In an effort to increase support for its economic rescue plan, congressional leaders inserted a number of year-end tax measures that Congress was scheduled to address.

While much of the attention has been on the measures intended to address the subprime mortgage crisis at the root of Wall Street's instability, here are some of the income and business tax issues also in the new law.

AMT Patch

Congress included an alternative minimum tax (AMT) patch in the new law. Under the new law's patch for the 2008 tax year, the AMT exemption amounts are $69,950 for married couples filing jointly and surviving spouses, $46,200 for single taxpayers and heads of household, and $34,975 for married couples filing separately for 2008.

The patch is designed to insulate middle-income taxpayers from the reach of the AMT. Without the change in law, the AMT would have collected $61.8 billion from middle-class taxpayers never intended to be targets of the tax. The AMT is one of the few areas of the tax code not indexed for inflation, and this is why Congress repeatedly passes these patches.

The patch is only for 2008. For years, Congress has avoided facing up to the need to find a permanent solution to the AMT and pass AMT reform, rather than yet another patch.

The patch allows taxpayers to take nonrefundable personal credits to reduce their AMT liability. The law also removes limits in the AMT on taking personal credits against regular tax liability. Personal credits include the dependent care credit and education tax credits. The adoption, child and saver's credit were already allowed in full against the AMT and regular tax.

Individual Tax Incentives

Tax relief for individual taxpayers in the new law primarily comes in the form of a handful of popular "extenders." These encompass tax breaks that, for many taxpayers, have been considered as permanent provisions because of the expectation of automatic renewal every year or two.

State and Local Sales Tax Deduction. The American Jobs Creation Act of 2004 and subsequent legislation allowed individuals to deduct state and local general sales taxes in lieu of state and local income taxes. This deduction expired at the end of 2007. The new law makes the deduction retroactive for 2008 and extends it for two years through December 31, 2009.

Taxpayers can calculate their deduction either by saving receipts or using the Optional State Sales Tax Tables provided by the IRS.

Higher Education Tuition Deduction. The new law extends through December 31, 2009, the above-the-line higher education tuition deduction. The deduction allows eligible taxpayers to deduct the costs of qualified higher education expenses paid during the year for themselves, a spouse, or a dependent.

The deduction continues to be barred to taxpayers whose filing status is married filing separately, or if another person can claim an exemption for the taxpayer as a dependent on his or her tax return.

The maximum deductible amount is $4,000 for taxpayers with adjusted gross income not exceeding $65,000 ($130,000 for joint filers). Taxpayers whose income exceeds that limit but does not exceed $80,000 ($160,000 for joint filers) may deduct up to $2,000 in qualified expenses. For many taxpayers, the HOPE or Lifetime Learning credit is also an option.

Additional Standard Deduction for Real Property Taxes. The new law extends the additional standard deduction for real property taxes for non-itemizers through 2009. Congress authorized a maximum $500 additional standard deduction ($1,000 for joint filers) in the Housing Assistance Tax Act of 2008 but made it available only for the 2008 tax year.

The deduction is in addition to the standard deduction. It is not an above-the-line deduction that lowers a taxpayer's adjusted gross income (AGI). For 2008, the $10,900 standard deduction for joint filers will increase to a maximum of $11,900 with the additional standard deduction for nonitemizers, while the $5,450 standard deduction for single individuals will increase to a maximum $5,950, and the head-of-household amount from $8,000 to $8,500.

Teachers' Classroom Expense Deduction. For 2008 and 2009, teachers and other education professionals can deduct, above-the-line, up to $250 of certain out-of-pocket classroom expenses, including the cost of books, supplies, equipment, and software used in the classroom. First introduced in 2002, this deduction is available to qualified educators regardless of whether or not they itemize their deductions.

Expenses that exceed $250 and non-classroom supplies may be deducted as an employment-related miscellaneous itemized deduction subject to the two-percent floor for taxpayers who itemize.

