Agreement reached on tax extenders

It looks like Congress might actually complete some long-delayed tax legislation.

The House and Senate had been aiming for renewal of the package of popular tax breaks that expired Dec. 31, 2009, by the Memorial Day weekend. Then they hit some bumps in the road.

But today Ways and Means Chair Sandy Levin (D-Mich.) and Senate Finance Chair Max Baucus (D-Mont.) swear the tax extenders deal is done. (More on final timing here.)

The latest version is The American Jobs and Closing Tax Loopholes Act. Levin and Baucus issued a summary of the bill. Key individual tax breaks that will soon be back on the books are:

Deduction of state and local general sales taxes.
The bill would extend for one year (through 2010) the election to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction permitted for state and local income taxes. This proposal is estimated to cost $1.800 billion over 10 years.

Additional standard deduction for real property taxes.
The bill would extend for one year (through 2010) the additional standard deduction for State and local real property taxes. This proposal is estimated to cost $1.551 billion over 10 years.

Above-the-line deduction for qualified tuition and fees.
The bill would extend for one year (through 2010) the above-the-line tax deduction for qualified education expenses. This proposal is estimated to cost $1.501 billion over 10 years.

Above-the-line deduction for certain expenses of elementary and secondary school teachers.
The bill would extend for one year (through 2010) the $250 above-the-line tax deduction for teachers and other school professionals for expenses paid or incurred for books, supplies (other than non-athletic supplies for courses of instruction in health or physical education), computer equipment (including related software and service), other equipment, and supplementary materials used by the educator in the classroom. This proposal is estimated to cost $215 million over 10 years.

Extension of tax-free distributions from individual retirement plans for charitable purposes.
The bill would extend for one year (through 2010) the provision that permits tax-free distributions to charity from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per taxable year. This proposal is estimated to cost $627 million over 10 years.

Paying with carried interest: The final obstacle was how to make up the tax revenue lost by keeping the above (and more) tax breaks alive. Lawmakers finally came up with some of the money by agreeing on how to change the taxation of income received by hedge fund managers.

Such earnings had been treated as "carried interest," which meant the recipient paid taxes at the lower capital gains rate rather than at his or her ordinary income tax level.

Under the compromise, when such earnings accurately reflects a return on invested capital would continue to be taxed at the 15 percent (for now) top capital gains rate.

But when carried interest does not reflect such a return on invested capital, the bill would require investment fund managers to treat 75 percent of that interest income as ordinary income. The other 25 percent would be taxed at the lower capital gains rate.

More details on carried interest taxes will be available in a transition rule that will apply to transactions before Jan. 1, 2013.

And just how much money will this change make? We don't know yet. The carried interest cost is still being estimated by the Joint Committee on Taxation.

Just a year: Finally, we'll have to do this all again in seven or so months.

Despite speculation that the expired breaks might be extended beyond 2010, the expiration date is once again Dec. 31.

Related posts:

• Ways to pay for extenders grows
• Extenders outlook from W&M chair
• Bank tax to fund extenders?
• House OKs extending tax breaks
• Congressional tax wrap-up
• Tax break extenders on tap

Want to tell your friends about this blog post? Click the Tweet This or Digg This buttons below or use the Share This icon to spread the word via e-mail, Facebook and other popular applications. Thanks!

Comments

[Andy]

Seems to be more focused on corporations, with little real tax relief for working individuals. Can’t see any stand out credit or deduction akin to the stimulus credits of the last 2 years.

[Kay]

Elizabeth,
True, and I apologize for my excitement on the agreement in advance of enacted legislation. But it's the first step forward Congress has taken in this regard in months, so I am hopeful it soon will be law.
Kay

[Elizabeth R.]

But, it's still not officially passed? I have some clients waiting to hear about the Charitable Distributions from IRA's.