While many Washington observers have called much of the tax revenue side of the Bush administration’s Fiscal Year 2009 budget proposals dead on arrival, this year’s “Blue Book” of Treasury explanations nevertheless remains an important tax-planning tool.It underscores what the Bush administration considers are problems remaining to be solved. As such, they are problems that need to be either addressed or “planned around” in the meantime. Here is our take on some of the highlights in making that determination.


The administration’s 2009 budget recommended making permanent the reduced tax rates of the EGTRA and the JGTRA that are scheduled to sunset at the end of 2010. Those sunsetting provisions put into play $3 trillion in tax incentives. Much uncertainty remains on what will be done. One best guess is that legislation to extend the rate cuts, make them permanent, or arrive at some compromise rate structure will not take place until 2009, but that the need for economic certainty would not extend that 2009 deadline much further.

In the meantime, delaying the recognition of income, long a technique to capitalize on the time value of money, may not work as planned if rates spike at 5 percent higher or more after 2010. Deferred compensation, installment sales, like-kind exchanges and similar deferral techniques likewise may come to a significant halt by the end of this year, as taxpayers adopt a wait-and-see position. Year-end tax planning at the end of this year, too, may prove particularly challenging, since a forecast of what the next administration may do will just be getting more developed by December.


Those practitioners who have struggled over the past several years with ever-changing eligibility, contribution and distribution rules for a variety of retirement savings vehicles might agree with the administration’s recommendation to consolidate and simplify the current system.

Each of the alphabet-named savings vehicles (IRAs, non-deductible IRAs, Roth IRAs, ESAs, QTPs, MSAs and HSAs) has its own set of rules. The administration’s solution, one that has been included in prior budgets, would consolidate these vehicles into two main accounts: a Retirement Savings Account that can be used for retirement only, and a Lifetime Savings Account for all other needs in addition to retirement.

The complexity in the transitional rules that would accompany RSAs and LSAs, unfortunately, probably will doom their passage until the next Congress takes the reigns with more of a mandate for change. Under the proposal, for example, traditional IRAs could continue without further contributions or be converted into an RSA, with the conversion amount recognized ratably over four years if done before 2010.

TIPRA ’05, of course, has already made 2010 a big year for retirement accounts by making that the year in which the $100,000 adjusted gross income limit on the conversion of traditional IRAs to Roth IRAs is lifted. In addition, the recognition of income from conversions that is realized in 2010 can be spread over 2011 and 2012. Add the prospect of further change if Roth IRAs become RSAs, and it’s clear that those considering Roth conversions any time soon must deal with several variables. Taxpayers should also keep in mind the impact of the scheduled rate increase in 2011 on a conversion, as well as the lower current value of IRA accounts that are presently invested in the stock market.

Similarly, employer-sponsored retirement savings plans that permit employee deferrals or employee after-tax contributions have grown to a mind-numbing number, including 401(k)s, Simple 401(k)s, Roth 401(k)s, Thrifts, and 403(b) and 457(b) plans, as well as Simple IRAs and Sarseps. The administration would consolidate them into a single Employee Retirement Savings Account. Simplified nondiscrimination testing and safe harbors would apply.

Until that day occurs, however, tax planning both for participants and employers must continue to take into account the differences in each employer-sponsored plan.


Small business expensing would get another boost under the Bush administration’s proposal, jumping to $200,000 with an $800,000 equipment cap starting in 2009, and adjusted for inflation thereafter. Expensing for 2008 under the stimulus package would be set at a $250,000/$800,000 level. Without these changes, expensing would continue at the $125,000/$500,000 level until 2010, when it would drop back permanently to $25,000/$200,000.

With many possible scenarios for the future amount of Sec. 179 business expensing with which to work, an eligible taxpayer should plan equipment purchases at least two or three years out (but in pencil to remain flexible should Congress make further changes). Many businesses, especially service businesses, reportedly have already “maxed out” on the amount they need to spend on equipment, making the higher deduction and spending cap amounts irrelevant to them. The fate of higher business expensing on a permanent basis likely will be rolled into the larger business tax debate that is shaping up to take place in 2009.


Perhaps the most radical proposal (albeit one that has been in play for several years) in the administration’s budget is a new standard deduction for health insurance premiums. This health insurance standard deduction is principally aimed at two problems: overuse of the health care system by those with high-premium plans offered through employers (where the employee portion is pre-tax and without employment taxes and the employer portion is excluded from the employee’s income), and employees without employer-provided medical plans who either pay premiums with after-tax income subject to employment taxes or go uninsured.

The standard deduction for health coverage ($15,000 for family coverage and $7,500 for single coverage) would replace the exclusion for employer-based health insurance, the self-employed above-the-line premium deduction and the itemized medical deduction. Employer-provided health insurance would be subject to withholding and employment taxes, subject to rebate. Businesses would continue to deduct health insurance as a business expense.

Clearly, there are inequalities among taxpayers with respect to the tax benefits available to offset the cost of health insurance premiums. The IRS has some discretion to smooth out some of the injustice. For example, in Notice 2008-1, it finally agreed to allow a 2 percent S corp shareholder who takes out a health insurance policy, pays the premiums and is reimbursed by the S corp, to take an above-the-line Code Sec. 162(l) deduction to offset the income from the reimbursement. Nevertheless, changes in the disparate tax treatment of health insurance premiums appear to be overdue, and a solution, if not the one within the current administration’s budget, likely will also be a part of the 2009 tax debate.

