Tax Breaks Saved As Congress Extends Provisions. AMT Won’t Reduce Impact of Popular Credits

(RIVERWOODS, ILL., November 22, 1999) – Congress failed to take a major step forward on taxes this session, but as the year draws to a close, it has managed to avoid taking several steps back, according to CCH incorporated (CCH), a leading provider of tax and business law information and software.

Administration proposals for "targeted" tax cuts did not gain support in the Republican-controlled Congress, and a Republican proposal for nearly $800 billion in tax reductions over 10 years was vetoed by the President. But the agreement was reached on a bill to revive several tax breaks that had expired earlier this year. The legislation, expected to be signed by President Clinton, will extend a popular employee benefit program, preserve credits for businesses and keep a number of individual taxpayers out of the clutches of the dreaded alternative minimum tax.

According to Mark Luscombe, a CPA, tax attorney and principal federal tax analyst for CCH, congressional action to extend expiring provisions is a regular feature of every legislative session.

"Budgeting rules make it much easier for Congress to give these provisions a new lease on life every year or two rather than write them into the tax code permanently. Even so, deciding whether and how to pay for the extensions for even a limited time was a major sticking point this year," Luscombe said.

Fending off the AMT

Of particular note, the legislation included provisions that allow individuals to take advantage of nonrefundable credits – such as the Hope scholarship, lifetime learning credit and child credit – without being limited by the alternative minimum tax (AMT). This was extended for the 1999, 2000 and 2001 tax years.

House, Senate and administration alike placed a high priority on preventing the alternative minimum tax from limiting the availability of popular tax credits.

The AMT is an alternative system of taxation in which many common deductions and credits are disallowed. Its original purpose was to make sure that no one – especially the wealthy – escapes the income tax through use of "tax preference items." But the dollar figures that determine who might be subject to the AMT have not changed for more than a decade. As a result, every year the alternative levy can affect more and more taxpayers with comfortable, but far from regal, incomes – and because of the way the AMT works, the ranks of those touched by it would swell even more without the provisions in the extenders bill.

"Without the extenders, people who would not normally be liable for the AMT could find their use of credits such as the Hope scholarship credit curtailed," said Luscombe.

"For example, suppose that your normal income tax, before credits was $15,000 while your AMT was $14,500, and also assume that you were entitled to $1,000 in non-refundable credits. Without the extenders provision, you couldn’t use the full $1,000 to reduce your taxes to $14,000. You’d have to pay the AMT amount of $14,500, losing half the value of the credits," explained Luscombe.

The fact that more people would have to grapple with the forms for the AMT – if only to reassure themselves that they are not affected by it – was another strong impetus for extending the protection for nonrefundable credits for several years, according to Luscombe.

"Nothing takes the glow off a popular credit quite like having to deal with the AMT," Luscombe said.

Also in the Legislation

Other extenders in the legislation include:

The research and experimentation credit, a feature of the tax code especially popular with high-tech firms. The amount of the available credit also is increased. However, companies can’t actually claim any credits arising in the period July 1, 1999, through September 30, 2000, until October 1, 2000, or the credits arising from the period October 1, 2000, to September 30, 2001, until October 1, 2001. This budget-saving provision is tied to the government’s October fiscal year. Overall, the credit is extended until June 30, 2004.

The welfare-to-work credit and work opportunity credit, which benefit firms hiring low-income employees and employees from disadvantaged groups. Extended until December 31, 2001.

The taxable income limitation on percentage depletion, which allows greater amounts of depletion allowances to be claimed on marginal oil and gas wells. Extended until December 31, 2001.

The Subpart F exemption for active financing income, which provides favorable treatment for U.S. firms engaged in finance-related businesses overseas. Extended until December 31, 2001.
An extension of the credit for electricity produced from renewable sources and expansion of the credit to include electricity produced by recycling chicken waste. The expansion was sponsored by Senator William Roth of Delaware, chairman of the Senate Finance Committee, whose state is a major producer of chickens. Extended until December 31, 2001.
Brownfields environmental remediation. Extended until December 31, 2001.
An extension of the credit for holders of Qualified Zone Academy Bonds – a tax incentive to aid financing of school construction, educational equipment or teacher training in economically depressed areas. Program extended to qualifying bonds sold up until December 31, 2001.
A reinstatement and increase in the amount of rum tax "covered" to the Virgin Islands and Puerto Rico. Extended until December 31, 2001.

About CCH INCORPORATED

CCH INCORPORATED, headquartered in Riverwoods, Ill., was founded in 1913 and has served four generations of business professionals and their clients. The company produces more than 700 electronic and print products for the tax, legal, securities, human resources, health care and small business markets. CCH is a wholly owned subsidiary of Wolters Kluwer U.S. The CCH web site can be accessed at www.cch.com.

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