Emergency Economic Stabilization Amendment of 2008

In response to a near catastrophic collapse of the nation's credit markets, Congress and the President signed into law The Emergency Economic Stabilization Amendment on October 3, 2008. The stated goal of this new legislation is to remove troubled assets from the books of banks by a massive infusion of funding. By removing these troubled assets the hope is that the credit markets will begin to flow once more.

Why do it? In a word, history. Financial markets in crisis have occurred many times in developed economies. From Sweden in the 1990s to the U.S. Savings & Loan troubles, government intervention has been credited with minimizing the economic impact of troubles in the financial markets. It is hoped that by removing troubled assets from the banks' books, it will reduce the risk of bank failure, jump-start the credit markets to start lending again, and stabilize the fragile psyche of investors and depositors.

Current Situation. Currently many banks are no longer lending to one another because they are not certain of the financial stability of their lending partner banks. Loans are not being written as banks adjust to the lack of liquidity and underwriters are making their loan qualifications much tougher. Financially sound banks are acquiring troubled banks at fire-sale prices. The stock market is volatile as nervous investors move their assets from the stock market into safe havens like U.S. Treasuries.

How will it work? The actual structure of the financial bail-out program has been left, in large part, to the Treasury Department. The variety of loan types and the diverse structure of the loans make it very complex to determine what the true value of each banks' troubled portfolios is.

One of the proposals is to create a reverse auction where banks bid on the price they will take for their troubled asset portfolio. The Treasury Department would set a ceiling price on what they are willing to pay and would then purchase the assets from the lowest price to the highest price until they hit their max price ceiling. The Treasury Department could then sort through the loans and create common baskets of loan types and determine the best course of action to take with each group.

Another proposal is to offer insurance to banks to guarantee a bank's portfolio (for a price) and still another suggests of the government taking equity positions in banks to help taxpayers benefit from the banks' debt relief.

The key is that the government programs will be flexible and changing as no one really knows what is in these portfolios.

How much will it cost me? As structured, up to $700 billion is being made available through the Troubled Asset Relief Program (TARP). The money will be dispersed in parts with $250 billion available immediately, $100 billion available later and a final $350 billion subject to Congressional approval. The actual cost to you will depend on what the government pays for the assets relative to the "intrinsic value" of the loans. This is difficult because currently no one is buying these portfolios at ANY price. If the price paid is less than the value of the underlying assets, the government could actually make money by holding the loans to maturity. Other loans may make money if they are simply restructured. On the other hand, if the government pays too much, the real loss would be borne by taxpayers. Some government proponents claim the final cost of the bailout will be far less than the $700 billion program, but no one is sure.

In addition to the $700 billion in bailout funds, the new law also provides additional taxpayer protection and extensions of expiring tax benefits. Some of the major changes are outlined here.

Protection for Savers

Higher FDIC Insurance
For added protection and confidence building, the Federal Deposit Insurance Corp (FDIC) will raise its deposit-insurance cap to $250,000 from $100,000. This provision is temporary and effective through 2009.

Who benefits - Individuals and small business owners with more than $100,000 in savings are the primary beneficiaries of this added protection. Formerly no more than $100,000 was FDIC insured so savers had to divide their funds across more than one institution to protect deposits exceeding $100,000. Less worry and more confidence in their financial institution are additional benefits for individuals. Local banks could also benefit if more money is kept in their deposit accounts making more money available to lend to the local community. On the downside this added protection could cause a run on the stock market as more investors look for a safe place to put their money.

AMT patch set for 2008

An Alternative Minimum Tax (AMT) patch has been extended for 2008 to help middle class taxpayers being hit by a surprise tax hike. The AMT exemption amount for married taxpayers filing joint returns for 2008 will be $69,950, up from $66,250. For single taxpayers the AMT exemption rises from $44,350 to $46,200.

