Expiring and Expired Tax Breaks
Some of the most notable tax breaks that are on the endangered list.
A variety of tax breaks are due to expire at the end of 2012 (or have already expired at the end of 2011) unless Congress and the Obama administration manage to agree on a deal to extend the current tax rates and avert the fiscal cliff.
Approximately 60 tax provisions expired at the end of 2011, according to Congress's Joint Committee on Taxation, and another 41 are scheduled to expire at the end of 2012.
Here's a sampling of some of the most notable tax breaks, according to reports by the Congressional Research Service and the JCT.
The patch to prevent the AMT from spreading to millions more taxpayers actually expired at the end of 2011. Originally intended to ensure that the wealthy do not avoid paying taxes altogether, the AMT is traditionally "patched" every year by Congress to raise the exemption amount and prevent it from affecting more and more middle-class taxpayers. The IRS has warned that unless the AMT is patched in time for tax season, nearly 30 million additional taxpayers will be subject to the AMT on their 2012 income tax returns. The exemption amounts of $74,450 for joint filers and $48,450 for single taxpayers expired at the end of 2011. For 2012, the current-law AMT exemption amounts are much lower: $45,000 for joint filers and $33,750 for single taxpayers.
The Bush tax cuts were enacted into law mainly by the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 and the Jobs Growth Tax Relief Reconciliation Act (JGTRRA) of 2003, which gradually reduced individual income and estate tax liabilities between 2002 and 2010. Under the Bush tax cuts, the maximum individual income tax rate fell from 39.6 to 35 percent. The top four tax brackets with the Bush tax cuts are 35, 33, 28 and 25 percent. If they expire, the top four tax brackets will be 39.6, 36, 31 and 28 percent. These tax cuts were extended for 2011 and 2012 by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The 2010 Tax Act was enacted under President Obama, not President Bush, the Congressional Research Service noted, although the underlying policy is still commonly referred to as the Bush tax cuts.
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The Bush tax cuts gradually reduced the estate tax between 2002 and 2009, with a full repeal of the estate tax in 2010. Under EGTRRA, the amount of an estate that was exempt from taxation gradually rose from $1 million per decedent in 2002 to $3.5 million per decedent in 2009, while the top tax rate under the estate tax fell from 50 to 45 percent over the same time period. In 2010, for the first time since 1916, there was no federal estate tax. The 2010 Tax Act reinstated the estate tax, but raised the exemption level and lowered the tax rate in comparison to the estate tax in effect in 2009. Specifically, the exemption amount in 2011 was set at $5 million per decedent (adjusted for inflation, this amount will equal $5,120,000 per decedent in 2012) and the top tax rate was set at 35 percent. The estate tax is scheduled to increase in 2013, with a $1 million per
decedent exemption level and 55 percent top tax rate.
The payroll tax cut reduced the employee's share of Social Security payroll taxes by two percentage points, from 6.2 to 4.2 percent for employees, and from 12.4 to 10.4 percent for the self-employed, on the first $110,100 of wages in 2011 and 2012. The cost of extending the payroll tax cut for one year (2012) was estimated to be $114 billion over the 2012-2022 budgetary window, according to the Congressional Research Service. Approximately 159 million workers were eligible for the payroll tax cut in 2012,
which on average equaled approximately $717 per worker. However, the actual value depended on the taxpayers wages, with those making $20,000 receiving an additional $400 in take-home pay, and those making $110,100 or more (the Social Security wage cap in 2012) receiving a
maximum increase of $2,202 in take-home pay.
With the expiration on the Pease provisions of the Bush tax cuts, the limit on itemized deductions will be restored. For higher-income taxpayers, the total amount of itemized deductions will be reduced by 3 percent of the amount by which the taxpayers AGI exceeds an applicable threshold, adjusted annually for inflation. The total amount of itemized deductions will not be reduced by more than 80 percent. (In 2011, the applicable threshold if Pease had been in effect would have been $169,550).
The limit on personal exemptions for taxpayers and their dependents will be restored after 2012. For higher-income taxpayers, the total amount of exemptions that can be claimed will be reduced by 2 percent for each $2,500 by which the taxpayers AGI exceeds applicable thresholds, adjusted annually for inflation. In 2011, the applicable thresholds if PEP was in effect would have been $169,500 for single filers and $254,350 for married joint filers.
