Momentum Builds for Renewal of Tax Extenders
The Senate Finance Committee (SFC) approved a package of tax extenders before leaving Capitol Hill for its August recess. Taxpayers who have relied on the routine extension of these provisions may need to prepare for the possible elimination of some incentives.
Highlighted here are some of the extenders that are good candidates for renewal, some that are "on the fence," and some that may be allowed to permanently expire.
Of course, the fate of all of the extenders is linked to final negotiations among the White House, the Democratic-controlled Senate, and the GOP-controlled House. The lame-duck Congress, which meets after the November elections, is expected to take up the extenders, the expiring tax cuts, and more.
High probability of renewal
The Family and Business Tax Certainty Act of 2012 and recent legislative action in the House and Senate are good barometers to help identify which of the extenders enjoy bipartisan support and are likely to be renewed. At the top of the list are an alternative minimum tax (AMT) patch, the research tax credit, and the state and local sales tax deduction.
In previous years, Congress has routinely "patched" the AMT to prevent it from encroaching on middle income taxpayers. The most recent patch expired after 2011. In early August, the Senate approved the Middle Class Tax Relief Act, which increases the AMT exemption amounts to $78,750 for married couples filing joint returns and to $50,600 for single individuals. It also allows nonrefundable personal credits against AMT for tax years beginning after December 31, 2011. The House-passed the Job Protection and Recession Prevention Act, which provides a two year AMT patch (for 2012 and 2013). The AMT exemption amounts in the House bill are $78,750 for married couples filing a joint return and $50,600 for single individuals for 2012; and $79,850 for married couples filing a joint return and $51,110 for single individuals for 2013.
Research tax credit
The research tax credit is available for 20 percent of the excess of an eligible taxpayer’s qualified research expenses over a base amount, plus 20 percent of the taxpayer’s qualified basic research payments, plus 20 percent of the taxpayer’s post-August 8, 2005 payments to a qualified energy consortium for energy research. Qualified research expenses include the sum of all expenses paid or incurred for in-house research and contract research. Taxpayers may also compute their research tax credit using the alternative simplified credit method. Originally enacted in 1981, the research tax credit was most recently extended (through December 31, 2011) by the 2010 Tax Relief Act. The SFC bill would extend the research tax credit (and the alternative simplified credit method) through 2013.
State and local sales tax deduction
For tax years beginning after 2003 and before 2012, taxpayers could elect to deduct state and local general sales taxes as an itemized deduction in lieu of state and local income taxes. The amount of the deduction a taxpayer may claim is either the actual amount of general state and local sales taxes paid or accrued during the tax year, or the amount set forth in IRS tables. The SFC bill would extend the election through 2013.
Comment: The SFC bill does not extend bonus depreciation or enhances Code Sec. 179 small business expensing. The Senate-approved Middle Class Tax Relief Act provides for a Code Sec. 179 dollar amount of $250,000 and an $800,000 investment limitation for tax years beginning after December 31, 2012. The House-approved Job Protection and Recession Prevention Act of 2012 carries a Code Sec. 179 dollar amount of $100,000 and a $400,000 investment limitation after 2012.
Good prospects for extension
Several other extenders also appear to have bipartisan support. They include:
Higher education tuition deduction
The above-the-line higher education tuition deduction has been routinely extended since its creation in 2001. The maximum deduction reaches $4,000 for single individuals with adjusted gross income (AGI) of $65,000 or less ($130,000 for married couples filing a joint return) or $2,000 for single individuals with AGI of $80,000 or less ($160,000 for married couples filing a joint return). The deduction expired after 2011. The SFC bill would extend the deduction through 2013.
Comment: The Senate-approved Middle Class Tax Cut Act extends three education incentives not included in the SFC bill: the American Opportunity Tax Credit (AOTC), the student loan interest deduction, and enhancements to Coverdell Education Savings Accounts. All three incentives would be extended through 2013.
Small business stock
Noncorporate taxpayers may exclude 100 percent of the gain on the sale or exchange of qualified small business stock held for more than five years for stock acquired after September 27, 2010, and before January 1, 2012. None of the excluded gain on the qualified stock is considered an AMT preference. The SFC bill would extend the 100 percent exclusion of gain to stock that is acquired before January 1, 2014, and held for more than five years.
Teachers’ classroom expense deduction
Qualified educators may be eligible to claim an above-the-line deduction of up to $250 for certain out-of-pocket classroom expenses. The teachers’ classroom expense deduction expired after 2011. The SFC bill would extend the deduction through 2013.
The Finance Committee bill would also extend other incentives for individuals, businesses, and specific industries. They include:
- Deduction for qualified mortgage insurance premiums
- Special rules for contributions of capital gain real property made for conservation purposes
- Charitable distributions from IRAs
- Work Opportunity Tax Credit
- Employer wage credit for activated military reservists
- 15-year recovery period for qualified leasehold, restaurant, and retail improvement property
- Treatment of certain dividends of regulated investment companies
- Exceptions under Subpart F for active financing income
- Look-through rule for related controlled foreign corporations
- Renewable electricity property wind production tax credit
- Investment tax credit in lieu of production tax credit
- Code Sec. 25C credit for nonbusiness energy property
- Alternative fuel vehicle refueling property for biodiesel and renewable diesel
- Credit for construction of energy-efficient homes
- Credit for manufacture of energy-efficient appliances
- Incentives for alternative fuel and alternative fuel mixtures (other than liquefied hydrogen)
- Plug-in electric vehicles
- New Markets Tax Credit
- Enhanced deduction for contributions of food inventory
- Empowerment Zones
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