Changes to the Form 1040 for 2008

FORM 1040, INDIVIDUAL INCOME TAX RETURN
Gross Income:
Line 7. Wages, salaries, tips, etc. Excludable qualified military benefits include any bonus payment made by a state or political subdivision to a member or former member of the U.S. uniformed services, or to his dependent, because of the member’s service in a combat zone.

Payments made by Veterans Affairs under a work therapy program are tax exempt.
Line 13. Capital gain or (loss). For revised homesale exclusion rules for surviving spouses and for certain Peace Corps volunteers, see entries for Form 1040, Schedule D.

Line 21. Other income. An exclusion applies for qualified state or local tax benefits (such as reduction or rebate of state or local income or property tax) and qualified reimbursement payments (up to $360 a year) granted to members of qualified volunteer emergency response organizations (e.g., state or local organizations whose members provide volunteer firefighting or emergency medical services).

Adjusted Gross Income:
Line 25. Health Savings Account deduction. An individual is allowed a maximum HSA contribution of $2,900 for single coverage ($5,800 for family coverage).

Line 26. Moving expenses. The deduction for moving expenses is 19¢ per mile for Jan. 1 to June 30, 2008 and 27¢ per mile from July 1 to Dec. 31, 2008.

Line 32. IRA deduction. The IRA contribution limit is $5,000 ($6,000 if over 50 at the end of 2008). For 2008, the AGI phaseout ranges for making deductible contributions to regular IRAs by taxpayers that are active participants in an employer-sponsored retirement plan are higher (e.g., $85,000 to $105,000 for joint return filers).

Tax and Credits:
Lines 39c and 40. Standard deduction. For 2008, the standard deduction is $5,450 for single filers and for married persons filing separately, $10,900 for joint filers and qualifying widow(er)s, and $8,000 for heads of household. Also, for qualifying taxpayers, it is increased by the real property tax deduction and the disaster loss deduction and a box must be checked on line 39c if either increase is claimed.

Line 42. Personal exemptions. The exemption for 2008 is $3,500. Exemption starts to phase out if adjusted gross income exceeds: $159,950 for single filers, $119,970 for married persons filing separately, $239,950 for joint filers and qualifying widow(er)s, and $199,950 for heads of household. For 2008, a taxpayer loses only 1/3 of the amount he would otherwise lose under the regular phaseout computation.

Line 44. Tax. A zero tax rate applies to most long-term capital gain and dividend income that would otherwise be taxed at the regular 15% rate and/or the regular 10% rate.

The kiddie tax applies to children age 18, and children over age 18 but under age 24 who are full-time students—if their earned income doesn’t exceed one-half of the amount of their support.

Line 45. Alternative minimum tax. For 2008, the AMT exemption amounts are increased to $69,950 for married individuals filing jointly and surviving spouses, $46,200 for unmarried individuals, and $34,975 for married individuals filing separately.

For 2008, nonrefundable credits may offset an individual’s regular tax and AMT.
The AMT refundable credit may be claimed more rapidly and is no longer subject to phaseout rules. Tax underpayments (plus interest and penalties) outstanding on Oct. 3, 2008, that are attributable to pre-2008 phantom incentive stock option income under the AMT rules are abated.

Line 50. Education credits. For 2008, the Hope and Lifetime credits phase out ratably for taxpayers with modified AGI of $48,000 to $58,000 ($96,000 to $116,000 for joint filers). For 2008, the Hope credit is 100% of up to $1,200 of qualified higher education tuition and related expenses plus 50% of the next $1,200 of such expenses. Use Form 8863.

Line 53. Credits from certain forms. This line is used to report the residential energy efficient property credit from Form 5695. For 2008, there are two new components to the residential energy efficient property: qualified small wind energy property expenditures and qualified geothermal heat pump property expenditures.

This line is also used to report the adoption credit from Form 8839. The maximum adoption credit for 2008 is $11,650, and begins to phase out when modified AGI exceeds $174,730.

Line 54 Other credits. Qualifying expenditures paid or incurred after May 22, 2008 may qualify for a new agricultural chemical security credit, subject to conditions and limitations.

There is a new credit for small business employers that pay differential wages after June 17, 2008, to active duty members of the uniformed services.

Other Taxes:
Line 57. Self-employment tax. Maximum amount of self-employment income subject to FICA tax is $102,000; no ceiling on Medicare wage base.