The top tax rate for both long-term capital gains and dividends is 15 percent under the Bush tax cuts. Once the tax cuts expire at the end of 2012, the top tax rate for long-term capital gains will rise to 20 percent, and dividends will be taxed at ordinary income tax rates.
Several temporary tax provisions affecting individuals 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 revenue losses, according to the Congressional Research Service, include the deduction for state and local sales taxes; the refundability of the credit for prior
minimum tax liability; the above-the-line deduction for qualified tuition and related expenses; the deduction of mortgage insurance premiums as qualified interest; the expansion of the adoption credit and adoption assistance programs; the above-the-line deduction for certain
expenses of elementary and secondary school teachers; and the parity in the tax treatment of employer-provided transit benefits to parking benefits.
Several temporary tax 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 revenue losses, according to the Congressional Research Service, include bonus depreciation in 2011 and 2012, whereby a 100 percent bonus depreciation allowance is in effect through the end of 2011, set to decrease to 50 percent for 2012 and expire after Dec. 31, 2012; the research and experimentation credit; the exception under Subpart F for active financing income earned by banking, financing and insurance business operations abroad; the enhanced cost-recovery for qualified leasehold, restaurant and retail improvements; and the enhanced expensing allowances, which allow businesses to expense $500,000 for investment in
qualified investment in 2011, $125,000 in 2012, and $25,000 thereafter.
Several temporary provisions designed to incentivize charitable giving expired at the end of 2011. Of these, the largest in terms of estimated revenue losses, according to the Congressional Research Service, include tax-free distributions from IRAs for the purposes of charitable donations; enhanced charitable deductions for corporate
contributions of computer equipment for education purposes; and enhanced charitable deductions for contributions of food inventory.
Several temporary provisions 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 revenue losses, according to the Congressional Research Service, include incentives for alcohol fuels (primarily ethanol); incentives for biodiesel and renewable diesel; the Section 1603 grants-in-lieu of tax credit; the placed-in-service date for the production tax credit for wind; and the credit for nonbusiness energy property (sometimes referred to as the 25C credit).
Several provisions to promote community development expired at the end of 2011. These include qualified zone academy bonds, which are available to state and local governments for elementary and secondary school renovation, equipment, teacher training and course materials; the New Markets Tax Credit, which is designed to promote investment in low-income and impoverished communities; and tax incentives to encourage economic activity in empowerment zones, the District of Columbia and American Samoa.
A number of disaster-related tax provisions expired at the end of 2011 or are scheduled to expire at the end of 2012, according to the Congressional Research Service. They include provisions designed to help redevelopment of the New York Liberty Zone and the Gulf Opportunity Zone, as well as provisions to provide relief following the Midwestern storms and Hurricane Ike in 2008.
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The revenue losses from extending the tax extender provisions depends on which provisions are extended and the duration of the extension. Congress's Joint Committee on Taxation estimated that the cost of extending temporary provisions that expired in 2011 through the end of 2012 was
$42.92 billion over the 2012-2021 budgetary window. By contrast, the JCT estimated that the cost of extending certain expiring provisions through the end of 2013 was $205.06 billion over the 10-year period of 2013 through 2022. The U.S. Treasury estimated that extending certain temporary provisions that expired in 2011 and 2012 through the end of 2013 was $26 billion over the 2013-2022 budgetary window. The Congressional Budget Office estimated that the revenue losses from extending temporary provisions for a longer period than one or two yearsthrough 2022would reduce revenues by $839 billion over the 2013-2022 budgetary window. The debt service associated with financing these extensions was estimated to be $173 billion over the same period.
If the Bush tax cuts are extended, the Congressional Budget Office estimated that extending various 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. Specifically, over this 10-year budgetary window extending the Bush tax cuts and extending the AMT patch would reduce revenues by $4.6 trillion, while extending the tax extenders would reduce revenues by $839 billion. The cost of extending the payroll tax cut for one year (2012) was estimated to be $114 billion over the 2012-2022 budgetary window.