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2011 Mid-Year Update Regarding Bush-Era Tax Cuts

Posted by Admin Posted on June 04 2012
We've been monitoring the expiration of several Bush-Era cuts and whether or not Congress will extend them since many credits expired at the end of 2011. The following is a report from our friends at CCH regarding the status of a few of the most important issues, followed by a list of specific deductions and credits that have expired and are on the fence for renewal, provided by Sharon Kreider and Karen Brosi of Western CPE.

Mid-year brings no resolution to fate of Bush-era tax cuts, extenders and more


Hopes for a pre-election resolution to the fate of the Bush-era tax cuts, extenders and other tax incentives are quickly fading as summer approaches. This year is increasingly looking like a replay of 2010, the last time the Bush-era tax cuts were facing imminent expiration. The White House, the Democratic-controlled Senate and the GOP-controlled House all have different opinions on the fate of these tax incentives and negotiations, which have been few and far between, and have quickly bogged down. One solution, which is being talked about more and more, is a temporary extension of the tax cuts. While this would punt the issue to the next Congress, it does little to ease taxpayers' concerns about tax planning in a climate of constant uncertainty.

Bush-era tax cuts

Unless extended, the tax cuts in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) (as extended by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010) will sunset after December 31, 2012. The list of expiring tax incentives is long and includes reduced individual income tax rates and capital gains/dividends tax rates; the $1,000 child tax credit; enhancements to the earned income tax credit (EIC); and much more.

On May 15, House Speaker John Boehner, R-Ohio, said that the House will vote before the November elections on legislation to extend the Bush-era tax cuts. Boehner gave no timetable for a vote. It is unclear at this time if the GOP plans to vote on making the Bush-era tax cuts permanent or merely to extend them one or two more years. Also unclear is whether or not any extension would be offset with revenue raisers elsewhere. Even if the House votes on the tax cuts, there is no guarantee the Senate will take them up.

Complicating matters is the federal budget deficit. After months of partisan wrangling last year, Congress passed the Budget Control Act of 2011 (BCA). The BCA imposes mandatory, across-the-board spending cuts through sequestration. The BCA's spending cuts are scheduled to take effect in 2013. The GOP wants to repeal the BCA and on May 10, the House approved legislation to effectively do that. The GOP bill has no chance of passage in the Democratic-controlled Senate. So the BCA remains, for now, law.

Few Capitol Hill observers expect Congress to take any meaningful action on the Bush-era tax cuts before the November elections. This leaves the fate of the Bush-era tax cuts to the lame duck Congress. Depending on the outcome of the November elections, the lame duck Congress could do nothing and allow the Bush-era tax cuts to expire, make the tax cuts permanent, or--and this appears to be the most likely scenario--extend the tax cuts for one year. Either way, the uncertainty complicates tax planning for 2012 and beyond.

Small businesses

Lawmakers are also dueling over competing small business tax bills. The House has approved the GOP-sponsored Small Business Tax Cut Act. The GOP bill would, among other provisions, provide a deduction for 20 percent of qualified domestic business income of the taxpayer for the tax year, subject to limitations. In the Senate, the Democrats' small business bill would give a 10 percent income tax credit to small employers that increase wages or create jobs in 2012 and extend 100 percent bonus depreciation through 2012 (which had expired at the end of 2011). If the Senate approves the Democratic bill, the two chambers could iron-out the differences in the bills in conference.

Tax extenders

Since January, supporters of the tax extenders have tried several times, all unsuccessfully, to attach the extenders to other bills. Some of the extenders were initially attached to the Middle Class Tax Relief and Job Creation Act of 2012, which extended the employee-side payroll tax cut for all of calendar year 2012, but were subsequently dropped. Supporters also tried to include many of the extenders, especially energy-related tax incentives, to the Senate's highway funding bill: the Moving Ahead for Progress in the 21st Century (MAP-21) Act. At the last minute, the extenders were removed from the Senate bill.

A drag on the extenders is their estimated cost to the federal budget. According to the Congressional Research Service, renewing all of the extenders for 2012 would cost $35 billion. This is one reason why supporters have tried to move only some of the extenders. There have also been calls in Congress to let some of the extenders expire permanently; but every extender has its supporter.

Federal estate tax

Another big question mark hovers over the federal estate tax. Unless Congress acts, the federal estate tax is schedule to revert to its pre-EGTRRA levels (a top tax rate of 55 percent with a $1 million exclusion). In 2010, the White House and the GOP agreed on a top tax rate of 35 percent with a $5 million exclusion (indexed for inflation) for decedents dying in 2011 and 2012 (special rules applied to decedents dying in 2010). The GOP has proposed to eliminate the estate tax entirely or, if not abolished, to retain the 35/$5 million amounts for decedents dying after 2012; the White House has proposed to reduce the exclusion amount to $3.5 million.


Many 2011 Tax Benefits Are No Longer
Available for 2012 Returns

 
The news is all about a looming ?taxageddon? at year end when a lame duck Congress must address expired and expiring tax provisions.  No one knows what will happen to the 2013 tax rates or what other Bush tax provisions will be extended.  Regardless of this uncertainty, there is a fairly lengthy list of tax provisions that expired at the end of 2011. At the moment, here is what you can work with for 2012 tax projections: 
  • Recovery period for some assets. Qualified leasehold improvement, qualified restaurant property and qualified retail improvements recovery period drops back to 39 years from 15 years.
  • Section 179 expensing. §179 reduced from $500,000 to $139,000 effective for 2012 taxable years
  • Bonus depreciation. Bonus depreciation reduced from 100% to 50% for purchases on or after Jan 1, 2012.
  • Work opportunity credit. WOTC expired Dec. 31, 2011 except for employers who hire qualified veterans.
  • Basis reporting. Form 1099B to include basis for mutual fund shares purchased in 2012 or later.
  • AMT. Patch expired at the end of 2011.  28 million additional taxpayers due to pay AMT without a 2012 patch.
  • Estate tax exemption. Estate tax exemption increases to $5,120,000.  Annual gift exclusion remains at $13,000.
  • Adoption credit. §137 drops credit from $13,360 in 2011 to $12,650 in 2012. 
  • Employer provided transit passes. Fringe benefit allowance for transit passes drops from $230 to $125 in 2012. Parity with parking allowances dropped.
  • R and D credit. Expired Dec. 31, 2011.
  • Expensing of environmental remediation costs. Expired Dec. 31, 2011.
  • Enhanced charitable deductions for food inventory and book inventory. Expired Dec. 31, 2011.
  • Lower shareholder basis adjustments for charitable contributions by S corporation. Expired Dec. 31, 2011.
  • Reduced S corporation recognition for built in gains tax. Expired Dec. 31, 2011.
  • Exclusion of 100% of gain on sale of §1202 small business stock. Expired Dec. 31, 2011.
  • Election for itemizers to deduct sales tax in lieu of income tax. Expired Dec. 31, 2011.
  • Tuition deduction. Expired Dec. 31, 2011.
  • Mortgage insurance premiums. Expired Dec. 31, 2011.
  • $250 teacher deduction. Expired Dec. 31, 2011.
  • Nonbusiness energy property credit. Expired Dec. 31, 2011. 
  • IRA transfer to charity. Expired Dec. 31, 2011.
 
©2012 Sharon Kreider & Karen Brosi