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Annette
Nellen

Expiring provisions by the numbers

We hear a lot about expiring tax provisions; here is a look at the scope of these items
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September 13, 2012

By Annette Nellen, Esq., CPA

Federal tax law includes many temporary provisions. Some of these items, such as the research tax credit (Sec. 41) and the exclusion for employer-provided education (Sec. 127), have expired and been renewed many times over the past 20-plus years. A few other temporary provisions, such as the reduced FICA rate for employees and self-employed individuals for 2011 and 2012, are economic stimulus provisions not intended to be permanent. Some of the most significant temporary provisions in terms of numbers of taxpayers affected and the cost to renew are the reduced tax rates for individuals that expire at the end of 2012.

This article provides some numbers to help describe the expiring provisions. This data helps to illustrate the magnitude of the “temporariness” of federal tax law, the number of taxpayers affected, and the cost to renew some of these temporary provisions.

Number of expiring provisions

The Joint Committee on Taxation (JCT) prepares reports with the details of all temporary provisions and when they expire. The JCT report, List of Expiring Federal Tax Provisions 2011–2022 (JCX-1-12) (Jan. 13, 2012), lists each expired and expiring provision. The totals are summarized in the following table.

Expiration Date

Number of Provisions

Disaster Relief Provisions

4/30/11

1

 

6/30/11

1

 

12/31/11

58

6

1/31/12

1

 

3/31/12

2

 

9/30/12

2

 

12/31/12

36

2

12/31/13

8

1

9/30/14

1

 

12/31/14

5

 

12/31/16

5

 

12/31/17

1

 

12/31/18

1

 

12/31/20

1

 

Time periods

Several temporary provisions have been in temporary form for decades. For example, Sec. 41, Credit for increasing research activities, has been temporary since it was first enacted in 1981—a period of 30 years (the credit last expired Dec. 31, 2011). The temporary allowance of off-the-shelf software as eligible for Sec. 179 expensing dates back to 2003.

The 2012 individual tax rates have been in effect since 2003. This is among the longest time periods of unchanging tax rates (in terms of the top marginal rates), as shown in the following table. (The tax rate data are from the Tax Policy Center. Only periods where the top rate was the same for at least five consecutive years are shown.)

Time Period

Top Marginal Individual
Tax Rate

Number of Years

1925–1931

25% (24% for 1929)

7

1954–1963

91%

10

1971–1980

70%

10

1982–1986

50%

5

1993–2000

39.6%

8

2003–2012

35%

10

Numbers of taxpayers

Temporary provisions affect all sizes and types of taxpayers. However, the temporary provisions of greatest significance, in terms of numbers of taxpayers affected, apply to individuals. For example, the income tax rate reductions that expire at the end of 2012 affect all individual taxpayers. For 2010, the IRS reports that 142,892,051 individual returns were filed (IRS Publication 1304, Individual Income Tax Returns 2010, p. 2 (2012)).

The 2012 midyear report of the IRS National Taxpayer Advocate highlights the issue of expired provisions. The report also indicates the number of taxpayers affected by some of these temporary provisions, as noted in the following table (National Taxpayer Advocate, Fiscal Year 2013 Objectives Report to Congress, pp. 1–7 (June 30, 2012)).

Expired provision

Number of individuals affected (millions)

Alternative minimum tax (AMT) “patch”

27

Election to deduct state sales tax rather than state income tax

11

Mortgage insurance deduction

4

Above-the-line deduction for K–12 teacher expenses

4

Deduction for qualified tuition and expenses

2

The report also notes that about 70,000 taxpayers are affected by the expiration of the research tax credit (p. 4).

The Congressional Budget Office (CBO) has reported additional details on the expiration of the AMT “patch.” The following CBO table shows the increased number of individuals affected by the AMT and the additional revenue raised due to the expiration of the “patch” after 2011.

