taxes

Tax breaks dead until Congress revives them

Congress © Cameron Whitman/Shutterstock.com

For the past 10 months, tax planning for millions of Americans has been on hold. The reason? A whopping 55 tax deductions, tax credits and other tax-saving laws expired Dec. 31, 2013.

This hodgepodge of individual and business tax breaks -- some of which apply to large groups of taxpayers, others that are much more specific -- has been on the books for years.

But technically these laws are temporary.

Each has a specific end date, typically the conclusion of a tax year. For the most part, Congress has extended them year after year. That's why the collective bunch is referred to as "extenders."

Congress has promised to deal with the extenders sometime after the Nov. 4 elections. But there's no firm timetable for legislative action. And there's no guarantee that all the expired tax provisions will be renewed retroactively to the beginning of the 2014 tax year.

The Senate Finance Committee has approved most of the extenders as one package, but it has yet to be approved by that full chamber. The House Ways and Means Committee is addressing the various laws in smaller groups. Eventually, representatives and senators will have to agree on one set of extenders to send to the president for his signature.

Popular individual tax breaks that expired Dec. 31, 2013

Tax benefitType of tax break
State and local sales taxesDeduction
Private mortgage insurance premiumsDeduction
Educators' out-of-pocket expensesDeduction
Higher education tuition and feesDeduction
Residential home energy improvementsCredit
Rollover of IRA distribution to a charityIncome exemption
Mortgage debt forgivenessIncome exemption

Individuals, businesses awaiting action

Individual filers have seen extenders for years on the various tax forms they file at tax time. They range from a few hundred dollars in tax savings for teachers to thousands added to IRS bills of homeowners facing tax on mortgage debt that is written off by the loan holders.

Companies, too, are bemoaning the loss of several business tax breaks at the end of 2013. They include the 50 percent bonus depreciation option, a larger Section 179 write-off for some equipment, larger deductions for certain business charitable donations, research and development tax credits, and work opportunity tax credits.

Why only temporary?

A key reason behind the temporary nature of these persistent tax breaks is how they are accounted for in the federal budget. Rather than factoring in the many tax provisions' long-term costs, lawmakers opt to deal with the legislative continuances on a short-term, and therefore relatively less expensive, basis.

Individually, many of the extenders are not that large of a cost in the overall federal budget scheme, but members of Congress regularly cite some of the more arcane tax breaks as examples of government waste.

And with recent Capitol Hill focus on the federal deficit, the costs of each tax break could be in for more scrutiny than ever before.

Retroactive laws tricky for tax planning

Many federal lawmakers would like to see these temporary tax benefits dealt with on a more long-term basis.

The House is trying this approach but is running up against Congress' penchant for procrastination.

The House and Senate tend to let legislation pile up, often running out of time at the end of a session to complete it. In those cases, Congress can reauthorize the tax deductions and credits with a retroactive effective date.

That means that while a law might not be approved until the end of a tax year, once it is finally enacted it's as if the tax break had been in effect for the full 12 months.
On one hand, that's good. At least the tax benefit eventually is available.

However, when it comes to making effective year-round tax plans, such late laws cause headaches for taxpayers and tax professionals.

Business taxpayers contemplating any major equipment or software additions are in limbo as the tax year winds down. They also can't make plans for 2015. "There are no guarantees that these larger deductions will be available in 2014," says Janet Moore, CPA, co-manager of the tax department at the Tuscaloosa office of the Alabama accounting firm JamisonMoneyFarmer PC.

Lost opportunity in 2014

When 2014 began, there was hope that Washington, D.C., might finally agree on a tax reform plan that would incorporate many of the extenders on a permanent basis. No such luck.

The chairmen of the tax-writing committees -- Rep. Dave Camp, R-Mich., of the House Ways and Means Committee and Sen. Max Baucus, D-Mont., of the Senate Finance Committee -- traveled across the U.S. for much of 2013 seeking tax reform input from businesses and individual taxpayers. Camp even produced a working draft of tax reform he had hoped would be the basis for tax code overhaul. In an election year, however, even many of Camp's Republican colleagues were resistant to making major tax law changes.

Now, however, Baucus is gone, having resigned his Senate seat to become ambassador to China, and Camp is wrapping up his tenure as Ways and Means chairman. Any move toward tax reform won't happen until the new Congress convenes in 2015.

Tax reform, however, is a massive undertaking. While the effort to overhaul the tax system could begin in 2015, a full rewrite of the tax code will take time. "It may be several years before any major reform can be achieved," Moore says.

In the interim, taxpayers once again must wait for lawmakers to renew the expired tax extenders for the almost-over 2014 tax year and beyond.

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