Bailout Plan Paves Way for Tax Breaks

The financial rescue plan is loaded with tax breaks, and many apply specifically to individual taxpayers. Do you know what the changes will mean for you?

In the late-80s, football fullback Tom Rathman routinely cleared the path so running back Roger Craig could break through the opponent's defense and score touchdowns. U.S. taxpayers may have gotten the same support from D.C. lawmakers-only the objective isn't touchdowns, it's a lower tax bill.

When the financial rescue plan went to the House and flopped miserably, senators quickly overhauled the bill and pushed it through. That process consisted of adding in a diverse set of tax breaks, designed strictly to woo the representatives who had originally voted against the measure. Some of those tax breaks seem silly, especially the one that applies to wooden arrow manufacturers. But other rescue plan sweeteners should bring a little tax relief directly to many U.S. households.

AMT controversy

The alternative minimum tax (AMT) was implemented to ensure that wealthy taxpayers don't use deductions and credits to eliminate their liability to the IRS. But in recent years, the AMT has inched its way towards the middle class, raising more and more tax bills in its wake. In 2007, the AMT exemption amount was $66,250 for married couples filing jointly, or $44,350 for single taxpayers. The financial rescue plan raises this exemption for 2008 to $69,950 for married couples filing jointly, or $46,200 for single filers. A separate provision waives back-due AMT that's related to the exercise of stock options.

Ride a bike and save

The rescue plan offers a nice perk for those who commute to work by bicycle. Riders can earn up to $20 tax free each month from their employers.  This little tax gift is intended to offset the costs of purchasing and maintaining the bike.

Extensions galore

Senators also revived some tax breaks that were supposed to be dead after 2007, including:

• The itemized deduction for state and local sales tax

• The Tuition and Fees Deduction, which allows for the write-off of up to $4,000 of college-related expenses

• An IRA charitable rollover-taxpayers can exclude IRA distributions from income if those distributions (up to $100,000) are transferred to a charity

A couple of perks that were supposed to expire in 2008 or 2009 have been extended, too:

• The standard deduction for property taxes of $500 for single filers, and $1,000 for those filing jointly

• The exclusion allowance of up to $2 million for mortgage debt that was written off by the lender

Disaster relief

Congress carved out about $8 billion to provide tax relief to victims of natural disasters in various Midwest states. People can now withdraw funds from qualified retirement accounts without penalty (but not without taxes).  

When senators faced stiff opposition to the financial rescue plan, they decided to run the Hail Mary income tax play. Taxpayers and voters may not like the strategy, but they'll certainly take the tax breaks.