By now, you’re probably aware that if Democrats and Republicans can’t reach a compromise in the next few weeks, your first paycheck of 2012 will be smaller as a temporary cut in the Social Security payroll tax expires. But the payroll tax break is just one of an extraordinary 67 tax provisions that will run out on Dec. 31, including some with broad bipartisan support. (Full list here.)
On the individual tax side, two provisions that together save 26 million middle class Americans from the clutches of the dreaded alternative minimum tax (the AMT “patch” they’re known as) will expire. On the business side, the research and development credit, beloved by politicians from both sides of the aisle, will lapse.
Some of these disappearing tax breaks may not be renewed—meaning you should consider grabbing them now. So, for example, if you’re self employed or own a small business and are in the market for a new vehicle, consider buying before Dec. 31. Until then you can write off the full cost of purchasing a new luxury SUV—provided it’s used 100% for business and its gross vehicle weight is more than 6,000 pounds. If you’re considering making energy efficient home improvements, get the work done before Dec. 31 to take advantage of an expiring $500 tax credit.
Other expiring breaks fall into a group of tax deductions, credits and provisions—known as “extenders”—which Congress has repeatedly renewed, but never makes permanent, simply because it doesn’t want to acknowledge their true costs. Barring a tax reform which eliminates most tax expenditures, these provisions are likely to be eventually renewed, but perhaps not until after the 2012 election.
Inconvenient? You bet. But there’s precedent for this. On Dec. 31, 2009, Congress allowed 50 tax breaks to expire, including the AMT fix and the R&D credit. It didn’t get around to extending them retroactively until a lame duck session in December 2010. Then they were revived in the deal between Obama and Republicans that also created the now about- to-expire payroll tax cut for 2011; extended the Bush tax cuts until Dec. 31, 2012; and raised the estate and gift tax exemption to $5 million until the end of 2012.
Not surprisingly, such delays are a pain for a lot of taxpayers. For most of 2010, families subject to, or possibly subject to AMT, were unsure of how much in estimated taxes to pay. Meanwhile, because theInternal Revenue Service’s computers had to be reprogrammed for late changes, 2010 tax refunds were delayed for 6.6 million taxpayers claiming the (retroactively revived) deductions for state and local sales taxes; for higher education expenses; and for teachers’ out-of-pocket expenses, according to the Treasury Inspector General for Tax Administration. ( TIGTA report here.) Those very same deductions are now expiring again.
On the business side, public companies had to adjust their reported earnings during 2010 for the lapse of the R&D credit, and then later restate earnings when the credit was retroactively revived.
Moreover, the now-you-see-it-now-you-don’t tax code is more than just a nuisance. Excuse me, while I hop on my soapbox. You can make a credible argument that the R&D credit should be redesigned to better stimulate innovation or that the economy might be better served by dumping all special credits and lowering the current 35% corporate rate—high when compared to the rest of the industrial world. But if we’re going to have a credit to encourage investment in R&D, it makes absolutely no sense to undercut the incentive by having the future of the credit always uncertain. Incredibly, since the credit’s creation in 1981, Congress has allowed it to lapse 10 times, and in one case, during the 1990s, the revival wasn’t retroactive.
Similarly, you can argue (although few politicians are brave enough to do so) that not only Warren Buffett and millionaires, but also middle class families will have to pay more if we’re to solve our long-term deficit problems. But that doesn’t justify subjecting tens of millions of families to the fiendishly complex AMT, or even to the challenge of planning for an uncertain AMT liability.
Okay, other than writing your Congressman, and speeding up possible green home repairs and SUV purchases, is there anything you can or should do now about all this tax uncertainty? Definitely. Read this new story from the Dec. 19th issue of Forbes on tax planning in uncertain times —it’s got some good suggestions, including charitable, retirement savings and wealth transfer moves you may want to make before Dec. 31.