Tax-Free Distributions from IRAs for Charitable Purposes. The new law permits taxpayers to make tax-free distributions from IRAs for charitable purposes through December 31, 2009. This popular charitable contribution option had expired January 1, 2008. The maximum contribution limit for 2008 and again for 2009 is $100,000.

This treatment applies to traditional and Roth IRAs. However, no charitable deduction is allowed for any portion of these withdrawals that would have been otherwise taxable.

More Individual Incentives. The new law also extends:

• Treatment of certain dividends of Regulated Investment Companies (RICs)
• Estate tax look-through for RIC stock held by nonresidents
• Qualified investment entities treatment

Child Tax Credit

The new law enhances the child tax credit. The credit is currently refundable to the extent of 15 percent of the taxpayer's earned income in excess of approximately $12,050 (reflecting inflation adjustments from the original floor of $10,000). Under the new law, the earned income floor falls to $8,500.

Additionally, the rescue plan changes the definition of a "qualifying child" with respect to age and joint returns, clarifies the tiebreaker rules and ties the child tax credit to the child dependency exemption.

Business Tax Incentives

The new law includes a host of incentives targeted to businesses, several of which revise as well as extend tax benefits. Among the most significant are revised research tax credit, enhanced depreciation for leasehold and restaurant improvements, and brownfields remediation.

Research Tax Credit. The new law extends the research tax credit to amounts paid or incurred in 2008 and 2009. It also modifies the credit, increasing the alternative simplified credit while repealing the alternative incremental research credit.

Congress first created the alternative simplified credit in 2006. The credit was 12 percent of qualified research expenses that exceed 50 percent of the average qualified research expenses for the three preceding tax years. The new law raises the percentage to 14 percent and makes some technical corrections.

Leasehold and Restaurant Improvements. Under the new law, qualifying restaurant improvements and leasehold improvements will be eligible for 15-year cost recovery rather than a 39-year period for two more years, through December 31, 2009. Similarly, Congress authorized a 15-year recovery period for depreciation of certain improvements to retail space. This treatment is extended through December 31, 2009. The treatment applies to retailers that own their buildings as well as retailers that lease.

Charitable Contributions. The Tax Code gives businesses enhanced deductions for contributions of food to charitable organizations, as well as contributions of books and computer equipment to qualifying schools. The new law extends these tax breaks through December 31, 2009. Additionally, Congress extended the temporary suspension of limitations on charitable contributions in the case of a qualified farmer or rancher contributing food before January 1, 2009.

S corp shareholders are also eligible for special tax treatment when making charitable contributions of qualifying property. The new law extends the special rule allowing S corp shareholders to take into account their pro-rata share of charitable deductions even if such deductions would exceed such shareholder's adjusted basis in the S corp through December 31, 2009.

New Markets Tax Credit. The new law extends the New Markets Tax Credit through December 31, 2009. The New Markets Tax Credit encourages taxpayers to invest in or make loans to small businesses in economically distressed areas. In today's credit crunch, extension of the New Markets Tax Credit may prove especially valuable to those businesses.

Hurricane Katrina Relief. After Hurricane Katrina devastated the Gulf Coast in 2005, Congress passed a package of tax incentives to help individuals and businesses recover. One provision enhanced the Work Opportunity Tax Credit for Hurricane Katrina-affected employers. The new law extends this provision through 2009. Another Katrina-related incentive, the increased rehabilitation credit for structures in the Gulf Opportunity Zone, is also extended through 2009.

More Business Extenders. The new law also extends:

• Seven-year straight-line cost recovery for motorsports complexes;
• The special domestic production activities deduction in Puerto Rico;
• Qualified Zone Academy Bonds;
• District of Columbia first-time homebuyer tax credit;
• Indian employment credit;
• and over a dozen more targeted provisions.

Energy Tax Incentives

The new law extends a host of energy tax incentives, some targeted to consumers and others to producers and manufacturers. Many of the extensions go beyond the one or two year periods that Congress authorized for non-energy extenders.

