By Amy Feldman
NEW YORK, Dec 28 (Reuters) - In the drama over the “fiscal cliff,” the usual year-end tax dilemma - about the little bits of the tax code that either fall by the wayside or automatically get renewed - is easy to overlook. But it is worth noting that dozens of these so-called “tax extenders” are up for grabs in the final days of the year, and that some of them actually expired at the end of 2011.
At issue are popular tax breaks that help cover the soaring cost of college; the choice to deduct state and local sales taxes for those residing in states with low or no income tax; the annual patching of the alternative minimum tax, which would snare more than 30 million households without a fix -- and many more.
Back in August, the Senate Finance Committee passed a $205 billion tax extenders package to deal with many of these expired and expiring tax breaks apart from the broader cliff mess. But that’s gone nowhere, and the clock is now ticking toward year-end.
“We’re days away from the end of the year, and I have just as many questions as I did five months ago,” says Ray Radigan, a managing director in U.S. Bank’s private-client business.
With that in mind, here’s a guide to six important provisions that affect individuals - beyond the George W. Bush-era tax cuts and current, extremely generous estate-tax provisions - that are at risk of expiring or already have. In the hubbub likely to ensue over the next few days, pay at least a little bit of attention to these line items.
Every year, the AMT, that second tax system designed to ensure that the wealthy pay their fair share, snares more middle class taxpayers, and each time, Congress steps in with a patch to forestall its expansion. Without a patch, the AMT exemption would drop from $74,450 for married taxpayers and $48,450 for singles in 2011 to just $45,000 for marrieds and $33,750 for singles. The result: More than 31 million taxpayers subject to the AMT in 2012 without congressional action, compared with 4.3 million last year, according to the Tax Policy Center.
While the AMT historically gets patched at the last minute, and that’s likely to happen this year, too, the timing is problematic. The Internal Revenue Service recently said that a failure to deal with the AMT could mean delayed tax filings - and refunds for those who get them - for as many as 100 million households.
The tuition and fees write-off -- a deduction of as much as $4,000 -- quietly expired 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 - is slated to expire on December 31. At a time of soaring college costs, these are hugely important tax breaks for many middle-class American families.
The Senate Finance Committee bill called for extending the tuition and fees deduction through 2013, while President Obama has long called for making the American opportunity credit permanent. If your kids are in college, or you’re paying your own schooling costs, wait for a resolution before doing your taxes. If you’re sitting on a big tuition bill for the spring semester, (and you haven’t already spent enough to max out the American opportunity credit) consider paying it before the end of the year.
This tax credit - the single largest individual tax credit - helps adoptive parents cover the costs of adoption fees, court costs, attorneys’ fees and the like associated with adoption. The credit was expanded in 2011, to a maximum of $13,360, then returned to the lower level of $12,650, in 2012. Without congressional action, only families who adopt special-needs children will qualify for a tax credit, at the much smaller maximum level of $6,000 after this year. While a relatively small number of people claim the adoption tax credit, its impact in making adoption affordable is enormous. With the credit in flux, a group of more than 100 child-welfare and adoption organizations have organized as the Adoption Tax Credit Working Group (adoptiontaxcredit.org) to save it.
This provision - which expired at the end of 2011 - let taxpayers choose between deducting state income taxes (a no-brainer in high-tax states, like New York) and state sales taxes (a much-better deal in states that don’t collect income taxes, like Florida). In 2009, 10.3 million taxpayers deducted state sales taxes, versus 33.8 million who deducted state income taxes, according to IRS data. It seems likely to get a reprieve: Not only did the Senate Finance Committee bill include its extension, but a bipartisan group of senators is pushing to keep it.
Since 2006, a popular rule had permitted those aged 70-and-a-half or older to donate up to $100,000 from their individual retirement accounts (IRAs) to charity without paying tax. The charitable rollover could count toward their required minimum distribution, but it wasn’t taxed like a regular distribution. For those who didn’t need the money from their RMDs for living expenses, it was a better deal than paying taxes on the distribution and then donating it to charity.
That provision expired at the end of 2011, to the consternation of many charitable organizations that relied on it to bump up year-end fundraising. It could be extended and retroactively reinstated - that’s what happened two years ago and it was included in the Senate Finance Committee’s tax extenders’ bill - but even if it is, the timing won’t work for those who need to decide what to before year-end.
The Pease limitation (named for the late Rep. Don Pease of Ohio) limits itemized deductions for high-income earners. Along with the similar personal exemption phase-out, Pease effectively increased taxes on the affluent without raising marginal tax rates. It was temporarily eliminated, and does not apply to 2012 taxes, but it’s slated to return in 2013.
This particular tax break is more central to the “fiscal cliff” debate than many of the other extenders, so its future is even more unclear than many of the others. As Radigan so deftly understates, “It is extremely difficult to plan.”