Conservation Reserve Program payments are not treated as self-employment income for SECA tax purposes if received by an individual who is getting Social Security retirement or disability payments.

An individual may use the farm optional method only if (a) his gross farm income was not more than $6,300 or (b) his net farm profits were less than $4,548. It permits individuals to compute their farm self-employment earnings as the smaller of (1) 66 2/3% of gross farm income, or (2) $4,200.

An individual may use the nonfarm optional method only if (a) his net nonfarm profits were less than $4,548 and also less than 72.189% of his gross nonfarm income and (b) he had net earnings from self-employment of at least $400 in 2 of the prior 3 years. Individuals may compute their self-employment earnings as the smaller of two-thirds of gross nonfarm income or $4,200.

A self-employed individual with both farm and nonfarm incomes is allowed to use both optional computation methods if the farm income qualifies for the farm optional method and the nonfarm income qualifies for the nonfarm optional method. If both optional methods are used to compute net earnings from self-employment, the maximum combined total net earnings from self-employment for any tax year can’t be more than $4,200.

Payments:
Line 65. Excess social security and RRTA tax withheld. Maximum Social Security (OASDI) tax for 2008 is $6,324 (computed on the first $102,000 of wages) for purposes of credit for excess tax withheld.

Line 66. Additional child credit. For 2008, the earned income formula for the determination of the refundable child credit has been modified to apply to 15% of earned income in excess of $8,500.

Line 69. First-time homebuyer credit. Eligible first-time homebuyers buying principal residences in the U.S. after Apr. 8, 2008 and before July 1, 2009, may claim a refundable tax credit (on Form 5405) equal to the lesser of 10% of the purchase price or $7,500 ($3,750 for married individuals filing separately). Purchases after Dec. 31, 2008, and before July 1, 2009, may be treated as made on Dec. 31, 2008.

FORM 1040, SCHEDULE A ITEMIZED DEDUCTIONS 2008
Line 1. Medical and dental expenses. The standard mileage rate for medically-related use of an auto is 19¢ per mile for Jan. 1 to June 30, 2008 and 27¢ per mile from July 1, to Dec. 31, 2008.

Line 17. Gifts to charity other than by cash or check. The higher limits on qualified conservation contributions by qualified farmers or ranchers are expanded through the end of 2008 to apply to contributions of apparently wholesome food inventory by qualified farmers and ranchers.

Line 20. Casualty or theft losses. The 10% of AGI floor doesn’t apply to an individual’s casualty or theft losses arising in a federal disaster.

Line 21. Unreimbursed employee expenses. The standard mileage rate is 50.5¢ per mile for Jan. 1 to June 30, 2008 and 58.5¢ per mile from July 1, to Dec. 31, 2008.

Line 29. Total itemized deductions. The allowable amount of itemized deductions will be reduced if adjusted gross income in 2008 is more than $159,950 ($79,975 for married filing separately). For 2008, a taxpayer will lose only 1/3 of the amount he would otherwise lose under the regular reduction computation.

FORM 1040, SCHEDULE B INTEREST AND DIVIDEND INCOME 2008
Line 1. Interest. Accrued interest on Series E or EE U.S. savings bonds issued in ’68 or in ’78 is taxable.
Line 3. Excludable interest on Series EE or Series I U.S. savings bonds. The exclusion for education related savings bond interest phases out at higher income levels. For 2008, the phaseout begins at modified adjusted gross income above $67,100 ($100,650 on a joint return).

FORM 1040, SCHEDULE C PROFIT OR LOSS FROM BUSINESS 2008
Line 9. Car and truck expenses. The standard mileage rate is 50.5¢ per mile for Jan. 1 to June 30, 2008 and 58.5¢ per mile from July 1, to Dec. 31, 2008. ( ¶ 1561 )

Line 13. Depreciation and section 179 expense. See entries for Form 4562, below.
Line 27. Other expenses. A taxpayer to elect to treat any qualified disaster expense as a deduction for the tax year in which paid or incurred.

FORM 4562, DEPRECIATION AND AMORTIZATION
Part I. Election to expense certain tangible property under Sec. 179.

