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Economic Stimulus Act of 2008

Foreclosures - the Tax Consequences

Economic Stimulus Act of 2008
By Joshua J. Bright, Staff Accountant

With all the bad news about gas prices and bankrupt banks, wasn't it nice to hear about the Economic Stimulus Act of 2008? When people hear of this act, most minds go directly to the stimulus checks that are being sent to individuals this year. However, those are only half of the tax benefits that have been implemented. There are also many tax breaks for businesses.

Individuals will gain from the Economic Stimulus Act through the federal rebate checks. The checks are designed to refund some or all of your 2007 tax liability. If a taxpayer's 2007 tax liability was greater than $600 ($1,200 for joint filers); then the rebate check is $600 for individual filers and $1,200 for joint filers. If the tax liability was less than $600/$1,200 then the rebate check will most likely equal the tax liability.

There are exceptions to this, of course. If a taxpayer had $3,000 of earned income, Social Security benefits and certain veterans' benefits (including survivors of disabled veterans) or any combination thereof, then the rebate check is $300 for individuals and $600 for joint filers. Those rebate check values will also be triggered if tax liability was at least $1 and gross income was greater than the basic standard deduction and personal exemption amounts added together.

All payments of rebate checks should be completed by the end of the summer.

Unfortunately, there are many who will not benefit as individuals from the Stimulus Act. For individual filers, limitations on the rebate amount begin if adjusted gross income (AGI) for 2007 equals $75,000, and the credit completely phases out for individuals once AGI reaches $87,000. For joint-filers, limitations start at $150,000 AGI, and phase-out is at $174,000 AGI.

Businesses benefit from the Economic Stimulus Act through the enhancement of Code Section 179 expensing and bonus depreciation. Prior to this act, the allowable Sec. 179 deduction for equipment placed in service in tax years beginning in 2008 was $128,000; and that deduction would be reduced dollar for dollar by any equipment purchases over $510,000.

The Stimulus Act increases the allowable deduction to $250,000 and the phase-out threshold to $800,000. This act act raises Code Section 179 expensing to the highest it has ever been. But the changes only apply to equipment placed in service in tax years beginning in 2008. All other rules and limitations still apply to Code Section 179 expensing.

Businesses that do not qualify to take Section 179 expense may benefit from the new 50% bonus depreciation rules. Depreciation of certain business assets may be accelerated for property placed in service in tax years beginning in 2008.

The Economic Stimulus Act of 2008 gives tax benefits to low-to-middle income families and smaller businesses with some provisions of the Act excluding high-income taxpayers and larger businesses.

This short summary is only meant to be an overview and not a complete analysis of all limitations and calculations. It is important to know new tax laws and how they will effect you and your business.

The Burdette Smith Group prides itself in keeping abreast with current tax regulations and changes. Please feel free to contact us should you have any questions or are in need of any tax, accounting support, or other financial services.

Foreclosures - the Tax Consequences
by Diane H. Acurso, CPA

The IRS is urging struggling homeowners to consider their options carefully before giving up their home through foreclosure. There are two possible consequences of a home foreclosure: cancellation of debt income and gain on the deemed sale of the home.

When a lender forecloses on a property, sells the home for less than the borrower’s outstanding mortgage and forgives all or part of the mortgage debt, the Tax Code treats the cancelled debt as taxable income to the taxpayer. There are exceptions to this rule. Debt forgiveness is not includible in income (1) when the debt is discharged through bankruptcy, (2) to the extent the individual is insolvent, (3) where the loan is a nonrecourse loan and (4) for certain farm debts.

Taxpayers who do not qualify under one of these exceptions can now look to the recently-enacted Mortgage Forgiveness Debt Relief Act of 2007. It provides for a temporary exclusion from income for the tax years 2007-09 discharges involving up to $2 million of indebtedness secured by a principal resident and incurred in the acquisition, construction or substantial improvement of the residence. This exclusion would not apply to home equity loans or cash-out refinances when cash had been used for personal purposes like paying off credit cards or buying a new car.

The second consequence of a foreclosure is the gain on the deemed sale of the home. It arises when the fair market value of the home when foreclosed is greater than the adjusted basis of the home. Assuming, however, that the taxpayers have lived in the house two of the past five years, they would then be able to exclude up to $500,000 of the gain under Code Section 121.

As our newsletter went to print, a new foreclosure relief act was being debated in Congress. We are here to answer your questions if this new legislation is enacted.