The Lame-Duck Congress: So Many Tax Issues, So Little Time

By :: December 6th, 2010

As usual in December, personal finance columns are filled with end-of-year tax advice—all those things you should do before New Year’s to cut your tax bill. But 2010’s end-of-year issues are different: This year, it’s Congress and the president who need to act fast on a long list of tax policies.

Everyone knows about the expiring Bush-era tax cuts—how taxes will jump for every taxpayer if the cuts sunset as mandated in the 2001 law. We’ve heard representatives and senators of every political stripe explain ad nauseam how extending or not extending some or all of the expiring cuts will wreak havoc on (pick one or more) our economic recovery, small business, income inequality, federal deficits, and/or the national debt.

But that’s only the tip of the tax iceberg. Other issues, in no particular order here, also demand attention:

1. Patching the alternative minimum tax (AMT): Absent Congressional action, more than 28 million taxpayers will pay an average of more than $3,700 additional tax on their 2010 returns because of the AMT. Congress has repeatedly “patched” the AMT to protect those households but hasn’t done anything yet for 2010. Leaders of the congressional tax-writing committees assured IRS Commissioner Doug Shulman last month that they would boost the 2010 exemption, sparing more than 23 million people the higher levy. Shulman took them at their word and IRS has reprogrammed its computers in anticipation. Everyone assumes the patch will emerge from the current negotiations, but if Congress fails to act, the IRS will have to hustle to re-re-program everything before processing affected returns.

2. Estate taxes: People dying in 2010 will pay no estate tax, no matter how large their estates. Already five billionaires have taken advantage of that tax hiatus and—who knows?—others may have plans to join them this month. But miss the December window and everything changes—estates worth more than $1 million will face tax rates as high as 55 percent. The president wants to return to 2009 law—a $3.5 million exemption and 45 percent tax rate—while Republicans would prefer a $5 million exemption and a 35 percent rate…or better yet, a permanent repeal. Good luck planning how to structure your estate, to say nothing of how Congress plans to replace billions of dollars of lost revenue.

3. Stimulus Tax Provisions: Tax provisions in the 2009 stimulus act, most notably the Making Work Pay credit, also expire at year’s end. Expiration of MWP alone will cut workers’ after-tax income by an aggregate $60 billion next year. Other provisions that make the child credit more refundable, expand EITC for larger families, help pay for college, and exempt $2,400 of unemployment compensation from income tax will also disappear, pulling nearly $20 billion more out of taxpayers’ pockets. President Obama wants to extend all of those tax benefits as part of the Grand Tax Compromise but budget hawks don’t like the cost.

4. Tax Extenders: Congress has yet to address the annual list of expiring tax provisions, all of which get extended every year. In theory, limiting the lives of all those tax breaks to one year lets taxwriters critically review them each year before passing them for another 12 months. More accurately, extenders require Congress to find an appropriate legislative vehicle to carry them forward. And maybe a way to pay for them, although that’s typically stripped out in the end.

All this is a lot to deal with in the next ten days. Maybe a grand compromise will solve the problem. But with extending unemployment benefits and ratifying the START treaty also on the agenda, Congress has its work cut out.