Most of us are scrambling this time of the year. Baking treats, buying gifts for loved ones, sending cards and making travel plans.
In its Lame Duck session, Congress is scrambling, too. Not only gearing up for their next break, but also for their end-of-the-year tradition of extending tax favors for special groups and well-connected interests.
Cronyism at its best.
Around this same time last year, they bickered up until the last minute. They picked and chose winners and losers, kicked the can down the road, held their noses, voted, and went home for the holidays.
And then President Obama signed the package of tax extenders costing $622 billion over the next decade.
Now here we are again …
The Joint Committee on Taxation published a list of 37 provisions that expire in December. Below are five examples that at the least make it difficult for taxpayers to plan.
At the worst, they are payback for political support.
Tax extender #1 — Medical expense deduction
One of the ways Congress hoped to pay for Obamacare was by increasing the threshold for claiming your itemized medical expenses to 10% of adjusted gross income (AGI) from 7.5%.
However, if you are age 65 or older, there is a temporary exemption that allows you to keep using the lower 7.5% of AGI threshold until the end of this year.
Tax extender #2 — Mortgage insurance premiums
If you itemize, you can deduct your private mortgage insurance (PMI). Once your AGI exceeds $100,000 ($50,000 for married filing separately) the deduction is reduced. And the deduction is eliminated once your AGI exceeds $109,000 ($54,500 if married filing separately).
The way it stands now, 2016 will be the last year you can use this deduction.
Tax extender #3 — Discharge of debt on principal residence
Typically when debt is forgiven, the discharged amount is included in the taxpayer’s gross income. But there is, at this time, an exemption that allows struggling homeowners who modify their mortgage or do a short sale on their primary residence to exclude up to $2 million of the amount forgiven.
Come Jan. 1, 2017, those homeowners could face a hefty tax bill.
Tax extender #4 — Tax credits
Tax credits are not subtracted from taxable income, but directly from a person’s tax liability; they therefore reduce taxes dollar for dollar. As a result, credits have the same value for everyone who can claim their full value.
Most tax credits are nonrefundable; that is, they cannot reduce a filer’s tax liability below zero. As a result, low-income filers often cannot receive the full benefit of the credits for which they qualify.
Some tax credits, however, are fully or partially refundable. If their value exceeds a person’s tax liability, the Treasury Department sends a check to the filer.
An analysis by Mercatus found that, while tax credits can help those receiving them, they generally have no impact on our country’s economic growth.
But it’s not only individuals who receive tax credits …
A dollar-per-gallon credit goes to biofuel producers.
What’s especially troubling is that the tax code for that privilege is so enticing and so complicated that three government agencies — the EPA, the IRS and the DOJ — haven’t been able to properly monitor and enforce the provision! Consequently, $100-million-plus fraud cases (such as this one in Indiana) have become common.
The wind power industry enjoys tax credits, too.
Billionaire investor Warren Buffett, who is famous for touting the idea that the rich don’t pay their fair share of taxes, said,
“On wind energy, we get a tax credit if we build a lot of wind farms. That’s the only reason to build them. They don’t make sense without the tax credit.”
So while Buffett pockets money from these temporary tax credits that prop up industries that can’t compete in the free market, everyday Americans and energy consumers suffer.
Tax extender #5 — Accelerated depreciation
Businesses must deduct the cost of new equipment and other capital purchases over a set number of years. If you own a rental house, for example, then you can’t deduct the full cost of a new stove in the year you replace it. Instead, you must deduct it over five years.
But some industries get special treatment …
“How can families and local businesses count on tax relief each year as long as Congress can’t decide what’s permanent and what’s not?” — Congressman Kevin Brady (R-Texas)
For instance, in this year’s list of extenders is an accelerated depreciation for motorsports entertainment facilities. Racetrack construction and renovation costs can be written off over seven years instead of the typical 15 that you or I would face if we built a road or replaced a fence on our business property.
The mining, green energy, and film industries are also in line to have their special accelerated depreciation schedules extended another year.
Deviations from the standard rules are political payoffs that should come to an end.
Expensing should be uniform and simple. And the simplest solution would be to allow businesses to write off all costs the year they are incurred. That would simplify the tax code, boost investment and reduce the potential of politicians using the IRS as a tool to benefit favored industries.
Temporary extensions create confusion
House Ways and Means Chairman Kevin Brady (R-Texas) wants to replace the complicated tax code with a Fair Tax that ends the need for a massive tax bureaucracy.
He said this about the current process of temporary tax extenders,
“How can families and local businesses count on tax relief each year, as long as Congress can’t decide what’s permanent and what’s not?”
Brady furthered his case,
“I believe those provisions that are temporary need to be part of the overall tax reform discussion. I believe if you allow one extender it will grow to 10, and then we’re back into that same circus at the end of the year that frankly has created real problems in the past.”
Temporary extensions are a poor solution for our country’s complicated tax code. It makes no sense to have to come back and do the same thing one year later. They impose high costs on Congress’ time at the end of a session and create economic uncertainty. This can lead to piecemeal long-term business planning and slow economic growth.
For example, the savings by eliminating such privileges could be used to lower tax rates for all Americans. This in turn would promote economic growth.
Saying “No” to tax extenders will save taxpayers billions and demonstrate that Washington has the courage to do something serious about fiscal responsibility and pursuing fair, comprehensive, pro-growth tax reform.