Congress might still OK
(a few) new tax breaks
By Kay Bell • Bankrate.com

The budget battle continues, tying up some tax provisions, while others have been pulled from previous legislation and tacked onto seemingly unrelated bills.

The new deadline for finding ways to pay for federal health and education programs has slipped to Nov. 10. Meanwhile, efforts to extend expiring tax relief to exempt child-care credit recipients from more costly alternative minimum tax rules have stalled, and tax breaks included in the health care debate are definitely postponed until next year.

But it's still possible that some tax-related minimum wage riders could pass, now as part of a bankruptcy bill. And a Senate-approved trade bill proposes paying for part of its programs by increasing the percentage that estimated tax filers have to pay.

Welcome to the chaos that is representatives and senators trying to head home.

Extending current tax breaks
If you find yourself having to pay the alternative minimum tax because of some tax credits you take, you probably will get help from Congress very soon. Legislation to correct the minimum tax problem, as well as new rules for taxpayers who pay estimated taxes quarterly and the establishment of a relief mechanism for possible Y2K tax problems, have a good chance of passage.

Each of these matters is in a collection of legislative "extenders," so-called because they do just that: prolong or reinstate expired or sun-setting tax breaks. The House approved its extenders in September, and the Senate has been working on a version that will easily mesh with the House proposals. Almost everyone agrees that these issues need to be resolved now, but the sticking point is deciding exactly how long these breaks should be extended.

The alternative minimum tax is a separate tax computation, with its own brackets and rates. It was devised originally to nail high-income individuals who use credits and incentives to avoid tax bills. But the strong and steady growth of the economy during the last decade has pushed many taxpayers into the clutches of the minimum tax. Most vulnerable are taxpayers with several children, interest deductions from second mortgages, high state and local taxes, and incentive stock options.

Among minimum tax victims now are an estimated 1 million taxpayers facing higher taxes because they use the $500-per-child credit. Congress is in agreement that these filers should be exempted from alternative minimum tax consequences, but differ on how long this relief should be granted. The Senate would allow the credit to be taken without penalty through 2000, while the House wants to exempt affected taxpayers permanently.

Taxpayers who file quarterly estimated taxes, however, are not as lucky. Rather than getting a tax break, estimated filers could find their liability increasing. Quarterly tax filing usually is used by taxpayers who have no or little withholding income; for example, people who work for several different employers on a contract basis and whose incomes fluctuate throughout the year. If you end up owing more than $1,000 when you file your final tax return, you could owe a penalty. One way to avoid the penalty is to meet a "safe harbor" payment amount: either 90 percent of what you ultimately will owe this year, or a percentage of the taxes you paid last tax year.

Many quarterly payers use the percentage method because it allows taxpayers to know exactly what they must pay instead of taking the chance that their estimated final tax is off. The current prior-year payment safe harbor is 105 percent of 1998's taxes paid. The House wants to increase the percentage to 108.5 in 2000. The Senate wants more: 110.5 percent for 2000-2003, increasing to 112 percent in 2004.

What if you tried to file your final 1999 estimated tax payment, due Jan. 18, 2000, but your accountant's computer wasn't Year 2000 compliant and ate all your financial data? The House extenders bill would allow the IRS to postpone, on a taxpayer-by-taxpayer basis, certain deadlines for up to 90 days in the case of a Y2K-related failure. The Senate bill does not address the Y2K issue.

If you think this process is confusing, you're not alone. Even the IRS is struggling with how to adjust its operations to deal with the slow timetable Congress is using.

Business extenders are key
Along with the provisions affecting individual taxpayers, the House and Senate must agree on various business extenders. A major hurdle here is figuring out how to pay for all these tax breaks, including the following business measures:

• Research and development credits: The House wants to extend the break through June 30, 2004, while the Senate extension would be only through 2000.
• Employer-provided educational assistance credits: The Senate would continue through 2000 the tax break for employers assisting workers taking both graduate and undergraduate courses. The House has no educational assistance provisions.
• Credits for certain alternatively produced electricity programs: The Senate would extend credits for electricity produced by alternative sources such as wind and manure recycling, but the House does not address this issue.
• Welfare-to-Work tax credits: Both the House and Senate would extend the credit businesses receive for paying employees hired through welfare-to-work programs. The credit expired June 30, 1999. The House extend it to employees hired since then and before Jan. 1, 2002, while the Senate bill would covers employees who begin work before Jan. 1, 2001.

