There are more than 60 tax provisions that expired at the end of 2011, according to the Joint Committee on Taxation.
In terms of interest, they run the gamut from a temporary increase in the limit on "cover over" of rum excise tax revenues to Puerto Rico and the Virgin Islands, to the increased Alternative Minimum Tax exemption amount, the research and development credit, and a wide variety of others on the list of extender items.
The failure of the Supercommittee (or Joint Select Committee on Deficit Reduction, to be precise) to reach any kind of agreement on deficit reduction and taxes may be reflective of the partisan way its members were selected. At the same time, it may portend an ongoing failure to act on any kind of tax legislation during the year ahead. Hence, for expiring provisions that didn't get extended before the end of the year, it may be a long time before Congress reconsiders them.
"The hope was that the Supercommittee would reach a deal on the big picture items, such as an agreement to reduce the deficit, with fundamental tax reform as part of it," said Marc Gerson, former Majority Tax Counsel to the House Ways and Means Committee and tax partner in the Washington office of law firm Miller & Chevalier. "Now the attention will be turned to a number of items that are high priority for both the administration and Congress."
"The biggest thing on the administration agenda is the jobs bill," said Edward Karl, vice president for taxation at the American Institute of CPAs. "In terms of the AMT patch, we're good through 2011, but it and a whole host of issues will come up in 2012. These include the student loan interest deduction, state and local tax deduction, and the deduction for school teacher expenses. And the whole estate tax discussion will be up for consideration at the end of 2012."
Karl predicted that the more contentious and bigger issue items like the AMT patch and the extenders are likely to be dealt with after the election.
"It's very important to have certainty in taxes," agreed Dean Zerbe, former senior counsel and tax counsel to the Senate Finance Committee and managing director of alliantgroup. "I don't think we'll see extenders or the AMT patch until later in the year. In fact, we could wait for everything, including extenders, AMT and the Bush tax cuts, until after the elections."
"There's not much incentive to deal with capital gains, other than carried interest, which will be very watered down," he said. "For the AMT, they'll just kick the can down the road for another year or two. The R&D credit is like the swallows coming back to Capistrano - it will be re-instated, but not until later and it will have to be done retroactively. There could be a jobs bill before the election and there might be a small energy bill to provide a vehicle for some of the other provisions. Clients are getting used to accelerated depreciation and are beginning to anticipate it. Other than that, I don't see much of anything happening until after the elections."
Some 63 provisions were set to expire in 2011, noted Robert Kerr, senior director of government relations with the National Association of Enrolled Agents. "But if they weren't acted on by the end of the year, Congress has already demonstrated it's willing to do a boatload of extenders on a tremendously retroactive basis," he said. "The AMT patch is becoming very expensive ... so we could go deep into the year before addressing the expiring provisions. The problem is caused by having temporary tax provisions and by not indexing. The AMT patch is a problem of not indexing, and the state and local tax deduction is a problem of being temporary."
But nothing is certain, according to Kerr.
"There are no guarantees," he said. "The more narrow the tax favor, the more question you should have on the possibility of it getting extended. And there's a tipping point. If it didn't happen by the end of the year, it won't happen for quite awhile next year."
Doug Van Der Aa, CPA, JD, a tax practitioner and an adjunct professor at Grand Valley State College, agreed. "We're in an environment with a great degree of uncertainty," he said. "Other than a few quick little publicity stunts, we won't see much for the bulk of 2012. I'm fearful that the legislative process will completely shut down for the duration of the political campaign. Every sitting member of the House, and one of three in the Senate, is running for re-election."
"That's not a situation that gives me a lot of comfort when it comes to tax preparation or planning for my clients," he added.
The changing limits in Sec. 179 and in bonus depreciation will require analysis to see how they will affect capital spending plans, he observed. "It's uncertain if these will be increased." The 100 percent bonus depreciation in effect in 2011 dropped to 50 percent for 2012. The 2011 limit of $500,000 dropped to $136,000 in 2012 and will fall further to $25,000 in 2013 without legislative action.
"Your clients will have to take a hard look at what they're buying and when," he said. "For 2011 there is no phase-out until you buy more than $2 million of equipment, but the phase-out for 2013 starts at $200,000. Until legislation increases this, I can't advise companies to spend their money on new equipment. We'll go from that environment to a situation where there's little or no incentive to stick your neck out and make an equipment purchase."
Politically, it will be necessary but difficult to fix the AMT during 2012, according to Van Der Aa. "When you talk about the deficit projection, it already includes the revenue increase from the AMT in the baseline, so it will be hard to do," he said. "But if it's not done, it will be pretty ugly for one out of five returns filed. The AMT is doing a hostile takeover of the Internal Revenue Code - we could reach a crossover point soon where you can eliminate the individual income tax, and you would lose less revenue than if you eliminate the AMT."
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