Dying tax breaks: Use them while they're hot

Wed Feb 8, 2012 10:59am EST

By Amy Feldman

Feb 8 (Reuters) - Every year, dozens of little bits of the tax code fall by the wayside or, more typically, get ritually renewed by Congress. This half-in, half-out nature of the tax code frustrates accountants, individual taxpayers and businesses, and makes rational long-term tax planning a challenge.

Consider: A report by the Joint Committee on Taxation found that 60 tax breaks expired at the end of 2011 (though they could still be extended retroactively), and another 41 are slated to disappear at the end of 2012.

Many of these are little noticed or cared-about giveaways like a credit for the production of Indian coal, while others, like the Bush tax cuts, are broad-reaching and the subject of continuous public debate. Both of those are gone at the end of 2012 if Congress does not act.

Between these two extremes, however, are scores of beloved and important tax breaks. Among them: The deduction for college tuition and fees, which expired at the end of 2011, and the 10 percent tax bracket, which lowers the taxes of all Americans regardless of their marginal tax rate, and which expires at the end of 2012.

Another complex break set to expire at the end of this year is the repeal of the so-called "Pease limitation," which curbs the deductions a high-income taxpayer can take. Millions of Americans would fall into the punitive alternative minimum tax if it were not "patched" (in the Washington vernacular) with inflation-adjusted trigger amounts every year or two.

The idea behind making tax provisions expire after a certain date was to keep their costs within budget. In theory, that's a good idea.

But the reality of an ever-changing tax code is quite different. Is this any way to make tax policy? A recent Senate Finance Committee hearing considered just that question. The lure of a stable tax system is one of the most popular selling points of tax reform.

While Washington talks, the clock is ticking. Here are six important tax breaks that have already expired, or will be gone by the end of 2012 without congressional action. Enjoy them while you can:

* The Bush tax breaks. This catch-all phrase encompasses a number of different cuts, all of which were originally passed during the George W. Bush administration and then extended at the end of 2010. They will expire at year-end unless Congress acts. Among them are lower marginal income tax rates, which cut the top rate (for those making over $379,150) to 35 percent from 39.6 percent. At the bottom end of the income scale, the 10 percent bracket was carved out, affecting all taxpayers because of the layering of marginal rates atop one another.

* Lower rates on capital gains and dividends. This was part of the Bush tax cuts, too. On the investment side, the rates for long-term capital gains and qualified dividends were lowered to 15 percent. Before that legislation, long-term capital gains were taxed at 20 percent and dividends were taxed as ordinary income.

* The payroll tax break. Watch the fighting in Washington as its Feb. 29th expiration approaches. This temporary cut to the Social Security portion of the payroll tax increased the take-home pay for American workers in a rough economy and was kept alive for two months after its year-end expiration by a Band-Aid agreement at the end of 2011.

* Educational tax breaks. The tuition and fees deduction, which permits a deduction of up to $4,000, expired quietly at the end of 2011, while the American opportunity credit, which permits a credit of up to $2,500 for undergraduate education -- and is the most beneficial of all the education tax breaks -- will expire at the end of this year. At a time of rising college costs, this credit -- one that taxpayers who owe no tax can still take advantage of -- is widely used, and President Obama has called for making it permanent.

* The deduction for state and local sales taxes. This provision lets taxpayers choose between deducting state income taxes (a no-brainer in high-tax states, like New York and California) and state sales taxes (a much-better deal in states that don't collect income taxes, such as Florida and Washington state). In 2009, 10.3 million taxpayers took advantage of the sales tax deduction, compared with 33.8 million who deducted income taxes, according to Internal Revenue Service data. It expired at the end of 2011, and already politicians like Senator Maria Cantwell, a Washington Democrat, are calling for its extension.

* The adoption credit. This tax credit -- the single largest individual tax credit -- helps adoptive parents cover the costs of adoption fees, court costs, attorneys fees and travel expenses associated with adoption. The credit was expanded in 2011, to a maximum of $13,360. For 2012, it returns to a lower level, of $12,650, and, without congressional action, it will expire at the end of the year.

* The IRA-to-charity rollover. Since 2006, this popular rule had permitted those age 70-1/2 or older to donate up to $100,000 from their Individual Retirement Accounts to charity without paying any tax. It got a last-minute reprieve through 2011, but expired at year-end.

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