When members of the U.S. Senate went home earlier this month, they left the future of 50 individual and business tax breaks in limbo. All expire at the end of 2009.
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Among the disappearing breaks are the research tax credit and an annual alternative minimum tax "patch," which keeps 23 million additional middle-income Americans from being forced into calculating and paying the dreaded AMT. (For 2009, with the patch in place, 4 million upper-middle- and high-income families will pay AMT.)
Most of the fading-out-50 can, and likely will, be reauthorized retroactively, creating an inconvenience for some taxpayers, but not the same sort of mess as Congress' failure to resolve the future of the estate tax.
The estate tax will expire at the close of Dec. 31 and Democrats are pledging to resurrect it retroactively, leading to all sorts of potential legal problems, as well as some planning opportunities for wealthy families.
Among the expiring individual tax breaks: the deduction for state and local sales taxes for itemizers (which benefits mainly residents of states that don't impose an income tax); the additional $1,000 deduction for real estate taxes for those who claim the standard deduction; the $4,000 deduction for college tuition; and a special $250 deduction for teachers who spend their own money on classroom supplies.
This isn't the first time Congress has let some of the 50 breaks lapse. In fact, expiring provisions have come to be known as "extenders," because instead of eliminating them or making them permanent and recognizing their true costs, Congress simply extends them year by year.
This time around, on Dec. 9, House Democrats pushed through a bill extending most of the breaks at a cost of $31 billion. The Senate, mired in partisan warfare over health care reform, never took up a similar measure. On Tuesday, Senate Finance Committee Chairman Max Baucus, D-Mont., and Ranking Member Charles Grassley, R-Iowa, issued a joint letter promising to extend the provisions retroactively as soon as possible.
But taxpayers can't count on early action. "We've seen this movie before," sighs Clint Stretch, managing principal of tax policy with Deloitte Tax. "When this has happened in the past, it's been literally months before Congress has gotten around to fixing things." For example, Congress finally included dozens of lapsed tax breaks in the October 2008 bank bailout, making them retroactive to Jan. 1, 2008.
Meanwhile, taxpayers have some decisions to make. For example, if the AMT patch isn't passed by the time their first 2010 estimated tax payments are due in April, they'll have to decide whether to pay extra money or risk underpaying and incurring a penalty. One lapsed provision allows taxpayers age 70-and-a-half or older to transfer up to $100,000 directly from an IRA to charity without booking the amount transferred as income. Older folks planning a charitable gift may want to do this before Jan. 1.
For businesses, the lapsing of the R&D credit — a $7 billion a year break — is a particular problem, since companies must plan for long-term research commitments amid uncertainty. Since its enactment in 1981, the credit has been extended 13 times; in the mid-1990s there was a one-year gap when it wasn't extended retroactively.
"Companies are sensitive to that," says Monica McGuire, executive secretary of the R&D Credit Coalition in Washington, which represents such research heavyweights as 3M, AT&T, Genentech, Hewlett-Packard and Xerox. "If Congress is serious about jobs in this jobless recovery, they ought not to treat the credit like a yo-yo," she adds. The lapse could also affect companies' reported earnings, since they won't be able to assume the credit will be extended.
The expiration of the credit stands in contrast to President Barack Obama's call for the credit to be made permanent. "Under my budget, this tax credit will no longer fall prey to the whims of politics and partisanship," Obama said in remarks to technology executives at the White House in March. "It will be far more effective when businesses like yours can count on it, when you've got some stability and reliability." Multinationals argue that uncertainty over the credit makes the U.S. look less competitive when they are deciding whether to locate new research projects here or in countries with permanent tax incentives.
Multinationals are also frustrated that two other provisions--the Subpart F active financing and look-through rules--haven't been extended. "Until there is clarity, companies may have to avoid doing certain transactions," says Stretch. "Basically, it fouls up their marketplace."
Other corporate breaks that are in limbo include a railroad track maintenance credit; special expensing rules for U.S. film and television productions; and tax laws that help Puerto Rican and U.S. Virgin Islands distillers.
The House extenders bill passed Dec. 9 didn't include the AMT patch. Stretch says it's likely the AMT patch and the traditional extenders, including the research credit, will be extended for 2010 sometime next year. Still, with the budget deficit growing, the Bush-era tax cuts set to expire at the end of 2010, and economic advisers to Obama looking at options for tax reform, nothing is certain.
"Who knows what's going to happen next year?" asks McGuire.
© 2012 Forbes.com