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    • The amount that may be expensed under Code Sec. 179 in 2008 is $250,000, with investment-based phaseout beginning at $800,000.
    • The expensing allowance for qualified GO Zone property is $350,000 for 2008 ($250,000 +$100,000), and the investment ceiling limit is $1,400,000 for 2008 ($800,000 + $600,000).
    • The expensing allowance for qualified enterprise zone and renewal property is $285,000 for 2008 ($250,000 + $35,000), with only 50% of expensing-eligible property taken into account in applying the investment ceiling limit.
    • For property placed in service after Dec. 31, 2007, with respect to disasters declared after that date, the maximum Code Sec. 179 expensing amount is increased by the lesser of: (1) $100,000, or (2) the cost of qualified section 179 disaster assistance property placed in service during the tax year. Several types of property (including property eligible for bonus depreciation under Code Sec. 168(k) ) are ineligible for this increase.

Part II. Special depreciation allowance.

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    • Taxpayers may claim a 50% bonus depreciation deduction for qualified property.
    • For property placed in service after Dec. 31, 2007, with respect to disasters declared after that date, taxpayers may claim 50% bonus depreciation deduction for qualified disaster assistance property. However, bonus depreciation may not be claimed twice for the same property.

Part II. MACRS depreciation. A five year recovery period applies for any machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) which is used in a farming business and the original use of which commences with the taxpayer.

Part V. Listed property. First-year luxury auto limits for vehicles first placed in service in 2008 are $10,960 for autos and $11,160 for light trucks or vans.

FORM 1040, SCHEDULE D CAPITAL GAINS AND LOSSES
A zero tax rate applies to most long-term capital gain and dividend income that would otherwise be taxed at the regular 15% rate and/or the regular 10% rate.

A surviving spouse may qualify for the up-to-$500,000 homesale exclusion if the sale occurs not later than 2 years after the spouse’s death, provided the requirements for the $500,000 exclusion were met immediately before the spouse’s death and the survivor has not remarried as of the date of the sale. An individual may elect to suspend for a maximum of 10 years the homesale exclusion’s five-year test period for ownership and use during certain absences due to volunteer service in the Peace Corps.

FORM 1040, SCHEDULE J INCOME AVERAGING FOR FARMERS AND FISHERMEN
Effective Oct. 3, 2008, qualified taxpayers (such as fishermen) may report qualified settlement income (otherwise includible interest and punitive damages) received from the ’89 Exxon Valdez oil spill civil action using 3-year income averaging.

Source:  Federal Taxes Weekly Alert (preview) 10/30/2008, Volume 54, No. 44

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Charitable Contributions Receipting Requirements

Substantiating and reporting charitable contributions
Practice Alert
Author: Preston J. Quesenberry, associate with the Washington, DC law firm of Caplin & Drysdale, Chartered.
In 2007, the Treasury Inspector General for Tax Administration released two reports suggesting that hundreds of thousands of taxpayers are incorrectly reporting billions of dollars in deductions for noncash charitable donations. Taxpayers and tax preparers should review the substantiation and reporting requirements for charitable contributions, especially since the Pension Protection Act of 2006 (PPA) recently added even more requirements. Schedule M on the new Form 990, which will allow IRS to identify those charities receiving noncash donations, gives taxpayers and tax preparers added incentive to make sure they get the substantiation and reporting of their charitable deductions right. Unfortunately, these requirements have become unduly complex over the years as both Congress and Treasury have sought to prevent actual and perceived improper deductions. This Practice Alert, which is excerpted from a more extensive article in the March/April 2008 issue of Taxation of Exempts , discusses the requirements for substantiating and reporting charitable contributions.

The dollar thresholds. The discussion below follows the standard practice of organizing the substantiation and reporting requirements by the dollar thresholds at which different rules take effect. Unless otherwise stated, the dollar thresholds represent the amount of the deduction that the donor claims for the charitable contribution, which will not always equal the actual value of the contribution. If, for example, a donor receives goods or services in exchange for the contribution, and is forced to reduce his or her deduction accordingly, the threshold is usually determined by the deduction amount, not the gross value of the contribution. For this purpose, “deduction amount” means the deduction before applying any income limitations under Code Sec. 170(b) (i.e., limitations of charitable deductions to 50%, 30%, or 20% of the donor’s “contribution base,” usually adjusted gross income).

Unless otherwise stated, the substantiation and reporting requirements apply to the contributions of individuals, corporations, and partnerships. They apply to partnerships at the entity level, even though inadequate substantiation can result in the denial of the deduction at the individual partner level.

