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Tax Issues Loom Large As Congress Heads Back to Washington, Says CCH
AMT, Extenders, EGTRRA, JGTRRA Extensions Could All Be on House, Senate Agendas, But Time is Running Out; CCH Reviews Likely Priorities
(RIVERWOODS, ILL., November 3, 2010) – While post-election discussion may center on how the new House and Senate makeup will shape policies in 2011 and beyond, there still are many unanswered tax issues left on the existing congressional plate, according to CCH, a Wolters Kluwer business, a global leading provider of tax, accounting and audit information, software and services (CCHGroup.com). However, how much is achieved is both a matter of the limited amount of time until this Congress adjourns – just six weeks – and the political will of a lame-duck Congress returning from a highly contentious mid-term election.
“There are many tax issues where there isn’t significant disagreement, and it is possible they will be resolved in the next few weeks,” said CCH Principal Federal Tax Analyst Mark Luscombe, JD, LLM, CPA. “However, there are many more that are more complicated and more polarizing. They’ve not been able to move these forward so far and may simply leave to the next Congress to address.”
Below, CCH reviews key outstanding tax provisions.
Extenders Bill Revived in Senate and AMT Relief Likely to Be Addressed
The most immediate concern for millions of taxpayers are credits and deductions that have not been extended for the 2010 tax year. An initial package of tax extenders passed the House earlier this year, however, it languished in the Senate. Tax extender provisions were introduced in a new bill earlier this fall. Now called the Job Creation and Tax Cuts Act, the bill includes several tax breaks for businesses, as well as extending through 2010, many popular tax incentives for individuals, including:
- The option to take an itemized deduction for state and local sales taxes rather than the itemized deduction for state and local income taxes;
- The additional standard deduction for state and local real property taxes;
- The above-the-line deduction for qualified education expenses; and
- The above-the-line deduction (up to $250) for teachers’ classroom expenses.
Extending Alternative Minimum Tax (AMT) relief also is expected to be addressed. Rather than a long-term fix, the AMT patch also tends to be year-by-year. Because the income thresholds for AMT were not indexed for inflation, Congress began temporarily increasing exemption amounts used to figure the AMT starting in 2001. The 2009 AMT exemption amounts were $70,950 for joint filers and surviving spouses and $46,700 for singles and heads of households. However, without a patch for 2010, the exemptions for this year’s taxes will drop back to the levels of 2000: $33,750 for single taxpayers; $45,000 for joint filers and surviving spouses; and $22,500 for married taxpayers filing separately.
“From a practical perspective, it’s likely that Congress will take up the extenders and AMT relief in the final session. These are popular provisions that tend to be carried forward year after year,” said Luscombe. “However, the contention comes in agreeing on how to pay for the tax breaks.”
If an impasse continues through the end of the year, it is still possible that the provisions could be passed retroactively by the new Congress in early 2011. However, both last-minute passage this year or waiting until early next year would add extra costs and confusion to the upcoming income tax season.
That was the case in 2006, when the Tax Relief and Health Care Act of 2006, which included many tax changes affecting 2006 income taxes, was not signed into law until December 20, 2006. The IRS forms and instructions had already been completed and new instruction on where to report information or claim credits and deductions on the tax return had to be issued.
EGTRRA and JGTRRA Provisions: Some May Make It Onto 2010 Agenda, More Will Wait Until 2011
Also looming large for taxpayers attempting to plan for 2011 and beyond are sunsetting provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 ( JGTRRA).
For several of the expiring provisions, President Obama had proposed modifications based on income to provide tax relief to taxpayers earning below $200,000 ($250,000 for joint filers). The likelihood of Congress having the time – or the will – to address all of these in the waning days of 2010 is unlikely, according to Luscombe.
Among those most likely to garner attention from the current Congress include:
- Ordinary income tax rates – Without action, the 10-percent bracket will be eliminated and the pre-EGTRRA brackets will range from 15 to 39.6 percent for 2011.
- Long-term capital gains and dividends – The current capital gains rates are 0 percent and 15 percent. If Congress does nothing, the capital gains rates will sunset to the pre-JGTRRA rates in 2011, increasing capital gain rates to 10 and 20 percent. Additionally, dividends now taxed at capital gains tax levels would be taxed again at the higher ordinary income tax rates – which could be as high at 39.6 percent.
- Itemized deduction phaseouts – Without action, the limitations on itemized deductions for most taxpayers earning more than $166,800 ($83,400 for married taxpayers filing separately) will be reinstated as of 2011.
- Personal exemption phaseouts – Personal exemption phaseouts were gradually repealed under EGTRRA but will be reinstated in full starting in 2011 if the provision is allowed to sunset.
Debate also is ongoing for many other provisions set to expire, including several related to families, children and education. However, it may not be until next year – if at all – that any of these are addressed.
Earlier this fall, CCH issued a Tax Briefing detailing the JGTRRA/EGTRRA provisions that will sunset and lawmakers’ proposals for select extensions.
“It’s challenging for individuals and their tax and financial advisers to plan with this amount of uncertainty,” said Luscombe. “As the end of the year approaches, they will need to move forward under their best assumptions.”
Resolution on Estate Tax Issues – 2011 or Beyond
One of the most vexing areas for many planners has been estate tax planning. Historically, a long-term undertaking, it has become an annual event in recent years.
Under EGTRRA, the maximum estate tax rate dropped steadily from 55 percent in 2001 to 45 percent in 2009. In addition, during that same period, the amount of property excluded from the estate tax rose from $675,000 to $3.5 million. For 2010, there has been a full repeal of the estate tax. However, the estate tax is poised to jump back to the pre-EGTRRA rate of at least 55 percent in 2011, plus a 5-percent surcharge on large estates, with an exclusion amount of $1 million.
“Resolving the estate tax issue was expected to be a top priority in early 2010, but it has yet to be resolved,” said Luscombe. “Whether an agreement can be reached in 2011 remains to be seen. In the meantime, many taxpayers who’d never considered estate tax planning are going to now have to give it serious thought.”
Proposed changes to the estate tax laws include keeping the current full repeal of estate taxes to returning to the 2009 rate of a maximum of 45 percent on estates of $3.5 million or greater.
About CCH, a Wolters Kluwer business
CCH, a Wolters Kluwer business (CCHGroup.com) is the leading global provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. Among its market-leading solutions are The ProSystem fx® Suite, CorpSystem®, CCH® IntelliConnect®, Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill. Wolters Kluwer (www.wolterskluwer.com) is a market-leading global information services company. Wolters Kluwer is headquartered in Alphen aan den Rijn, the Netherlands. Its shares are quoted on Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices.
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