Budget battle taxes smokers
The last major budget battle now being waged is how to pay for federal health and education programs. If President Clinton has his way, this budget could cost smokers.

The White House wants a 55-cents-per-pack tax on cigarettes as part of any health and education budget. An estimated $7.8 billion would be raised from this tax next year, and supporters argue it would help discourage teenage smokers. However, anti-tax Republicans have been joined by representatives, from both parties, of tobacco-growing states in opposing this tax.

The proposed cigarette tax was part of a larger, $90 billion revenue package set out by the White House to pay for fiscal 2000 budgets. Rather than incorporate the tobacco tax or any other taxes into separate budget bills, Republican Congressional leaders forced a vote on the whole tax measure on Oct. 19. The bill was easily defeated.

However, a smaller cigarette tax increase is still a possibility as the president and Congress try to work out a way to pay for health and education programs.

Health care tax breaks
Health care insurance legislation received a lot of attention earlier this fall, primarily because of a controversial provision to allow patients to sue managed care plans. The House-approved version also includes several tax components. These tax breaks could ultimately affect taxpayers, but Congress probably will not get around to final approval of them until next year.

• Expanded access to Medical Savings Accounts (MSAs), would allow you to set aside money tax-free for medical care while purchasing special, high-deductible insurance policies that cover only catastrophic illness expenses. This option would be available beginning in 2001. Congress instituted a similar option in a limited form -- both in time available and number of accounts authorized -- in 1996, but few took advantage of that plan.
• A shortened timetable for increased deductions of the cost of health insurance purchased by self-employed and uninsured individuals. All of the premiums paid for health care coverage would be deductible in 2001. Under current law you have to wait until 2003 for the full deductibility.
• A deduction for health insurance expenses and long-term care insurance expenses at the rate of 25 percent in 2002 through 2004; 35 percent in 2005; 65 percent in 2006; and 100 percent beginning in 2007.
• An additional personal exemption allowance for caretakers of elderly family members, beginning in 2001.
• The allowance of self-employed individuals and small businesses to form groups and buy health insurance under federal rather than state regulation.

The bill was sent to the Senate, where members have been selected to meet with representatives to work out differences in the two health care bills. That isn't expected before Congress's first session adjourns in a week or so. And that means for now, no one gets the health care tax breaks.

Tax breaks tied to minimum wage
A bill to increase the minimum wage, which includes several tax provisions, has bipartisan support, but it too may be postponed until after 2000 budget issues are resolved.

The bill would increase the minimum wage by $1 over the next three years, and contains several tax relief provisions that were part of the Financial Freedom Act of 1999, vetoed in September by President Clinton. Among the items culled from the vetoed bill are: an extension of the work opportunity and welfare-to-work tax credits; an acceleration to 100 percent in the deductibility of health insurance costs by the self-employed; an increase in the deduction for business meal expenses; an increase in the private activity bond volume limits; and modifications to the low-income housing credit.

The bill is not just a rehash of the Financial Freedom Act; it offers some new tax breaks. Employer-provided educational benefits to their employees' children would be considered a scholarship and excluded from the employees' gross income. Occupational taxes on distilled spirits, wine and beer for retailers, wholesalers and producers would be repealed, and the disabled access tax credit would be extended.

In addition, the bill proposes several estate tax changes, including a reduction in estate taxes over the next five years. In the larger, original tax bill, estate taxes would be phased out over 10 years. It also would eliminate the 5 percent surtax on large estates and reduce the top rate from 55 percent to 53 percent.

Several pension reforms also are part of the minimum wage measure. Workers older than 50 would be allowed to save additional money for retirement, employees would vest in their pension plan more quickly and pensions would become more portable.

Despite the wide support for many of these measures, it is unclear when Congress will consider the minimum wage bill. Its tax breaks would cost almost $35 billion over five years, and Congressional leaders are hesitant to add to the financial battles with fiscal budget issues still being argued.

The debate on these tax issues intensifies now, with Congress wanting to close its doors for the year and head back home to constituents. But that can only be done if they and the president can agree on ways to pay for keeping the country running. As this budget bargaining progresses, some of these tax breaks may survive, or meet the same fate as the doomed Financial Freedom tax cut plan.

-- Posted Nov. 1, 1999