Requirements applicable to all charitable deductions. To take a charitable deduction for any contributions of cash, checks, or other monetary gifts made after Aug. 17, 2006, Code Sec. 170(f)(17) requires that a donor retain either (1) a bank record or (2) a written communication from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution. For these purposes, a bank record can include a canceled check, a bank copy of a canceled check, or a bank statement containing the name of the charity, the date, and the amount. This provision therefore puts an end to the ability of taxpayers to claim a charitable deduction for undocumented cash contributions, even if each contribution is of a relatively small amount.

Donors making contributions through payroll deductions can satisfy the “written communication” portion of Code Sec. 170(f)(17) with (1) a pay stub, Form W-2, or other document furnished by the employer stating the amount withheld for payment to a charity; and (2) a pledge card or other document prepared by (or at the direction of) the donee organization showing the name of the donee organization. (Notice 2006-110, 2006-51 IRB 1127)

Similarly, donors of noncash property must retain a “receipt” (which can include a letter or other written communication) from the donee. It must show the name of the donee, the date and location of the contribution, and a reasonably detailed description (but not necessarily the value) of the property contributed. ( Reg. § 1.170A-13(b)(1) ) When obtaining a receipt would be “impractical,” however, (e.g., if the donor deposits property at a charity’s unattended drop site), the donor can support a deduction by keeping “reliable written records” that contain the following information:

    • The name and address of the donee.
    • The date and location of the contribution.
    • A reasonably detailed description (but not necessarily the value) of the property contributed.
    • The fair market value of the property at the time the contribution was made.
    • The method used to determine the fair market value (and, if the valuation was determined by appraisal, a copy of the appraiser’s signed report).
    • The terms of any agreement or understanding entered into by the donor relating to the use, sale, or other disposition of the contributed property. (Reg. § 1.170A-13(b)(2)(ii))

Requirements applicable to charitable deductions of $250 or more. The most significant provision that takes effect with gifts of this size is Code Sec. 170(f)(8). It requires donors taking a deduction of $250 or more for any one contribution (either cash or noncash) to obtain a “contemporaneous written acknowledgment” from the donee. This acknowledgment must state (1) the amount of cash and/or provide a description (but not the value) of any noncash property contributed and (2) whether the donee organization provided any goods or services in consideration (in whole or in part) for any cash or other property contributed.

If goods and services were provided as consideration, the acknowledgment also must provide a good faith estimate of the value of such goods or services (or, if such goods or services consisted solely of “intangible religious benefits,” a statement to that effect). (Code Sec. 170(f)(8)(B)) To be “contemporaneous,” a written acknowledgment must be obtained on or before the earlier of (1) the date the donor files the return for the tax year in which he or she makes the contribution or (2) the due date (including extensions) for filing that return. (Code Sec. 170(f)(8)(C))

In determining whether they have crossed the $250 threshold, donors need only look at the amount of a single contribution to a specific donee. Accordingly, separate contributions of less than $250 to the same donee do not require a contemporaneous written acknowledgment, even if they total $250 or more during the same tax year. (Reg. § 1.170A-13(f)(1))

Requirements applicable to noncash charitable deductions of more than $500. Donors of cash of more than $500 face no substantiation and reporting requirements other than those discussed above. Other donors face a more complicated situation. The most notable requirement that takes effect for noncash contributions above the $500 threshold is filing an Form 8283, which any donor, other than certain C corporations, must do when claiming a charitable deduction for a noncash gift of over $500. C corporations, other t
han personal service and closely held corporations, must file Form 8283 only if the amount claimed as a deduction is more than $5,000.

Another requirement is to maintain the “reliable written records” discussed above. These donors’ records must also include information regarding (1) how the donor acquired the property (e.g., by purchase, gift, bequest, inheritance, or exchange); (2) the approximate date on which the donor received the property (or substantially completed its production, manufacture, or creation); and (3) the adjusted basis of the contributed property (with the exception of publicly traded securities) immediately before the contribution. (Reg. § 1.170A-13(b)(3))

Additional requirements apply to gifts of particular kinds of noncash contributions in excess of $500—specifically, (1) qualified vehicles, (2) qualified conservation contributions under Code Sec. 170(h) , and (3) clothing and household items.

