal residence or lose their principal residence in a foreclosure. The Stimulus Bill offers relief to business taxpayers who would otherwise recognize debt discharge income in 2009 or 2010 to recognize the income ratably during the years 2014 to 2018.

COBRA Premium Subsidy.
For employees who are involuntarily separated from employment between September 1, 2008, and January 1, 2010, the Stimulus Bill provides for subsidy of up to 65% of the cost for up to nine months of COBRA premiums. As the subsidy is initially paid by the employer, who then claims a credit for the payment on its payroll tax returns, employers should coordinate the credit for the COBRA premium subsidy with their payroll tax provider.

PRESIDENT OBAMA'S PROPOSALS: WHAT MAY BE COMING

Tax Rate Increases.
As has been well-publicized, the President’s intention is to retain current tax rates for single taxpayers with income under $200,000 and married couples with income under$250,000 but to increase the top two tax rates for high income taxpayers from 33% and 35% to 36% and 39.6%, respectively. President Obama would also make permanent the current maximum 15% rate on long-term capital gains and qualifying dividends for low- income taxpayers, but would raise the rate for high income taxpayers from 15% to 20%. Although the rate itself is only a nominal 5% increase it will increase the amount of capital gains owed by 33%.

Limitation on the Value of Itemized Deductions.
Because deductions reduce taxable income, the extent to which they reduce a tax liability depends on the taxpayer’s tax bracket. For example, the value of $10,000 of itemized deductions (i.e., mortgage interest, charitable contributions, state and local income taxes, real estate taxes, etc.) to a taxpayer in the 15% tax bracket is $1,500, while the value of the same deductions to a taxpayer in the 39.6% tax bracket is $3,960. The President is proposing to limit the value of itemized deductions to no more than 28% starting in 2011, meaning that the maximum value of a $10,000 deduction— even for a taxpayer in the 39.6% tax bracket—would be $2,800. This change, combined with the restoration of the overall limitation on itemized deductions, would severely reduce the value of itemized deductions for high-income taxpayers.

Repeal of LIFO.
For many years taxpayers have been permitted to use the LIFO (last in, first out) method of accounting, as opposed to FIFO (first in, first out), the more traditional method. The theory behind LIFO is that taxpayers should be allowed to offset their most recent cost against their current sales. With inflation over the years, the inventory on hand is valued at costs far below its current value. This represents an untaxed profit and tax savings that would not have been available under the FIFO method. President Obama would repeal this provision.

Expanded Net Operating Loss Carryback.
The Stimulus Bill provides temporary help to small business corporations by allowing them to carryback their 2008 net operating losses (NOLs) for up to five years (see above). Although details have not yet been provided, President Obama would like to further expand the benefits of NOLs. Some have inferred that the President would expand the benefits of the Stimulus Bill to NOLs incurred in 2009.

Elimination of International Tax Havens.
Under current law, profits earned from overseas activities are not taxable to U.S. companies unless and until those funds are repatriated. How much a loophole this is can be argued both ways. President Obama is adamant about taxing those funds, claiming that our tax laws as they are now written create an incentive for U.S. corporations to invest their profits overseas.

Estate Tax.
The 2001 tax bill gradually reduced rates, increased exemptions and provided for a temporary repeal of the estate tax for the year 2010. However, in 2011, without new legislation the law reverts to the $1 million exemption and rates (up to 60%) that were in effect in 2001. The budget proposes to make permanent the estate tax rate (45%) and exemption amount ($3.5 million) that applied in 2009. With a minimal amount of estate planning, married taxpayers could exempt the first $7 million of estate value from tax. Whereas the budget proposals are not yet enacted, there is a strong likelihood that many will become law. There are three basic reasons for this assumption: First, many of the proposals are changes that President Obama promised (or warned of) during his campaign. Second, the Democrats have a large majority in the House and are at or near a filibuster-proof majority in the Senate. Finally, numerous tax provisions adopted in 2001 and 2003 are scheduled to expire on December 31, 2010. Without tax legislation, all tax laws would revert to the 2001 tax law, which neither party wants.

Of course, until a final tax law is passed, President Obama’s view of the tax environment could change dramatically. We’ll continue to watch closely as these proposals are debated. If you have any questions, please do not hesitate to contact a member of our Tax Department at 800.229.1099 or coheinfo@cohencpa.com.
  
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Pursuant to U.S. Treasury Department Regulations, we are now required to advise you that any federal tax advice contained in this communication, including attachments and enclosures, is not intended by the Sender or Cohen & Company,Ltd to constitute a covered opinion pursuant to regulation section 10.35 or to be used for the purpose of (i) avoiding tax-related penalties under Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.