While the new tax law changes in the Emergency Economic Stabilization Act of 2008 were the most significant developments in the final quarter of 2008, many other tax developments may affect you, your family, and your livelihood. These other key developments in the final quarter of 2008, as well as other changes which are effective for year 2009, are summarized below.
- Lien process expedited for homeowners trying to sell or refinance. The IRS has announced an expedited process to make it easier for financially distressed homeowners to avoid having a Federal Tax Lien block refinancing of mortgages or the sale of a home. Filing a Notice of Federal Tax Lien is a formal process by which the IRS makes a legal claim to property as security or payment for a tax debt. Taxpayers looking to refinance or sell a home in situations when a Federal Tax Lien has been filed, have two options. They or their representatives, such as their lenders, may (1) request that the IRS make a Tax Lien secondary to the lien of the lending institution that is refinancing or restructuring a loan (subordination), and (2) also request that, under certain circumstances, the IRS discharge its claim if the home is being sold for less than the amount of the mortgage lien. The process to request a discharge or a subordination of a Tax Lien takes approximately 30 days after the submission of the completed application, but in late 2008 the IRS said it would work to speed those requests in wake of the economic downturn. The IRS urges people to contact the IRS Collection Advisory Group early in the home sale or refinancing process so that it can begin work on their requests.
- Estate and gift taxes. The increase in the basic estate-tax exemption amount to $3.5 million stems from a 2001 law. (Transfers from one spouse to the other typically remain tax-free.) Estate plans may need to be modified as a result of this higher exemption amount. The annual gift-tax exclusion rose to $13,000, up $1,000 from 2008. This means you can give as much as $13,000 this year to anyone you wish, or to as many people as you want, without having to worry about taxes or even having to file any forms with the Internal Revenue Service. The lifetime gift-tax exclusion amount remains unchanged at $1 million.
- Required minimum distributions (RMDs) waived 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. 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 taking 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 phase-outs of tax breaks. Taxpayers 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. This 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 cover their monthly expenses.
- Retirement plan contribution limitations. The maximum amount that savers can contribute to a 401(k) plan increased. The maximum amount that someone under age 50 can contribute to a 401(k) plan for 2009 rose to $16,500 from $15,500. Those 50 or older can save an additional $5,500 this year, for a total of $22,000, up from $20,500.
- Qualified plans required to offer post-2009 rollover option for non-spouse beneficiaries. A provision in late 2008 legislation requires employer -sponsored qualified retirement plans to offer non-spouse beneficiaries the opportunity to roll over an inherited plan account balance to an IRA set up to receive the rollover on the non-spouse beneficiary's behalf. This rule will become effective for plan years beginning after 2009. Until then, under current rules, qualified plans may, but are not required to, offer non-spouse beneficiaries this rollover option. The rollover option will give much-needed flexibility to those who inherit retirement plan accounts from someone other than their spouse, such as a parent, an uncle, or a same-sex partner. For a long time, non-spouse beneficiaries of IRAs have had access to a rollover-type option that the IRS has sanctioned. While non-spouse beneficiaries cannot treat an inherited IRA as their own, they can make trustee-to-trustee transfers to another IRA if the ownership of the new IRA is set up in the same way as the ownership of the old IRA; that is, in the name of the decedent for the benefit of the IRA beneficiary. An advantage of this type of rollover is that it allows for the continued tax deferral of accumulation while mandatory distributions are taken over the beneficiary's life expectancy.
- IRS scrutinizing use of rollovers to fund new business start-ups. The IRS issued guidelines to address potentially abusive retirement plan arrangements called Rollovers as Business Start-ups (ROBS). These are designed to allow individuals to convert their existing retirement accounts into seed money for funding new businesses without first paying taxes on the distributions. Having been made aware that ROBS plans are being actively marketed, the IRS has issued guidelines for its employee plans specialists to follow in examining these plans. Though not stating that ROBS plans do not meet IRS requirements for qualified plans in and of themselves, the guidelines signal that the IRS is carefully scrutinizing these transactions, particularly with regard to the following key issues: discrimination in benefits; rights and features; improper stock valuation; and prohibited transaction payments of promoter fees.
- Corporations can gain credits by foregoing special depreciation. A corporation may elect to accelerate its use of unused carry forwards of the minimum tax credit and the research credit from tax years beginning before 2006 and obtain a refundable credit instead of claiming the special depreciation allowance on eligible qualified property. If the election is made, the corporation must forego the special depreciation allowance for eligible qualified property acquired (including manufactured, constructed, or produced) after March 31, 2008, and placed in service generally before January 1, 2009, and use the straight-line method of depreciation on such property. The election is subject to a number of conditions and limitations. They are reflected in a worksheet IRS has posted on its website. Taxpayers can use the worksheet to calculate their refundable credits from making the election.
- Standard mileage rates down for 2009. The optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) is 55¢ per mile for business travel after 2008. That is 3.5¢ less than the 58.5¢ allowance for business mileage that applied in the last six months of 2008. Furthermore, the rate 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.
- Social Security taxes. The maximum amount of earnings subject to Social Security taxes rose to $106,800, up 4.7% from $102,000 in 2008.
- FBAR (Form TD F 90.22.1). A taxpayer is required to disclose on Schedule B of Form 1040, whether at any time during the preceding year he had an interest in, or signature authority over, a financial account in a foreign country containing over $10,000. If the question is answered in the affirmative, then a separate Form TD F 90-22.1 (“Report of Foreign Bank and Financial Accounts,” commonly known as an “FBAR”) must be filed with the IRS. This form was updated and changed significantly in October 2008, and the amended form must be used after December 31, 2008. Failure to file the FBAR could result in civil and/or criminal penalties. The IRS has intimated that it will be cracking down on taxpayers who violate the FBAR rules.