As I sat late Tuesday evening on November 4^th watching the President Elect, Barack Obama, deliver his victory speech, a reality became apparent that the Bush administration is actually approaching its close and a new administration will be entering Washington.

It’s hard to believe that eight years have passed so quickly and also, as I reflect, that such an incredible number of historic tax law changes were enacted throughout Bush’s term. From tax rate cuts to Alternative Minimum Tax (AMT) relief to economic stimulus packages, the past eight years have been an extremely active time in taxation. As the country enters its next presidential term under new leadership, tax policy will undergo significant change.

One challenge for the new administration is the daunting task of balancing taxation with the government’s commitment to fiscal and social responsibility. If it reduces taxes, vital government programs face cuts, while an increase in taxes would result in a reduction of consumer and corporate spending, thus hampering the economy. President Elect Obama has addressed this dilemma by offering to reduce taxes to families making under $250,000 per year and subsidizing this reduction with increases to families making over $250,000 per year, a reduction of government spending and the elimination of abusive tax loopholes.

Under Mr. Obama’s plan, the following tax incentives are highlighted.

Middle Class Incentives (under $250,000/family)

- Tax credits of up to $1,000 for workers

- A $4,000 refundable credit for qualified tuition expenses

- A 10% refundable credit for mortgage interest payments

- Eliminate income tax for seniors making under $50,000

- Expand Earned Income Credit, child care credits, clean vehicle credits and retirement savings incentives

Business Incentives

- Elimination of capital gains tax on investors in small businesses

- Cutting corporate tax rates for companies creating jobs in the US

- 50% refundable credit for small businesses paying employee premiums

- Making the Research and Development Credit permanent

On the flip side, Mr. Obama’s plan includes the following tax increases and reform:

Tax Increases to Families Exceeding $250,000 and an adjustment to Estate Tax

- Top tiered income tax rates restored to pre-Bush levels of 36% and 39.6%

- Long-term capital gain tax rate increase from 15% to 20% (families making under $250,000 will continue to pay 15%)

- Qualified dividend tax rate increase from 15% to 20% (families making under $250,000 will continue to pay 15%)

- Estate tax will retain a rate 0f 45% for those estates over $7M

Tax Reform

- Reforming international tax loopholes by eliminating incentives for shipping jobs overseas

- Closing domestic tax loopholes by clarifying the economic substance doctrine and increasing reporting on capital gains

- Elimination of tax incentives of oil and gas companies

- Closing other loopholes such as taxing carried interest as ordinary income and closing the CEO pay loophole

- Increase in the investigation of offshore tax havens

As evidenced by the items above, it’s easy to conclude that embodied in Mr. Obama’s plan is an underlying (and well-publicized) theme of “redistribution of wealth.” The goal is primarily to lessen the gap between the middle class and upper class — a gap that has widened to historic proportions under President Bush’s administration. Using AMT as an example, a number of middle class taxpayers become subject to a tax that was intended for the wealthy, thus subsequently forcing temporary patches included in various economic stimulus packages.

“Change” was the theme of Mr. Obama’s campaign and this will be what we can expect with taxation. We also should keep in mind that regardless of the items listed above, it is likely that events will occur that can drastically change his comprehensive tax plan. We only have to look as far back as the changes enacted by the Bush administration, and certainly we don’t need to be reminded of the famous words uttered by the elder George H.W. Bush that helped him win the 1988 presidential election.  Luckily, we were not very good lip readers.

At this point, everyone has heard of the new Emergency Economic Stabilization Act of 2008 (EESA), more commonly known as the “Bailout Plan.” This plan authorized the US government to spend up to $700B to rescue US financial institutions from the lingering effects of the sub-prime mess (to put it lightly). But the Bailout reached further than the banks and brokerage houses:  deeply rooted within the plan are tax provisions that will affect a large number of taxpayers.

One such provision is Alternative Minimum Tax (AMT) relief, which increases the exemption amounts to $69,950 for married filing jointly, and $46,200 for individuals (pre-EESA, the amounts were $45,000 and $33,750, respectively). The provision will also allow for personal credits against AMT. The cost of this provision is estimated at approximately $62B over ten years.

Also included are extensions expiring after December 31, 2007. For individual income tax some of the popular incentives include:

1.  the deduction for state and local sales taxes for those who elect to deduct sales tax in lieu of the state income tax deduction,

2.  deduction for qualified tuition expenses for higher education (subject to adjusted gross income limitations,

3.  teacher’s education expense deduction of $250,

4.  additional standard deduction for real property taxes for nonitemizers, and

5.  tax free contributions of IRA plans to qualified charitable organizations.

Extensions for some of the popular business tax incentives include:

1.  extension of the Research and Development Credit,

2.  15 year straight line depreciation for qualified leasehold, restaurant and retail improvements,

3.  section 199 deduction for Domestic Production Activity in Puerto Rico, and

4.  extension of Work Opportunity Tax Credits for Hurricane Katrina Employees.

The Bailout  also includes a number of renewable energy incentives enacted to encourage investment in this area, as well as  some revenue generating provisions. One provision that will affect many taxpayers is the new mandatory requirement for brokers to furnish basis information to the IRS relating to sales of publicly traded stock. In prior years, brokers were only required to report gross proceeds and it was up to the taxpayer to report the appropriate cost basis. It will be extremely important that taxpayers confirm that their broker has the correct basis on their portfolio, especially if funds were transferred to a new broker. This provision is expected to raise close to $6.7B in revenue over the next 10 years.

There is no question that the bailout, from a macro level, will ultimately cost Americans as Wall Street is slated for the bulk of the economic attention. Some studies have estimated the cost at around $5,000 per working American. However, the tax incentives included within the plan allow some relief for taxpayers and businesses.

Is the bailout plan perfect? This will likely be debated for some time, but one thing that is for certain is that the tax incentives were a necessary addition to the overall plan.

The federal government’s Economic Stimulus Act is best known for its individual rebates, but there are components that are designed to jumpstart business spending as well:

Q. How does the Economic Stimulus Act relate to business?

A. There are two main business areas; the first is increased asset expense allocation. The economic stimulus package doubles the current small business expensing limit from $128,000 to $250,000. This provides business owners with an immediate deduction for the entire cost of certain investments made in their business, such as purchasing new equipment. This applies only to business owners who invest less than $800,000 in their business this year.

The second is the bonus depreciation allowance, which provides a valuable tax break in the form of bonus depreciation. The incentive allows all qualifying taxpayers to claim an immediate 50 percent deduction for certain qualifying depreciable property acquired and placed in service in 2008.

Q. Are there restrictions on these incentives?

A. There are important guidelines that lay out how the benefits can be applied:

Increased Asset Expense Allocation

- Applies to depreciable tangible personal property placed in service in 2008

- For other than calendar year taxpayers, additional limitations apply to purchases eligible for increased expensing during 2008. If this applies to clients, CPAs should be sure they are aware and take the time to walk through the limitations with them.

- Includes off-the-shelf computer software

- Property must be used in the active conduct of a trade or business

- Must be newly purchased property

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