Effects of the Individual Alternative Minimum Tax in CBOs August 2012 Baseline

Source: Congressional Budget Office (CBO), tax receipts tables that supplement An Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022 (August 2012). Per the CBO, the baseline projections “incorporate the assumption that current laws generally remain in place; those projections are designed to serve as a benchmark that policymakers can use when considering possible changes to those laws.”

Delayed filing dates

The expired and expiring provisions will likely be addressed by Congress after the Nov. 6 election. When a similar situation existed in 2010, legislation was not passed until mid-December (Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312 (12/17/10)). This delayed the filing season for many taxpayers. As noted by the National Taxpayer Advocate, individuals claiming itemized deductions, the deduction for qualified tuition, or K–12 teacher expenses were not able to file their 2010 returns until Feb. 14, 2011, due to programming delays at the IRS (Fiscal Year 2013 Report, p. 1).

The cost to extend

The primary reason for long-standing, continually renewed, temporary provisions, such as the research credit or deduction for K–12 teacher expenses, is the budget process. When a temporary deduction or credit is made permanent, Congress must find offsetting revenue increases for a 10-year budget window rather than only one or two years for a temporary extension.

The following information is from the JCT revenue estimates on recent bills in the House and Senate to extend temporary provisions. The dollar amounts show the “cost” to extend, which require revenue offsets or spending cuts to achieve a revenue-neutral bill. (CBO estimates for extending expiring tax provisions are available online.)

Provision

Cost (millions)

References

Increase AMT exemption and allow personal credits against AMT for 2012 and 2013

$132,240

 

 

S. 3521
Senate Finance Committee press release of Aug. 2, 2012
JCX-71-12

Deduction for K–12 teacher expenses for 2012 and 2013

$462

Sec. 108 discharge of indebtedness exclusion for qualified debt on a principal residence for 2013

$1,327

Deduction for state and local general sales taxes

$4,359

Extend research tax credit for 2012 and 2013

$14,324

Extend 15-year straight-line cost recovery for qualified leasehold, restaurant, and retail improvements for 2012 and 2013

$ 3,717

Increase in Sec. 179 expensing amounts and threshold limits $500,000/$2,000,000, and expensing for qualified real property for 2012 and 2013

$2,352

Extend exception under subpart F for active financing income

$11,225

Extend tax rate reductions for all individuals for 2013

$94,006

 

H.R. 8
JCX-64-12

Repeal limitation on itemized deductions and personal exemptions for 2013

$10,892

Extend higher child tax credit and allow against AMT for 2013

$35,632

Extend 0%/15% capital gains rate structure for 2013

$10,123

Extend 15% rate for qualified dividends for 2013

$15,731

Extend tax rate reductions for 2013 for individuals with income below these threshold amounts: $200,000 ($225,000 for heads of household, $250,000 for married filing jointly)

$62,872

 

S. 3412
JCX-65-12

Extend the 0%/15% capital gains rates for individuals with income below the threshold amount; 20% rate for other individuals

$2,487

Extend American opportunity tax credit for 2013

$13,123

The costs of uncertainty

Not all costs related to expiring provisions are identified by government agencies. There are costs to taxpayers and tax advisers of extra time needed for tax planning and projections, risk of incorrect estimated tax payments, delays in refunds if the filing season is delayed, and lost time waiting to find out what the 2012 and 2013 tax rules are.

Looking forward

With temporary provisions existing for decades, today’s tax uncertainty saga is not new. Even the uncertainty of what happens to the 2001/2003 tax cuts is similar to 2010. New segments of this drama though exist now, namely the presidential election and a larger national debt (see CBO graph below), which may lead lawmakers to not extend every provision. Let’s see what happens (and when).

Federal Debt Held by the Public


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Annette Nellen, Esq., CPA, is a tax professor and director of the MST Program at San José State University. She is an active member of the tax sections of the AICPA, ABA, and California State Bar. She chairs the AICPA Individual Income Taxation Technical Resource Panel. She has several reports on tax policy and reform and a blog. She will be a speaker at the AICPA National Tax Conference, which will be held on Nov. 7 and 8 in Washington.