Lawmakers have departed Washington to campaign before the November 6 elections and left undone is a long list of unfinished tax business. In many ways, the last quarter of 2012 is similar to 2010, when Congress and the White House waited until the eleventh hour to extend expiring tax cuts. Like 2010, a host of individual and business tax incentives are scheduled to expire. Unlike 2010, lawmakers are confronted with massive across-the-board spending cuts scheduled to take effect in 2013.
Since the start of 2012, the list of tax measures waiting for Congressional action has remained unchanged. Among the individual tax provisions scheduled to expire after 2012 are:
- Reduced individual income tax rates
- Reduced capital gains and dividend tax rates
- Temporary repeal of the limitation on itemized deductions and the personal exemption phaseout for higher income taxpayers
- Reduced estate, gift and generation-skipping transfer tax rates
- Enhancements to many education tax incentives, such as the American Opportunity Tax Credit, Coverdell education savings accounts, and more.
Also scheduled to expire at the end of 2012 is the payroll tax holiday. The employee share of Social Security taxes is 4.2 percent rather than 6.2 percent, up to the Social Security earnings cap of $110,100 for 2012. Self-employed individuals benefit from a similar reduction.
Additionally, many so-called tax extenders for individuals expired after 2011. They include the state and local sales tax deduction, the teachers’ classroom expense deduction, and more. The most recent alternative minimum tax (AMT) “patch” expired after 2011.
The list of expiring or expired tax incentives for businesses is just as long. They include:
- Enhanced Code Sec. 179 expensing (after 2012)
- 100 percent bonus depreciation (generally after 2011)
- 50 percent bonus depreciation (generally after 2012)
- Research tax credit (after 2011)
- Production tax credit for wind energy (after 2012)
- Enhanced Work Opportunity Tax Credit (WOTC) for veterans (after 2012)
- Regular WOTC (after 2011)
- A lengthy laundry list of business tax extenders, such as special expensing rules for television and film productions, the Indian employment credit, and more (after 2011).
Along with all of the expiring provisions are even more pending proposals. They include proposals by the White House to enact tax incentives to encourage employers to hire long-term unemployed individuals, impose a minimum tax on overseas profits and more. The likelihood of any of these proposals being enacted before year-end is slim, but they could be revisited in 2013 depending on the outcome of the November elections. Comprehensive tax reform, including any reduction in the individual tax rates below their 2012 levels and a reduction in the corporate tax rate, is also expected to wait until 2013 or beyond.
Behind the scenes talks
The lame-duck Congress, which will meet after the November elections, may tackle some or all of the expiring tax incentives, or it could do nothing and punt them to the next Congress. Behind the scenes, some Democrats and Republicans in Congress are reportedly talking about a short-term extension of the expiring/expired provisions, for six months or one year, which would give lawmakers and the White House more time to reach an overall agreement. However, the dynamic could and likely will change if the GOP takes the White House and wins control of the Senate.
In the Senate, Sen. Kent Conrad, D-ND, has told reporters that he and several other senators from both parties have been discussing whether or not to extend the expiring tax cuts. Conrad, who is retiring at the end of 2012, has acknowledged that Democrats and Republicans are far apart on revenue raisers and spending cuts. Reports of informal talks among the members of the House Ways and Means Committee have also circulated but no concrete proposals have so far been revealed.
The imminent spending cuts (called sequestration) are the result of the Budget Control Act of 2011. The 2011 Act imposes approximately $110 billion in spending cuts, impacting defense and non-defense spending, for 2013. Almost every area of federal spending, including tax enforcement, will be affected.
In recent months, some lawmakers have proposed to mitigate the spending cuts by raising revenues elsewhere. One area targeted for tax increases is the oil and gas industry. However, several attempts to repeal tax preferences for the oil and gas industry failed in Congress in 2012.
Any extension of the expiring tax breaks will have to take into account the looming across-the-board spending cuts. Tax reform and debt reduction will go hand-in-hand. However, it is unclear if debt reduction will drive tax reform or vice-versa. Our office will keep you posted of developments.
Please contact our office at (908) 725-4414, if you have any questions about pending federal tax legislation.