FACTBOX-Big tax issues pending in U.S. Congress
WASHINGTON, Feb 5 (Reuters) -The U.S. Congress left several major tax issues unresolved when it adjourned last year, including allowing expiration of the estate tax and a fix to index the alternative minimum tax to inflation.
Here is a summary of major outstanding issues, which are likely to be tackled in coming months.
To the surprise of many, Congress failed to act to extend the federal tax on estates last year, letting it expire for one year due to a quirk in the law.
In 2009, the law exempted the first $3.5 million of an individual's estate, or $7 million for couples and taxed amounts above that at a rate of 45 percent.
If Congress takes no action, the level reverts to $1 million, with a rate of 55 percent in 2011.
The gift tax also dropped to 35 percent from 45 percent.
Many Republicans want to eliminate the estate tax altogether, but some have said they could compromise with a higher exemption of $5 million and a 35 percent rate. This proposal is backed by Republican Senator Jon Kyl and Arizona Democrat Blanche Lincoln. The U.S. House of Representatives passed legislation in December permanently extending the 2009 rates, but the Senate failed to act amid its laser focus on health care.
Senate Finance Committee chairman Max Baucus has said he would work early this year to reenact the estate tax retroactively. Many believe that is sure to meet a challenge on constitutional grounds, further muddying the waters.
BUSINESS TAX BREAKS
A set of tax credits and other benefits to business worth $17 billion also expired at the end of this year because of a logjam in the Senate. Extension of the breaks, including a 20 percent credit for research and experimentation, passed the House but failed in Senate.
These breaks, known as 'tax extenders,' are popular among both parties and fairly noncontroversial, so the question is how they will be funded.
A group of 300 companies including CA Inc (CA.O) and Dow Chemical Co (DOW.N) have pushed lawmakers asking for a permanent extension, a policy also backed by President Barack Obama.
HIGHER TAX ON HEDGE FUND, PRIVATE EQUITY MANAGERS
Partnerships such as hedge funds and private equity are now not subject to income tax; instead they pay a tax on capital gains, now set at 15 percent, on their profits.
The House bill on tax extenders contained a provision that would tax these profits, known as carried interest, earned by these managers at a higher ordinary income tax rate, typically in the highest income bracket that is now 35 percent.
President Obama included the tax in its budget, but it faces a lack of support -- and lack of a lawmaker willing to push for it -- in the U.S. Senate.
Senate Finance Committee chair Max Baucus has said he does not want to impose the tax on a stand-alone basis, but rather take it up when lawmakers address broader tax issues.
Many people think Congress has too much on its plate to address major tax reform this year, although there will be an opportunity for debate because individual tax cuts enacted by former President George W. Bush expire at the end of this year.
The carried interest tax would raise $23 billion over a decade, so investors are watching to make sure it does not take off amid populist anger over Wall Street compensation.
CRACK DOWN ON OFFSHORE REPORTING
More likely to become law as a way to pay for the tax extenders is a measure backed by House and Senate tax-writing committee leaders that would impose penalties on individuals and foreign banks that fail to report U.S. income.
This would impact the major foreign banks such as Credit Suisse Group AG (CSGN.VX) HSBC Holdings Plc (HSBA.L) and others.
The plan would raise $8.5 billion over a decade.
"BLACK LIQUOR" TAX LOOPHOLE
Some lawmakers want to close a loophole in a federal tax credit program intended to spur biofuel development. Paper companies have reaped big benefits from the credit by blending a paper by-product known as black liquor with small amounts of diesel, which critics say was not the intention of the law.
International Paper Co (IP.N) got a $469 million credit in its most recent quarter from the U.S. government.
Senate Finance Committee Chairman Max Baucus and others have criticized the paper industry for claiming the credit and has said he wants to plug the loophole. The House bill on "tax extenders" included closing the loophole.
ALTERNATIVE MINIMUM TAX
A "patch" to fix the alternative minimum tax (AMT), a parallel tax system set up to make sure the wealthy do not avoid paying any taxes, so that it is indexed to inflation, also expired at the end of the year.