Requirements applicable to noncash charitable deductions of $5,000 or more. Crossing the $5,000 threshold triggers the most onerous substantiation rule for donors of noncash property: the requirement to obtain a “qualified appraisal” of the contributed property. (Code Sec. 170(f)(11)(C))

Qualified appraisal. All donors claiming a charitable deduction of more than $5,000 for an item (or similar items) of noncash property (other than publicly traded securities and certain other excepted items) must obtain a qualified appraisal and keep it in their records “for as long as it may be relevant in the administration of the internal revenue laws.” (Reg. § 1.170A-13(c)(3)(iv)(C)) They also must complete the appraisal summary on section B of Form 8283, which must be signed and dated by both the qualified appraiser and the donee. (Reg. § 1.170A-13(c)(4)(i)(B), (C))

As defined in the Code and regs, a qualified appraisal is a written appraisal document that:

    • Is made not earlier than 60 days before the property is contributed.
    • Is received by the donor before the due date (including extensions) of the return on which the deduction is claimed.
    • Includes certain specified information.
    • Does not involve an appraisal fee based on a percentage of the appraised value of the property (with one narrow exception for certain fees to nonprofit appraiser associations) or the value of the property allowed as a charitable deduction under Code Sec. 170.
    • Is conducted in accordance with “generally accepted appraisal standards” (e.g., the Uniform Standards of Professional Appraisal Practice), as well as any applicable regs or other guidance provided by Treasury.
    • Is conducted, prepared, signed, and dated by a “qualified appraiser.” (Code Sec. 170(f)(11)(E) ; Reg. § 1.170A-13(c)(3))

A key component of a “qualified appraisal,” then, is that it be conducted by a “qualified appraiser.” Under new provisions in the PPA, a qualified appraiser is an individual who:

    • Has an appraisal designation from a recognized professional appraiser organization or has met minimum education and experience requirements to be set by regulation.
    • Is regularly paid to perform appraisals.
    • Can demonstrate verifiable education and experience valuing the type of property appraised.
    • Has not been barred from practice before IRS during the three years preceding the date of the appraisal.
    • Meets any additional requirements prescribed by the Treasury in regs or other guidance. (Code Sec. 170(f)(11)(E))

Requirements applicable to deductions of $20,000 or more for contributions of art. Donors who take a total deduction of $20,000 or more for contributions of works of art must attach a complete copy of their signed appraisal to the return on which they claim the deduction. For individual objects valued at $20,000 or more, a photograph of “sufficient qualify and size” must be provided to IRS upon request. (Ann. 90-25, 1990-8 IRB 25; Instructions to Form 8283)

Rev Proc 96-15, 1996-1 CB 627, contains a procedure open to those who contribute works of art valued at $50,000 or more. Such donors may, before filing the return claiming the charitable deduction, request a Statement of Value from the IRS to substantiate the value of the gift for income tax purposes. This does not save the donor the trouble of getting an appraisal, as the donor has to submit a completed appraisal to IRS to get the Statement of Value.

Requesting a Statement also presents a potential downside risk. If the donor does not withdraw the request before receiving an answer and obtains a Statement of Value that is lower than his or her appraisal, the donor nevertheless must attach the Statement to his or her income tax return reporting the charitable deduction (though the donor can also enclose additional information supporting his or her appraised value). On the other hand, if the Statement accords with the donor’s own appraisal, he or she is entitled to rely on it, assuming the Statement was based on “accurate statements of the material facts.”

Requirements applicable to deductions of more than $500,000. Donors claiming a deduction of more than $500,000 for an item (or group of similar items) donated to one or more donees must attach their qualified appraisal to their returns. (Code Sec. 170(f)(11)(D))

Source: Federal Taxes Weekly Alert (preview) 10/30/2008, Volume 54, No. 44

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Finally – Brokerage Statements Required to Report Cost Basis – After 2010

Basis and character reporting on the way for securities acquired after 2010
Under one of the revenue offset provisions that accompanied the tax provisions that were enacted as part of the Emergency Economic Stabilization Act of 2008 (Act), every broker that is required to file an information return reporting the gross proceeds of a “covered security” will have to include in the return the customer’s adjusted basis in the security and whether any gain or loss with respect to the security is short term or long term under Code Sec. 1222 . This article looks at the inner workings of this new provision, which generally will apply to securities acquired after 2010.

Background. Every person doing business as a broker must file an information return in accordance with IRS regulations. The return must show the name and address of each customer, as well as details concerning gross proceeds and any other information IRS may require.

