Expiring Tax Provisions

Transcription

1 Expiring Tax Provisions The term Bush-era tax cuts or Bush tax cuts is often used to describe the tax related reductions that were contained in legislation enacted by Congress in 2001 and 2003, the Economic Growth and Tax Relief Reconciliation Act of 2001 ( EGTRRA ) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 ( JGTRRA ). Along with lowering the individual, capital gains and estate tax rates, EGTRRA made a number of additional changes to the Internal Revenue Code, many of which were set to expire at the end of Two years ago, Congress extended most of these tax cuts through 2012, while also extending certain temporary tax relief provisions through And, in February of 2012, President Obama signed the Middle Class Tax Relief and Job Creation Act of 2012, which extended the payroll tax holiday through the end of The provisions that either have or will expire include: Reductions in the tax rates on earned income, long-term capital gains and dividends, repealed limitations on personal exemptions and itemized deductions, expanded refundable credits, a reduced marriage tax penalty, modified education tax incentives and reduced estate tax liabilities; The alternative minimum tax ( AMT ) patch increasing the amount of income exempt from the AMT and allowing personal credits against the AMT; The payroll tax cut, which reduced an employee s share of Social Security taxes by two percentage points; and A number of previously extended temporary tax provisions, commonly referred to as tax extenders, enacted to assist individuals, businesses, charitable giving, energy, community development, and disaster relief. On January 1, 2013, sequestration under the Budget Control Act of 2011 is scheduled to take effect, with the goal of reducing the federal budget deficit by nearly $1 trillion over 10 years. The combination of all of these events has many commentators referring to 2013 as taxmageddon or the fiscal cliff. 98 North Washington Street Boston, MA (617) Constitution Avenue NE Washington DC (202)

2 I. Expiring Tax Provisions The tax provisions described below include many of those scheduled to expire at the end of 2012 or that expired at the end of A. Income Tax Rates The 10, 15, 25, 28, 33, and 35 percent individual income tax rates, originally enacted in 2001 and most recently extended by the 2010 Tax Relief Act, are scheduled to expire after The 10 percent rate would disappear entirely and the remaining rates would be 15, 28, 31, 36, and 39.6 percent after B. Capital Gains/Dividends Currently, qualified capital gains and dividends are taxed at zero percent for taxpayers in the 10 percent and 15 percent brackets and at 15 percent for all other taxpayers. Originally enacted in 2003 and extended in the 2010 Tax Relief Act, this tax treatment is scheduled to expire after 2012, resulting in the top rate for capital gains rising to 20 percent and dividends taxed at ordinary income tax rates. C. Pease Limitation/Personal Exemption Phaseout The 2010 Tax Relief Act extended temporary repeal of the Pease Limitation on itemized deductions (named for the member of Congress who sponsored the original legislation) and the Personal Exemption Phaseout ( PEP ) through 2012, both applicable to higher-income individuals. After 2012: 1. Pease Limitation - For higher income taxpayers, the total amount of itemized deductions will be reduced by 3 percent of the amount by which the taxpayer s Adjusted Gross Income ( 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). 2. PEP Phaseout - 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 taxpayer s Page 2

3 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. D. Marriage Penalty The 2010 Tax Relief Act extended marriage penalty relief for married couples filing jointly (an increase in the standard deduction and the 15 percent tax rate brackets to twice the amount applicable to single individuals) through After 2012, the deduction for married couples decreases to 167 percent of the deduction for singles. E. Child Tax Credit Under current law, the $1,000 child tax credit, originally enacted in 2001 and most recently extended by the 2010 Tax Relief Act, is scheduled to expire after Unless extended, the child tax credit will be reduced to $500 per eligible child effective January 1, F. Adoption Credit The Bush tax cuts (EGTRRA) increased the dollar limitation on the credit and the exclusion for employer-provided adoption assistance to $10,000 for all adoptions and increased the income phase-out starting point to $150,000, with both indexed for inflation after These modifications were set to expire at the end of The Affordable Care Act increased the maximum amount of the credit to $13,170 for tax year 2010, with this amount indexed for inflation for 2011, and made the adoption credit refundable for 2010 and Thus, eligible taxpayers could claim two adoption tax benefits. Specifically, taxpayers could either exclude up to $13,360 from their income of employer provided adoption assistance in 2011 or claim a tax credit of up to $13,360 or a combination of both tax benefits as long as the combined level of qualified expenses does not exceed $13,360. For 2012, the combined limit for qualified expenses is $12,650. The income phase-out starting point was $185,210 in 2011 and $189,710 in After 2012, the adoption tax credit will be available only for special needs adoptions, the exclusion for employer provided adoption assistance will expire, the limit for the credit will be Page 3

