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Monday, August 6, 2012

Tax provisions that expired at 12/31/11 - what to do?

The National Taxpayer Advocate's mid-year report (pages 1 – 7) notes the number of taxpayers affected by the delays in knowing what happens to some key provisions that expired at the end of 2011. Several of these provisions have expired and been renewed in the past, so it is likely that will happen again, but if not done soon, the 2012 filing season will likely be delayed, as it was when this happened in late 2010.

Expired provision
Number of individuals affected (millions)
AMT "patch"
Election to deduct state sales tax rather than state income tax
Mortgage insurance deduction
Above-the-line deduction for K-12 teacher expenses
Deduction for qualified tuition and expenses

The NTA also notes that about 70,000 taxpayers claim the research tax credit that expired once again (I think it is the 14th time) at the end of 2011.

A few observations:
  • There are extra costs of the delay. The IRS needs to prepare tax forms and program its computers for the 2012 filing season. Delays or having to do the exercise twice is costly. Also, taxpayers do not know if they should have paid more estimated taxes, or they may have paid estimated taxes they ultimately don't owe.
  • Uncertainty can also be costly in changed business practices. For example, when a US company is deciding where to perform research, a temporary research credit in the US doesn't stack up well against permanent incentives in many other countries.
  • Why are there so many temporary provisions (60 expired at the end of 2011)? Several appear to be permanent because they have been renewed for many years, but taxpayers can't consider them to exist unless extended. The budget process prevents making them permanent. That is, in a 10-year budget projection, if a special deduction or credit is made permanent, its cost for the entire 10 years is in the budget and needs a revenue offset. If instead, only one or two years in included, a smaller revenue offset is needed.

On 8/2/12, the Senate Finance Committee passed a bill to extend many of these provisions. Click here for the SFC's description of the legislation. Click here for the Joint Committee on Taxation's revenue estimate for the bill. The cost for one to two year extension of several items totals $205 billion. That includes $132 billion for a 2-year AMT patch and $14 billion for a 2-year extension of the research tax credit.

SFC voted to extend some that were intended to be temporary economic stimulus, such as the shorter built-in gain period for certain S corporations. Why?  SFC voted to extend some oddly inequitable provisions such allowing a 7-year recovery period for certain motorsports racing track facilities (rather than 15 years for land improvements or 39 years for real property).

Final observation – how did the AMT patch come to cost $66 billion a year? That isn't even cost of repeal. That is to just keep 27 million individuals from paying AMT for whom it was never intended to affect.

The Blue Book for the Tax Reform Act of 1986 estimated that the individual AMT would raise $334 million in 1991. If you apply inflation adjustments to that figure, it would be $564 million in 2012.  Yes, million, not billions!  The AMT is way out of control!  It is past time to repeal this oddity of the tax system. For more on that, read my 2007 Business Journal op ed on this topic – still timely (unfortunately).

What do you think about the provisions that expired at the end of 2011 and remain expired today?  Should all be extended?  If not what criteria would you use to determine which to drop and which to make permanent?

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