Fate of expiring tax incentives complicates year-end planning

Tax extenders

Many taxpayers mistakenly believe that some popular tax incentives are permanent when in reality they are temporary. It is no surprise that taxpayers make this assumption. Congress routinely allows these tax incentives (called tax extenders) to expire and then renews them. This year, the outcome may be different.

Congress has tried, and failed, several times in 2010 to renew the tax extenders. The House approved H.R. 4213 earlier this year but the bill has languished in the Senate over concerns about its price tag. The cost of the tax extenders, estimated as high as $30 billion, needs to be offset by revenue raisers. While the tax extenders are popular, many lawmakers are cautious about raising taxes of any kind in an election year. It is almost certain that Congress will not take up the tax extenders before the November elections. That leaves their fate to a lame duck session or the new Congress that will convene in January 2011.

Many of the tax extenders expired at the end of 2009. For individuals, the expired tax extenders include:

  • State and local sales tax deduction
  • Higher education tuition deduction
  • Teachers’ classroom expense deduction
  • IRA contributions to charity
  • Conservation contributions of real property
  • National disaster relief targeted to individuals

For businesses, the expired tax extenders include:

  • Research tax credit
  • Military differential pay credit
  • 15-year recovery period for qualified leasehold improvements; qualified restaurant property and qualified retail improvement property.
  • Indian employment credit
  • Tax incentives for film and television production
  • Brownfields remediation
  • Tax incentives for mine rescue training and mine safety equipment
  • Tax incentives for empowerment zones;
  • Tax incentives for investment within the District of Columbia;
  • Renewal community tax incentives
  • New Markets Tax Credit

Expiring EGTRRA incentives

When Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), it not only reduced the individual income tax rates but also enhanced many popular tax breaks. However, like the reduced tax rates, the enhancements are temporary. Under current law, a number of tax incentives will revert to their pre-EGTRRA amounts; likely to the surprise of many taxpayers.

One of the tax incentives that will change the most is the child tax credit. For 2010, the child tax credit is $1,000 per qualifying child. After 2010, the child tax credit will fall to $500 per qualifying child. Other EGTRRA changes to the child tax credit, such as eliminating the supplemental child tax credit, will also disappear.

Along with the child tax credit, several other EGTRRA-enhanced tax incentives will significantly change after 2010. They include:

  • Lower employment-related expense amounts for the dependent care credit
  • Expiration of many taxpayer-friendly changes to the earned income credit
  • Reduced contribution limits for Coverdell education savings accounts
  • Lower income phase-outs for the student loan interest deduction

EGTRRA also provided increased exemption amounts for the alternative minimum tax (AMT). The increased exemption amounts expired after 2004 but Congress routinely extended them, most recently for 2009. Congress has yet to extend them for 2010 or 2011. Again, the cost of extending them is the stumbling block for many lawmakers.

More temporary incentives

Some temporary tax incentives are almost certain not to be renewed. They include the additional standard deduction for state and local property taxes, the exemption of the first $2,400 in unemployment benefits from federal taxation and COBRA premium assistance.

The fate of the first-time homebuyer credit is also up in the air. The credit was widely popular. Its supporters claim the credit kept the housing market, already at record lows in many parts of the country, from falling even lower. While popular, the credit has been linked to abuse. The IRS reportedly has struggled to correctly process claims for the credit and weed-out fraudulent claims.

Many taxpayers have seen an increase in their take home pay in 2009 and 2010. The Making Work Pay credit provides a refundable tax credit of up to $400 for individuals and up to $800 for married taxpayers filing joint returns. For individuals with income from wages, the credit is typically be handled by their employers through automated withholding changes. The Making Work Pay credit is scheduled to expire after December 31, 2010. President Obama has asked Congress to make the credit permanent but Congress has not acted and is not expected to act before year-end.

There may still be time to take advantage of some valuable energy tax incentives. Homeowners who make energy efficient improvements, such as adding insulation, energy efficient exterior windows and heating and air conditioning, may qualify for a tax credit. The tax credit rate reaches 30 percent of the cost of all qualifying improvements and the maximum credit limit is $1,500 for improvements placed in service in 2009 and 2010. Several energy tax incentives targeted to businesses, while temporary, will not expire until 2012 or later.

Planning questions remain

Uncertainty over the fate of the tax extenders and the other temporary tax incentives leaves many taxpayers in a quandary. Taxpayers can engage in year-end tax planning under the assumption that Congress will renew them or move forward under the assumption that the extenders will not be renewed. Complicating matters even more is the possibility that Congress will renew some of the tax extenders but not all. This is very likely concerning the individual tax extenders, such as the state and local sales tax deduction, the higher education tuition deduction, and the teachers’ classroom expense deduction.


About Don James, CPA/PFS, CFP
Don is the Tax & Financial Planning partner with Kiplinger & Co., CPAs headquartered in sunny Cleveland, Ohio since 1982. He partners with business owners and families and specializes in goal achievement solutions, tax minimization strategies and serves in the role of gatekeeper of sound financial advice.

10 Responses to Fate of expiring tax incentives complicates year-end planning

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