Popular Tax Breaks Dead. What Happens Next?

By Kay Bell Features Bankrate.com

A whopping 77 tax deductions, tax credits and other tax-saving laws expired on Dec. 31, 2011, according to a tally by the congressional Joint Committee on Taxation.

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This hodgepodge of individual and business tax breaks -- some of which apply to large groups of taxpayers, others that are much more specific -- have been on the books for years.

But technically these laws are temporary.

Each has a specific end date, typically the conclusion of a tax year. For the most part, Congress has extended them year after year. That's why the collective bunch is referred to as "extenders."

Individual filers have seen extenders for years on the various tax forms they file at tax time. They range from a few hundred dollars in tax savings for teachers to thousands added to Internal Revenue Service bills because of the alternative minimum tax system.

Popular individual tax breaks that expired Dec. 31, 2011
Tax benefit Type of tax break
State and local sales taxes Deduction
Private mortgage insurance premiums Deduction
Educators' out-of-pocket expenses Deduction
Higher education tuition and fees Deduction
Residential home energy improvements Credit
Rollover of IRA distribution to a charity Income exemption
Employee mass transit fees/parking costs Income exemption
Alternative minimum tax Increased income exemption amount; allowance of certain tax credits

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Companies, too, are bemoaning the loss of several business tax breaks at the end of 2011. They include the 100% bonus depreciation option, a larger Section 179 write-off for some equipment, larger deductions for certain business charitable donations, research and development tax credits, and work opportunity tax credits.

Why Only Temporary?

A key reason behind the temporary nature of these persistent tax breaks is how they are accounted for in the federal budget. Rather than factoring in the many tax provisions' long-term costs, lawmakers opt to deal with the legislative continuances on a short-term, and therefore relatively less-expensive, basis.

Individually, many of the extenders are not that large of a cost in the overall federal budget scheme, but members of Congress regularly cite some of the more arcane tax breaks as examples of government waste.

And this election year, with the added attention on the federal deficit, the costs of each tax break could be in for more scrutiny than ever before.

Retroactive Laws Tricky for Tax Planning

Then there is Congress' penchant for procrastination.

The House and Senate tend to let legislation pile up, often running out of time at the end of a session to complete it. In those cases, Congress can reauthorize the tax deductions and credits with a retroactive effective date.

That means that while a law might not be approved until the end of a tax year, once it is finally enacted it's as if the tax break had been in effect for the full 12 months.

On one hand, that's good. At least the tax benefit eventually is available.

However, when it comes to making effective year-round tax plans, such late laws cause headaches for taxpayers and tax professionals.

"Congress has extended them as a group and likely will do so again," says Janet Moore, CPA, co-manager of the tax department at the Tuscaloosa, Ala., accounting firm JamisonMoneyFarmer PC."We have to plan assuming that those items will be extended. That means we watch very closely as the legislative process proceeds to determine what will happen."

2012 Timing

The big question posed by Moore and other Capitol Hill watchers regarding eventual enactment of the lapsed tax extenders is: "When?"

Currently, the top task facing Congress is the payroll tax cut for employees. Just before last Christmas, this temporary 2 percentage point reduction in Social Security taxes withheld from workers' paychecks was renewed for two months. Senators and representatives have until Feb. 29 to make sure it remains in effect through all of 2012.

Initial speculation was that Congress would tack the extenders onto the final payroll tax bill. Some lawmakers reportedly still want to do that.

However, conventional wisdom is there isn't enough time to agree on everything. So the payroll tax and extenders likely will be dealt with separately and many months apart.

"I'm not very optimistic that anything will happen (with extenders' renewal) until after the election, and then probably not until the end of December," says Moore.

That means the only thing taxpayers and tax professionals can plan on in 2012 is continued tax uncertainty.

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