4 reduced to $6,000 (not indexed for inflation), and the income phase-out starting point is reduced to $75,000 (not indexed for inflation). G. Child and Dependent Care Credit The child and dependent care credit equals a percentage of the amount of work-related child and dependent care expenses paid by a qualified taxpayer to a care provider, subject to income limitations. The dependent care credit is equal to 35 percent of the first $3,000 of eligible expenses for one qualifying individual ($6,000 of qualifying expenses for two or more eligible individuals). The 35 percent credit rate is reduced for incomes above $15,000. These enhancements, extended by the 2010 Tax Relief Act, are scheduled to expire after Beginning in 2013, the dependent care credit will be equal to 30 percent of the first $2,400 of eligible expenses for one qualifying individual ($4,800 for two or more qualifying individuals). The 30 percent credit rate will be reduced for incomes exceeding $10,000. H. Alternative Minimum Tax The Alternative Minimum Tax ( AMT ) was designed to ensure that higher-income taxpayers owing little to no taxes under the regular income tax because they could claim tax preferences would still pay some tax. When calculating the AMT, taxpayers first add back various tax preference items, like certain deductions, to their taxable income, to determine the amount of income subject to the AMT, the AMT tax base, while subtracting a basic exemption amount from this AMT tax base. A two-tiered rate structure of 26 percent and 28 percent is then assessed against the AMT tax base to determine tax liability. If a taxpayer s AMT is greater than his or her regular tax liability, the taxpayer pays the difference in addition to their regular tax liability, with the difference paid technically amounting to the AMT. Unlike the regular income tax, important sections of the AMT, including the exemption amounts, are not indexed for inflation. Thus, as a result of inflation increasing taxpayers nominal income levels, additional taxpayers are becoming subject to the AMT. The Bush tax cuts temporarily increased the exemption amount under the AMT. This AMT patch was extended several more times, most recently through the end of 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 back to $45,000 for married individuals and $33,750 for unmarried individuals in In addition, from Page 4

5 on, most nonrefundable personal credits will no longer be allowed against the AMT. Without a continuation of the AMT patch at or slightly above the 2011 level, an estimated 26 million more individuals would be subject to the AMT in I. Higher Education Tuition Deduction The above-the-line deduction for higher education tuition and related expenses expired after The maximum deduction was $4,000 for those with AGI up to $65,000 ($130,000 for joint filers) and $2,000 for those with AGI up to $80,000 ($160,000 for joint filers). J. Other Education Incentives A number of other education-related tax incentives are also scheduled to expire, or to be significantly reduced after 2012, unless extended by Congress. The exclusion from income and employment taxes of up to $5,250 in annual employerprovided education assistance lasts only through Beginning in 2013, employerprovided educational assistance will be excludable from gross income only if it qualifies under working condition fringe benefit rules. The pre-2001 rule limiting the $2,500 above-the-line student loan interest deduction to the first 60 months of repayment returns in 2013 and the deduction will phase out at lower AGI thresholds. Also beginning in 2013, the maximum contribution amount to a Coverdell Education Savings Account ( ESA ) is reduced from $2,000 to $500. Additionally, elementary and secondary school expenses will no longer be qualified ESA expenses. K. Federal Estate and Gift Tax The 2010 Tax Relief Act set the maximum federal estate and gift tax rate at 35 percent for decedents dying in calendar years 2011 and 2012 with a $5 million exemption ($5.12 million adjusted for inflation for 2012). For 2011 and 2012, the estate of a surviving spouse may also be able to use the unused portion of the deceased spouse s estate tax exclusion ( portability ). Without legislative action, the maximum estate and gift tax rate in 2013 is scheduled to be 55 percent, with a 5 percent surcharge applying to large estates in excess of $10 million. The exemption amount is scheduled to be $1 million. Page 5