Energy Efficiency and Property. The new law extends several energy efficiency and energy property tax incentives. The deduction for energy efficient commercial buildings is extended through December 31, 2013. The residential energy efficient property credit is extended through December 31, 2016, along with adding incentives for residential small wind investment and geothermal heat pumps and authorizing taxpayers to use the credit to offset AMT. Congress also reinstated the residential energy property credit for property placed in service in 2009. Additionally, Congress modified the energy efficient appliance credit for manufacturers of qualifying dishwashers, clothes washers, and refrigerators.

The energy incentive impacting most individuals is the credit for the purchase of residential energy property. A credit of up to $500 is available for nonbusiness energy property that meets the requirements for qualified energy efficiency improvements or qualified residential energy property expenditures. Eligible improvements include insulation materials, exterior windows, including skylights and exterior doors.

Renewable Energy. Included in the new law are several extended incentives to encourage the production of renewable energy. Congress extended the credit for producing electricity from qualified wind facilities through December 31, 2009, and the credits for producing electricity through biomass and other qualifying renewable sources through September 30, 2011. The credit for solar energy, fuel cell, and microturbine property is extended through December 31, 2016.

The new law expands the definition of some of the renewable energy sources, such as biomass, enabling more producers to qualify for the tax incentives. To close a loophole, biodiesel fuel that is imported and immediately sold for export is ineligible for the tax incentive retroactive to May 15, 2008.

Transportation Fringe Benefits. Employees can exclude certain employer-provided transportation fringe benefits from income, such as transit passes and van pooling. The new law extends this treatment to employer-provided transportation fringe benefits paid to employees who commute by bicycle. The exclusion amount is $20 per month. This treatment is effective for tax years beginning after December 31, 2008.

More Energy Incentives. Other energy provisions relate to:

• Coal gasification investment credit
• Clean renewable energy bonds
• Steel industry fuel
• Alternative fuels credit
• Alternative refueling stations credit
• Percentage depletion for marginal wells
• Refinery expensing
• Excise tax on coal to fund Black Lung
• Disability Trust
• Plug-in electric drive vehicles
• Non-hydrogen alternative fuel refueling property

Congress also authorized a refund of coal excise taxes that the IRS collected from exporters, which the Supreme Court has deemed unconstitutional.

Disaster Relief

The new law provides temporary, but significant, tax relief to victims of the severe storms, tornadoes, and flooding that swept through the Midwest in 2008 and--to a lesser extent--victims of Hurricane Ike in Texas. Additionally, Congress authorized national relief for locations declared disaster areas by the president in tax years beginning after December 31, 2007, with some exceptions.

The Midwestern Disaster Area encompasses presidentially declared disaster areas in Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, and Wisconsin between May 20, 2008, and before August 1, 2008. The Hurricane Ike Disaster Area encompasses parts of Louisiana and Texas, which were declared disaster areas by the president on September 13, 2008.

Midwestern Disaster Area. The tax incentives in the Midwestern Disaster Area mirror many of the ones enacted in 2005 after Hurricanes Katrina, Rita, and Wilma devastated the Gulf Coast. These include increased expensing for demolition, environmental remediation, and clean-up costs; enhanced depreciation for qualified disaster property; education and housing tax benefits; and a higher standard mileage rate for charitable use of vehicles.

Hurricane Ike Disaster Area. The incentives targeted to the Hurricane Ike Disaster Area are much more limited than the incentives for the Midwestern Disaster Area. Congress authorized temporary tax-exempt bond financing and low-income housing tax relief for certain areas damaged by Hurricane Ike.

Victims of Hurricane Ike may be eligible for national disaster relief (discussed below).

National Disaster Relief. Taxpayers affected by natural disasters (after December 31, 2007, and before January 10, 2010, with some exceptions) may be eligible for increased expensing for qualified disaster expenses, special depreciation for qualified disaster property, enhanced NOL carryback, and other targeted tax breaks.

Related items:

Business Owners See Job Losses If Tax Extenders Not Renewed

Congress Debates Expiring Tax Provisions, Disagrees on Tax Hikes

Added to the news December 2, 2008.