The information return (Form 1099-B) has to show the name, address, and taxpayer identification number of the customer for whom the sale was effected, the property sold, the Committee on Uniform Security Identification Procedures (CUSIP) number of the security sold (if known), the gross proceeds of the sale, the date on which the sale occurred (the trade or settlement date, whichever the broker uses on a consistent basis), and any other information required by the relevant return. The gross proceeds on a sale are the total amount paid to the customer or credited to the customer’s account as a result of the sale, reduced by the amount of any accrued but unpaid interest, and increased by any of that interest that wasn’t paid or credited because of repayment of margin loans. In the case of a closing transaction that results in a loss, gross proceeds are the amount debited from the customer’s account.

Under pre-Act law, brokers were not required to report the grant or purchase of options, exercises of call options, or the entering into contracts that require delivery of personal property or an interest in personal property.

Under pre-Act law, information reporting of a taxpayer’s basis in stock was not required, but there was an obligation to keep records from which basis could be determined.

New law. Under the Act, if a broker is otherwise required to make a return under Code Sec. 6045(a) with respect to the gross proceeds of the sale of a “covered security” (see below), the broker must include in the return:

    • the customer’s adjusted basis in the security, and
    • whether any gain or loss with respect to the security is long-term or short-term. ( Code Sec. 6045(g)(2)(A) )

The customer’s adjusted basis is determined:

(I) in the case of any security (other than any stock for which an average basis method is permissible under Code Sec. 1012 ), in accordance with the first-in first-out (FIFO) method unless the customer notifies the broker by means of making an adequate identification of the stock sold or transferred, and

(II) in the case of any stock for which an average basis method is permissible under Code Sec. 1012 , in accordance with the broker’s default method unless the customer notifies the broker that he elects another acceptable method under Code Sec. 1012 with respect to the account in which the stock is held. ( Code Sec. 6045(g)(2)(B) )

Except as otherwise provided by IRS, the customer’s adjusted basis is determined without regard to Code Sec. 1091 (relating to disallowed loss from wash sales of stock or securities) unless the transactions occur in the same account with respect to identical securities. ( Code Sec. 6045(g)(2)(B)(ii) )

Covered security. The term “covered security” means any “specified security” (defined below) acquired on or after the “applicable date” (defined below) if the security:

(i) was acquired through a transaction in the account in which the security is held,
(ii) was transferred to the account from an account in which the security was a covered security, but only if the broker received a statement under Code Sec. 6045A with respect to the transfer. ( Code Sec. 6045(g)(3)(A) )

In the case of the sale of a covered security acquired by an S corporation (other than a financial institution) after Dec. 31, 2011, the S corporation will be treated in the same manner as a partnership for purposes of the Code Sec. 6045 reporting requirements. ( Code Sec. 6045(g)(4) )

In the case of a short sale, reporting under Code Sec. 6045 will be made for the year in which the sale is closed. ( Code Sec. 6045(g)(5) )

Specified security. The term “specified security” means:

(a) any share of stock in a corporation,
(b) any note, bond, debenture, or other evidence of indebtedness,
(c) any commodity, or contract or derivative with respect to the commodity, if IRS determines that adjusted basis reporting is appropriate, and

(d) any other financial instrument with respect to which IRS determines that adjusted basis reporting is appropriate. ( Code Sec. 6045(g)(3)(B) )

Applicable date. The term “applicable date” means:

(i) Jan. 1, 2011, in the case of any specified security which is stock in a corporation (other than any stock described in item (ii), below, and

(ii) Jan. 1, 2012, in the case of any stock for which an average basis method is permissible under Code Sec. 1012 , and

(iii) Jan. 1, 2013, or any later date IRS determines in the case of any other specified security. ( Code Sec. 6045(g)(3)(C) )

Reporting requirements for exercised options. The Act generally eliminates the pre-Act regulatory exception from Code Sec. 6045(a) reporting for certain options. If a covered security is acquired or disposed of under the exercise of an option that was granted or acquired in the same account as the covered security, the amount received with respect to the grant or paid with respect to the acquisition of that option is treated as an adjustment to gross proceeds or as an adjustment to basis, as the case may be. ( Code Sec. 6045(h)(1) )

Gross proceeds and basis reporting also generally is required when there is a lapse of, or a closing transaction with respect to, an option on a covered security. Thus, in the case of the lapse (or closing transaction as defined in Code Sec. 1234(b)(2)(A) ) of an option on a specified security or the exercise of a cash-settled option on a specified security, reporting under Code Sec. 6045(a) or Code Sec. 6045(g) with respect to that option must be made for the calendar year which includes the date of the lapse, closing transaction, or exercise. ( Code Sec. 6045(h)(2) )