Who Benefits - Taxpayers with taxable incomes triggering the Alternative Minimum Tax. (Taxpayers figure their AMT taxable income and then deduct the exemption amount subject to phase-outs.) Had Congress not raised the exemption, millions more taxpayers would have been hit with AMT in 2008.

Teachers save your receipts...AGAIN!

Qualified teachers will now continue to receive up to a $250 deduction for out of pocket expenses for classroom school supplies in 2008 and 2009. This is an "above the line" deduction and does not require you to itemize.

Who Benefits - This tax benefit expired in 2007 and would have been a sorely missed tax benefit for full-time, certified educators incurring non-reimbursed expenses for classroom supplies.

General State and Local Sales Tax Deduction

The new Financial Bailout plan reinstates the expired option for taxpayers to choose between an itemized deduction for state income taxes or a deduction for general sales taxes on their Federal 1040 tax returns in 2008 and 2009.

Who Benefits - This option is particularly valuable for those who live in states with no income tax or for individuals who have paid high sales tax on major purchases that exceed what the state tax on their income would be.

Qualified Tuition Deduction through 2009

The up to $4,000 college tuition deduction that expired in 2007 was reinstated for 2008 and 2009 with this bailout amendment.

Who Benefits - Taxpayers, spouses, or dependents with qualified income who have tuition and related education expenses will be the beneficiaries of this above-the-line deduction amount.

Charitable Deductions from Individual Retirement Plans Extended

Taxpayers older than 70 will once again be allowed to directly transfer up to $100,000 tax-free to a qualified charity from their IRA through 2009. Such transfers will not be counted as income or be deductible as a charitable contribution.

Who Benefits - This tax-free benefit was available in 2007 and then expired. It is now available for 2008 and 2009 and is particularly beneficial to those who are at least 70, who must take minimum distributions from their IRA, and who are planning to make charitable contributions.

New Property Tax Deduction for Non-Itemizers Extended

The Housing Assistance Act of 2008 creates an opportunity for qualified home-owners to deduct up to $1,000 ($500 if single) of their property taxes even if they didn't itemize their deductions. The bailout plan has extended this tax break through 2009.

Who Benefits - Individuals who normally claim the basic standard deduction on their Federal income tax return and don't itemize because their total itemized deductions are less than the standard deduction.

Energy Savings Tax Credits

The Financial Bailout Plan re-creates thirty energy savings tax credits for individuals and businesses, many that expired in 2007. Key energy savings provisions in this group include reinstatement of credits for energy from renewable sources, credits for clean energy from coal, alternate fuel credit, energy efficient home credit, new qualified plug-in electric motor vehicle credit, and non-business energy efficient property. There is also a re-instated deduction for the purchase of solar panels.

Who Benefits - Businesses and individuals making investments in energy savings processes, production, equipment, materials and home improvements.

Child Tax Credit Changes

A number of changes also apply to the child tax credit. More of the credit is refundable (the earned income floor drops from $12,050 to $8,500), the definition of qualifying child changes, and the credit is now tied to the child dependency exemption.

Who Benefits - Anyone who receives the child tax credit.

More Reporting Sent to IRS Starting in 2011

In a attempt to get more accurate information regarding taxpayer gains on stock and securities investments, Brokers must report the 'adjusted basis' of publicly traded securities to the IRS and note whether the sale is a short term or long-term sale. This basis will help the government more accurately calculate your gain or loss on sales of securities. Stocks acquired after 2010, mutual funds purchased in 2012 or later, and all other securities starting in 2013 must be reported. Congress estimates that with the added accuracy of this provision an additional $6 to $7 billion of tax revenue can be collected over the next 10 years.

Business Tax Changes

The recent Emergency Economic Stabilization Act of 2008 also extends a number of business tax incentives. Among them are: Seven year straight line cost recovery for motorsports complexes; Indian employment credit; research credit; Distr. of Columbia first-time homebuyer credit; employer provided transportation benefits and many more incentives.