A number of tax provisions have either expired at the end of 2011 or are scheduled to expire at the end of this year. These include the Bush tax cuts, the alternative minimum tax ('AMT') patch, the temporary payroll tax cut, and other temporary expiring provisions, many of which are commonly referred to as "tax extenders. Aside from the payroll tax cut, which was extended by the Middle Class Tax Relief and Job Creation Act of 2012, the most recent law extending many of these provisions was the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.
In past years, congress has extended expiring provisions en masse in one legislative vehicle. In the 112th Congress, members have yet to consider legislation that would extend all of the provisions. This past week, President Obama's renewed his call to extend the Bush-era tax cuts only for low- and moderate-income taxpayers while Republican congressional leaders call for extension of the Bush-era tax cuts for all taxpayers. Below is a list of some of the expiring provisions:
Several temporary tax (tax extenders) provisions affecting businesses either expired at the end of 2011 or are scheduled to expire at the end of 2012. Of these, the largest in terms of estimated tax reductions include:
- Bonus depreciation in 2011 and 2012, whereby a 100% bonus depreciation allowance is in effect through the end of 2011, set to decrease to 50% for 2012 and expire after 12/31/12
- Research and experimentation credit
- Enhanced cost-recovery for qualified leasehold, restaurant, and retail improvements;
- Enhanced Section 179 expensing allowances which allow businesses to expense $500,000 for investment in qualified investment in 2011, $125,000 in 2012, and $25,000 thereafter
- 15-Year Straight-Line Cost Recovery for Qualified Leasehold, Restaurant, and Retail Improvements
- Work opportunity credit
- Special Rules for Qualified Small Business Stock
- Employer provided educational assistance
Several temporary provisions (tax extenders) affecting the energy sector, including alternative energy, expired at the end of 2011 or are scheduled to expire at the end of 2012. Of these, the largest in terms of estimated tax reductions include:
- Incentives for alcohol fuels (primarily ethanol)
- Incentives for biodiesel and renewable diesel
- Section 1603 grants-in-lieu of tax credit
- Placed-in-service date for the production tax credit for wind
- Credit for non-business energy property sometimes referred to as the "25C credit
The payroll tax cut, which reduced an employee's share of Social Security taxes by two percentage points. The payroll tax cut, initially enacted for 2011 and extended for 2012 reduced the employee's share of Social Security payroll taxes, from 6.2% to 4.2% for employees and from 12.4% to 10.4% for the self-employed on the first $110,100 of wages in 2012.
The Alternative Minimum Tax (AMT) was designed to ensure that higher-income taxpayers who owed little or no taxes under the regular income tax because they could claim tax preferences would still pay some tax. The AMT patch, which, by increasing the amount of income that is exempt from the AMT and allowing certain personal credits against the AMT, prevents an estimated 26 million additional taxpayers from owing the AMT . In 2011, the AMT-exemption amounts were $74,450 for married individuals filing joint returns and $48,450 for unmarried individuals. These exemption amounts revert to $45,000 for married individuals and $33,750 for unmarried individuals in 2012.
Several temporary provisions (tax extenders) affecting individuals expired at the end of 2011 or are scheduled to expire at the end of 2012. Of these, the largest in terms of estimated tax reductions include:
- Reducing tax rates (see the shaded text box with a comparison of 2012 tax brackets under current law versus if the Bush tax cuts had hypothetically expired in 2012)
- Reducing limits on personal exemptions and itemized deductions
- Increase of the child tax credit
- Deduction for state and local sales taxes
- Refund of credit for prior minimum tax liability
- Above-the-line deduction for qualified tuition and related expenses
- Deduction of mortgage insurance premiums as qualified interest
- Increase of dependent care credit
- Reducing the marriage penalty
- Above-the-line deduction for certain expenses of elementary and secondary school teachers
As Congress decides whether to extend some or all of these expiring tax provisions, it may weigh the lower budgetary costs of short-term extensions of tax extenders against the unpredictability for taxpayers that can arise from short-term extensions. It may also consider several other options. It may choose to extend all expiring tax provisions. Congressional Budget Office ("CBO") estimated that extending these provisions through 2022 (except for the payroll tax cut, which CBO assumes expires as scheduled at the end of 2012) would reduce revenues by $5.4 trillion between 2013 and 2022. The extension of these provisions, would increase the 10-year cumulative (2013-2022) deficit from $3.07 trillion to $9.44 trillion (including debt service). This would result in projected deficits as a percentage of Gross Domestic Product rising from 1.5% to 4.7%, a figure many economists view as unsustainable.
Congress may instead choose to allow all temporary provisions to expire. According to CBO, this will result in a considerable rise in revenue that will have a significant effect on reducing the projected future deficit. However, some economists warn that the scheduled expiration of these temporary provisions, which would occur simultaneously with the scheduled expiration of emergency unemployment insurance benefits and scheduled budget cuts under the Budget Control Act, would reduce real GDP growth.
Finally, Congress may choose to balance the objectives of deficit reduction and economic assistance by extending certain provisions it determines are effective, while letting others expire.
Please contact us if you have questions concerning the 2013 federal tax law changes or any other tax compliance or planning issues.