The option reporting and the closing transaction reporting rule do not apply to any option that is granted or acquired before Jan. 1, 2013. ( Code Sec. 6045(h)(3) )

Source: Federal Taxes Weekly Alert, 10/23/2008, Volume 54, No. 43

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Individual and business extenders and other relief provisions in the 2008 Extenders Act

Individual and business extenders and other relief provisions in the 2008 Extenders Act

The “Tax Extenders and Alternative Minimum Tax Relief Act of 2008” (the 2008 Extenders Act), which was enacted on Oct. 3, 2008, provides extensions for several popular tax breaks and the addition of several new relief provisions, including disaster area tax relief. Here’s an overview of the key provisions in the new legislation:

Deduction of state and local general sales taxes. The option to deduct state and local general sales taxes is extended through 2009.

Qualified tuition deduction. The above-the-line tax deduction for qualified higher education expenses is extended through 2009.

Teacher expense deduction. The provision allowing teachers an above-the-line deduction for up to $250 for educational expenses is extended through 2009.

IRA rollover provision. The provision allowing qualified taxpayers to make tax-free contributions from their IRA plans to qualified charitable organizations is extended through 2009.

Additional standard deduction for real property taxes. The standard deduction for real property taxes for nonitemizers is extended through 2009.

Research and development credit. The research tax credit is extended through 2009. In addition, the alternative simplified credit is increased from 12% to 14% for the 2009 tax year, and the alternative incremental research is repealed for the 2009 tax year.

15-year straight-line cost recovery for qualified leasehold, restaurant, and retail improvements. The 15-year writeoff for qualified leasehold, restaurant and retail improvements is extended through 2008.

Basis adjustment to stock of an S corporation making charitable contributions of property. Favorable Subchapter S basis rules for gifts of appreciated property are extended through 2009.

Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico. The provision allowing a Section 199 domestic production activities deduction for activities in Puerto Rico is extended through 2009.

Other extended provisions. Other provisions extended through 2009 include:

    • Qualified zone academy bonds.
    • Indian employment credit.
    • Accelerated depreciation for business property on Indian reservation.
    • Tax credit for certain expenditures for maintaining railroad tracks.
    • 7-year recovery period for certain motorsports racetrack property.
    • Work opportunity tax credit for Hurricane Katrina employees.
    • New markets tax credit.
    • Increased rehabilitation credit for structures in the Gulf Opportunity Zone.
    • Enhanced charitable deduction for qualified computer contributions.
    • Tax incentives for investments in the District of Columbia.
    • Enhanced charitable deduction for food inventory.
    • Enhanced charitable deduction for contributions of book inventory to schools.
    • Special expensing rules for certain film and television productions.
    • Exception under Subpart F for active financing income.

Revenue raisers. The new legislation offsets the cost of the tax break extensions by requiring hedge fund managers and others to account for deferred compensation (income held in offshore accounts and other corporate structures) as it accrues, rather than avoiding appropriate and timely income taxes.

Additional tax relief provisions. In addition to the extensions of tax relief described above, the 2008 Extenders Act also includes liberalizations for the child tax credit, income averaging for Exxon Valdez litigation amounts, a 5-year writeoff for certain farming equipment, and a change in the standards for imposition of the tax return preparer penalty.

Disaster relief. Included in the new legislation is Midwestern disaster area tax relief for victims of the disaster in Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska and Wisconsin, and a new tax relief package for victims of all Federally-declared disasters occurring after Dec. 31, 2007 and before Jan. 1, 2010 (e.g., eased loss deduction rules, a new business writeoff for demolition, cleanup and repair, a 5-year carryback for casualty losses or qualified disaster expenses, bonus 50% first year depreciation for property placed in service through Dec. 31, 2011 (Dec. 31, 2012 for real property), and increased expensing dollar limits).

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New Real Estate Tax Deduction

If you take the standard deduction (because you don’t itemize your deductions), you can take up to an additional $500 real estate tax deduction for the home real estate taxes that you pay.

Originally this additional deduction was set to be effective only for the year 2008. Last Thursday, October 2nd, the President signed into law an extension to make that deduction apply to the 2009 year also.

This mostly benefits seniors who don’t have high home mortgage interest or high income taxes, or anyone else who doesn’t itemize their deductions but owns their own principal residence.

If your real estate taxes are less than $500 (hard to find in Wisconsin!) then your deduction is limited to the amount of the real estate taxes paid.

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