12/16/2011 1:45 AM ET|
Endangered tax breaks and benefits
Many tax deductions and subsidies are set to expire this year or in 2012 unless Congress steps in to save them. Could any of these raise your tax bill?
As Congress and President Barack Obama head into an election year, tax reform has emerged as a key roadblock to lowering the nation's debt -- and ultimately reviving America's economy and competitive edge.
Beginning in the George W. Bush presidency and continuing into the Obama era, national spending and tax revenue have diverged dramatically.
"We are rapidly approaching a time when the tax system we have will be unable to support the government that we want," said Howard Gleckman, a tax expert and resident fellow at the Urban Institute. "It's being held together by bubble gum and baling wire."
Bush-era tax cuts, as well as long-in-place tax breaks, expire at the end of 2011. Meanwhile, other established tax provisions will remain hot topics (and fair game) into the election year, as political and ideological rhetoric increases over how to reduce the nation's budget.
We asked Gleckman, author of the Tax Policy Center's TaxVox blog, and Dean Zerbe, the national managing director at the Alliant Group and a former tax counsel for the Senate Finance Committee, for their take on these tax cuts and subsidies.
Read on to see the most endangered tax provisions.
Capital gains and the 'Buffett Rule'
Obama got a lot of attention in September when he rolled out a deficit reduction plan including his "Buffett Rule" -- that no one making more than $1 million should pay a lower tax rate than the middle class.
In targeting this income group (whose income averages about $2.9 million annually), Obama recognizes that they make most of their money from investments. A few of these very high earners make more than two-thirds of their income from capital gains and dividends, which are taxed at 15%, said Bob Williams on the TaxVox blog.
While current rates expire at the end of 2012, the Obama administration would raise capital gains rates even as it cuts rates on ordinary income. For now, rates continue at historic lows for long-term capital gains and dividends. For taxpayers in the 15% income tax bracket and below, the rate is zero. For those in the 25% bracket and above, the rate is 15%.
The prospects of the "Buffett Rule" becoming law, however, are weak, with strong opposition among congressional Republicans. GOP presidential hopeful Mitt Romney would drop the rate on gains and dividends to zero for most taxpayers, with those making more than $200,000 still having to pay 15%, Gleckman said.
Research and development credit for businesses
The research and development tax credit celebrated its 30th anniversary in September. The basic credit rate is 20% and expires Dec. 31. Historically, the credit has been extended for a year or two and sometimes was allowed to expire and be restored retroactively, said Gleckman.
Although the tax credit is popular, there's room for improvement, said the Alliant Group's Zerbe. For example, raising the credit and offering a higher rate for small businesses would be a good start.
Both the administration and Congress have proposed raising the R&D tax credit as well as the related alternative simplified credit, or ASC, a simpler way for businesses to calculate the credit. "It can be a life saver for a small-business owner," Zerbe said.
IRA charitable donation
Congress extended this popular provision through 2011, but it will lapse in 2012 if lawmakers don't act. Donors older than 70½ may contribute up to $100,000 of IRA assets directly to one or more qualified charities. While there's no deduction, the gift is excluded from income, The Wall Street Journal reports.
More broadly, deductions that wealthier taxpayers claim will continue to be targeted by Republicans and Democrats heading into 2012. The White House has said that most of the cost of Obama's payroll tax cut and other job initiatives would be covered by limiting the deductions claimed by wealthier taxpayers.
Employer health subsidy
As we head into a presidential election year, this subsidy will be a key topic in the broader discussion of health care reform.
Under the current tax exemption for employer-sponsored health insurance, your employer's portion of your health premium is tax-exempt. If, however, the subsidy is axed and your employer instead gives you a raise to cover those health costs, you'll have a higher taxable income or a higher tax bill, Gleckman said.
A deduction of up to $4,000 for qualified education expenses expires at the end of 2011. All or part of the amount you pay can be for classes beginning in 2012, Inman News reports. But you must make your payments in 2011.
More broadly, Obama's $467 billion in tax increases announced in September includes caps on tax deductions. The plan targets tax preferences, including those for savings accounts for higher education and health expenses.
However, many other tax credits, deductions and savings plans are still available for taxpayers to help with the expense of higher education. For more details, visit the Internal Revenue Service's education information center.
Transit commuter benefit
In November, Sen. Charles Schumer, D-N.Y., called for Congress to renew the federal mass-transit tax break. Many large employers offer transit-benefit programs that allow workers to set aside up to $230 a month of their salaries for mass-transit costs. The money is exempt from federal, state and city income taxes.
Schumer has introduced a bill to make the $230-per-month benefit permanent, The Associated Press reports. The latest extension of the benefit expires Dec. 31.
Mortgage interest deduction
To be clear, a Dec. 31 deadline is not approaching for this deduction. But with the housing market still weak, debate about how the U.S. government can support the housing market will continue into 2012.
Interest paid on a mortgage is tax-deductible if itemized. Roughly a quarter of all tax filers claim this popular tax deduction.
State sales tax deduction
The state sales tax deduction is scheduled to expire at the end of 2011.
This is a valuable tax break for residents of states without income tax -- Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.
The timing of this deduction's end could wreak havoc on state and local budgets. They're already facing uncertainty about how much federal money they will get. Meanwhile, the weak economy and volatile stock market have lowered returns on state and local investments and will possibly cut income tax revenue. Adjusted for inflation, state and local revenues are below 2008 levels, said the TaxVox blog's Kim Rueben. Stay tuned.
Internet sales tax, use tax
While there's no looming Dec. 31 deadline related to sales tax, this tax issue made our list because it will continue to be newsy into 2012. Amazon.com has agreed to start collecting sales tax from its California customers in September 2012 unless there's federal legislation on the matter, The New York Times reports.
As bricks-and-mortar stores struggle, legislatures beyond California have seized on the sales tax issue. Meanwhile, most states now have a use tax that requires consumers to pay taxes every April that retailers did not collect, although taxpayers rarely do so, said the Urban Institute's Gleckman.
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