In the meantime, employees without a health insurance plan at work should take another look at the health savings account. Deductible contribution limits are $2,900 for self-only coverage and $5,800 for family coverage in 2008. The administration’s 2009 budget proposal would also bolster use of HSAs by broadening eligibility and coverage.


The administration proposes to make permanent the exclusion from income of qualified distributions made after age 70-1/2 from a traditional or Roth IRA directly to a qualified charitable organization. Direct IRA contributions benefit not only those elderly individuals who tend as a group not to itemize deductions, but also reduce their gross income and, therefore, lower AGI otherwise increased by mandatory traditional IRA withdrawals. This tax break had expired at the end of 2007.

Also expired as of Jan. 1, 2007, but proposed to be made permanent, are the enhanced charitable deduction for contributions of food inventory, the enhanced deduction for corporate contributions of computer equipment for educational purposes, and the increased limits on contributions of partial conservation interests in real property. The proposal also permanently extends the Pension Protection Act of 2005 provision that allows a shareholder to reduce stock basis by the adjusted basis of appreciated property contributed on the S corporation level and passed through to the shareholders.

While making all these charitable tax incentives permanent will increase predictability in planning, it also will reduce the sense of urgency that had been created by deductions that had an expiration date. Since they have already expired, however, taxpayers should not follow through on them until a retroactive amendment is in place.


The IRS sees increased information reporting as a key to closing a significant portion of the tax gap. Several administration proposals that appeared in the last budget appear again, but with growing support behind them this time around.

The administration recommended that, starting after 2009, brokerage houses, mutual funds, asset managers and fiduciaries should be required to report information on an adjusted basis in connection with the sale of securities. The proposal would serve a dual purpose: compliance (i.e., preventing inflated basis) and simplicity (by relieving taxpayers of the complicated task of calculating adjusted basis).

A more controversial proposal involves required information reporting on merchant payment card (credit and debit) reimbursements. It would encourage merchants to report income from customers’ credit card purchases.

A third proposal targets contractors who either fail to report income or fail to pay the proper quarterly estimated tax. Contractors receiving payments of $600 or more from a particular business would be required to verify their TIN on a Form W-9 that would be required to be sent from the contractor to the business. The business, in turn, would be required to offer optional tax withholding on payments at a 15, 25, 30 or 35 percent rate.

Finally, to improve the reporting of foreign trust income to the Internal Revenue Service, the administration recommended increasing the information-reporting penalty to the greater of 35 percent or $10,000.


This year’s budget proposals bring hope that the current preparer penalty controversy will be resolved soon, and in the preparer’s favor. To bring conformity to the penalty standards between tax return preparers and taxpayers, the Bush administration now recommends doing it by lowering the standard for preparers, rather than raising it for taxpayers.

The substantial authority standard would be used for both. Generally defined as a position having at least a 40 percent chance of success, the substantial authority standard would replace the more-likely-than-not preparer standard, now defined as a position having more than a 50 percent chance of success. As is the case now, no penalty would be assessed against a preparer who has reasonable cause and good faith with respect to the position taken on the return.


Along with the stimulus package, “must-pass” tax legislation for 2008 includes “the extenders.” The budget proposal addresses most of them.

On the top of the list, the administration recommended the extension of the Alternative Minimum Tax exemption levels retroactively for 2008. This is among the most certain of the proposals to be adopted by Congress. The likelihood of a permanent AMT solution in 2008, however, is extremely low. But in 2009 or 2010, legislation will be forced upon Congress with the end of the 2001 tax act rate reductions, an increasing deficit, a need to reconsider U.S. corporate tax from a more global perspective, and a growing AMT problem serving as catalysts.

The budget also recommended action on the following expired provisions:

A Making the $250 above-the-line deduction by educators for classroom supplies permanent, retroactively from Jan. 1, 2008;

* Making the R&E credit permanent, retroactively from Jan. 1, 2008;

* Extending for two years the Washington, D.C., first-time homebuyer credit, retroactively from Jan. 1, 2008;

* Extending for one year the new markets tax credit, through 2009;

* Extending for one year the temporary active financing exception to the Subpart F financing exception, through 2009 (which allows U.S.-based financial and insurance groups to continue their active international operations without incurring Subpart F income);

* Extending for one year the Subpart F “look-through” exception, through 2009 (thereby eliminating tax disincentives for U.S.-based multinational corporations to redeploy assets among foreign subsidiaries);

* Extending for two years the penalty-free withdrawals from qualified retirement plans allowed to individuals called to active duty, for individuals called to active duty through 2009; and,

* Extending for two years the election to include combat pay for determining eligibility for the Earned Income Tax Credit, retroactively through 2009.

Noticeably absent from the usual list of extenders were extension of the state and local sales tax itemized deduction and the extension of the higher education tuition deduction, both of which expired at the end of 2007. While not supported outright by the administration, they remain popular in Congress and, if the others are extended, they are expected to go along for the ride.


2008 is not shaping up to be a banner year for tax legislation. With the presidential elections front and center in Washington, Congress will be apt to sit on most tax proposals until the smoke clears.

Nevertheless, paying attention to the current revenue proposals in the Bush administration’s 2009 budget will pay dividends, both in seeing more clearly some of the problems being faced by taxpayers, and in appreciating the need to anticipate long-term solutions in developing tax strategies that can survive the 2010 firestorm now on the horizon.

George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at CCH Tax and Accounting, a Wolters Kluwer business.

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