6 L. Payroll Tax Holiday The payroll tax holiday, or cut - initially enacted for 2011 and extended for reduced the employee s share of Social Security payroll taxes. 1 Specifically, the payroll tax cut reduced the employee s share of Social Security taxes from 6.2 percent to 4.2 percent for employees and from 12.4 percent to 10.4 percent for the self-employed on the first $110,100 of wages in After December 31, 2012, the payroll tax cut is scheduled to expire. The employee-share of taxes will increase back to 6.2 percent. The two-percentage point reduction for the employees share of Social Security payroll taxes provided $2,201 in savings up to the Social Security wage base of $110,100 for The Administration reported that the average worker would increase take-home pay by about $1,000 as the result of the 2012 extension. Thus, the expiration of the payroll tax holiday, similar to the sunsetting or expiration of the Bush tax cuts, would effectively create a tax increase in II. Temporary Tax Provisions ( Tax Extenders ) Many temporary tax incentives expired at the end of 2011, or are scheduled to expire at the end of These provisions generally fall into one of six categories related to individuals, businesses, charitable giving, energy, community development, or disaster relief. 3 A. Individuals 1 Old-age, survivors and disability insurance ( OASDI ) tax. 2 The payroll tax cut did not reduce employer s share of payroll taxes. The social security payroll tax, prior to the payroll tax reduction, is 12.4 percent. Statutorily, employer s pay half of the tax (6.2 percent) and employees pay the other half (6.2 percent), although many economists believe that workers end up bearing the entire cost of the tax in reduced wages. 3 A complete list appears in Joint Committee on Taxation, List of Expiring Federal Tax Provisions, January 13, 2012, JCX Page 6

7 1. The deduction for state and local sales taxes, the refundability of the credit for prior minimum tax liability; 2. The above-the-line deduction for qualified tuition and related expenses; 3. The deduction of mortgage insurance premiums as qualified interest; 4. The expansion of the adoption credit and adoption assistance programs; 5. The above-the-line deduction for certain expenses of elementary and secondary school teachers; and 6. The parity in the tax treatment of employer-provided transit benefits to parking benefits. B. Business 1. The bonus depreciation provision, through which a 100 percent bonus depreciation allowance is in effect through the end of 2011, set to decrease to 50 percent for 2012 and to expire after December 31, 2012; 2. The research and experimentation credit; 3. The exception for active financing income earned by banking, financing, and insurance business operations abroad; 4. The enhanced cost-recovery for qualified leasehold, restaurant, and retail improvements; 5. 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; and 6. The 2010 Tax Relief Act increased the 75 percent exclusion from tax for capital gains recognized on the sale of certain small business stock held for more than five years to 100 percent, with the 100 percent exclusion expiring at the end of C. Charitable These provisions (expired at the end of 2011) include: 1. Tax-free charitable distributions from IRAs; Page 7

8 2. Enhanced charitable deductions for corporate contributions of computer equipment for education purposes; and 3. Enhanced charitable deductions for contributions of food inventory. D. Energy 1. Incentives for alcohol fuels (primarily ethanol) and biodiesel and renewable diesel; 2. The Section 1603 grants-in-lieu of tax credit; 3. The placed-in service date for wind energy facilities to qualify for the energy production tax credit; and 4. The credit for nonbusiness energy property. E. Community Development 1. Qualified zone academy bonds, available to state and local governments for elementary and secondary school renovation, equipment, teacher training, and course materials; 2. The new markets tax credit, designed to promote investment in low-income and impoverished communities; and 3. Tax incentives to encourage economic activity in empowerment zones. F. Disaster Relief Provisions 1. Provisions designed to help redevelopment of the New York Liberty Zone and the Gulf Opportunity, along with provisions to provide relief from Midwestern storms and Hurricane Ike in Page 8

9 III. Conclusion Congress could temporarily extend some or all of the expiring tax provisions, or choice not to act, or could possibly include them as part of a reform of the entire Internal Revenue Code. * * * This Policy Update provides general information and not legal advice or opinions on specific facts Page 9